Foreign Contribution (Regulatory) Amendment Act, 2020: A Challenge for Non-Profits?

[Shreya Mishra and Ayesha Bhattacharya are recent graduates of the West Bengal National University of Juridical Sciences, Kolkata. The authors would like to thank Prof. Umakanth Varottil for his comments]

Recently, the Central Government froze the accounts of Amnesty International India, citing violation of foreign funding laws, while the latter has accused the Central Government of halting its operations in an attempt to stifle dissent. This development, in addition to the recent legislative changes that the Central Government has sought to introduce in the laws pertaining to foreign contributions to non-profit organisations, has garnered attention.

The Foreign Contribution (Regulation) Act, 2010 (‘FCRA’) was enacted to regulate the inflow of foreign contribution, and to prohibit its utilisation for activities opposed to national interest. Amendments are proposed to be made to the FCRA through the Foreign Contribution (Regulatory) Amendment Act 2020 (‘Amendment Act’), which was introduced by the Ministry of Home Affairs (‘MHA’), Government of India, in the Lok Sabha on 21 September 2020. The Amendment Act’s statement of objects and reasons states that it was introduced to, first, curb the underutilisation of foreign contributions and, second, the non-compliance with annual filing of returns and maintenance of accounts. While some of the changes that have been introduced by the Amendment Act are discussed here, this post seeks to cover the more obscure changes in the Amendment Act, which fail to align with its stated objectives. Instead, the changes will make the operations of non-governmental organisations more cumbersome by introducing additional compliances, hindering their functional autonomy, and introducing additional checks that have no nexus with the problems the Amendment Act seeks to check.

Inquiry Conducted by the Central Government

Under section 11 of the FCRA, any persons seeking to receive foreign contribution have to either register themselves or seek prior permission from the Central Government. The proviso to section 11(2) states that any persons found guilty of violating the aforesaid provisions cannot utilise the remaining funds of foreign contribution, unless they have received prior approval from the Central Government. However, clause 5 of the Amendment Act seeks to amend this proviso, so that even when there is a pending inquiry for the contravention of section 11 of the FCRA, the said person is prohibited from utilising the foreign contribution. The rationale for this shift in the threshold, from proven guilt to mere pendency of inquiry, is unknown and fails to achieve the stated objectives of the Amendment Act. Moreover, the FCRA website has a detailed “Information Bank”, which provides a list of FCRA registered associations and associations with prior permission. Therefore, checking whether any association has flouted the requirements under section 11 would be fairly easy, assuming that the MHA regularly updates the website, and thus, prevents any unnecessary delay in the functioning and operation of the association.

Further, no timeline or maximum time limit has been stipulated within with such pending inquiry is sought to be completed. However, rule 22 of the Foreign Contribution (Regulation) Rules, 2011 (‘FCRA Rules’) specifies that any investigation undertaken by the Central Bureau of Investigation or any other agency, which is conducting any investigation in accordance with the provisions of the FCRA, should furnish its report to the Central Government on a quarterly basis. This probes the question: is it reasonable to assume that any such pending inquiry under section 11 of the FCRA will also be completed in a maximum of 90 days?

Under section 13 of the FCRA, the Central Government may suspend the certificate of any holder, while an inquiry about its cancellation is pending under section 14 therein. Such suspension cannot exceed 180 days. However, clause 8 of the Amendment Act has sought to extend this time limit to 360 days. This change is reflective of the Government’s intention to prolong the process of suspension, during which the holder of the certificate cannot utilise the foreign contribution or receive any additional funds, unless the Central Government gives its prior approval. Such a move conveniently allows the Government to suspend the certificate for a longer duration, if they do not have a case for cancelling it.

Reduction of Administrative Expenses from 50% to 20%

Section 8 of the FCRA provides for a maximum limit of 50%, on administrative expenses (defined in rule 5 of the FCRA Rules) unless otherwise approved by the Central Government. The Amendment Act has sought to lower this limit to 20%. While no justification has been provided, a possible rationale could have been an increase in the instances of cases involving the misuse of the upper limit prescribed earlier. However, this speculation does not bode well with the information on Penal Action available on the FCRA website, according to which, the violation of section 8 is one of the grounds for only two out of seven suspension orders and two out of eight cancellation orders (‘statistic’). Compared to the statistic, the certificates of registration of 1142 organisations were cancelled (only in the state of Andhra Pradesh) by an order dated 3 March 2015 for non-filing of annual returns. However, the Amendment Act fails to introduce any provision to check the latter.

The issues with the proposed amendment to section 8 of the FCRA are two-fold. First, the earlier cap on the utilisation of foreign contribution for administrative expenses, which was 50%, allowed NGOs to exercise autonomy regarding allocations and dispensation of funds. However, no explanation has been provided to demonstrate that the 50% cap was too high, and hence excessive funds were being allocated to administrative causes. Further, the Amendment Act has not set any parameters to rationalise the revised cap of 20%. If adequate funds cannot be allocated towards fuelling projects, innumerable NGOs will be left in a bind, since they will be unable to pursue their foundational objectives. Administrative expenses under the FCRA Rules have been defined to include inter alia travel expenses, infrastructural changes pertaining to rent and repairs, cost of running an office, stationary, printing, maintenance of vehicles. Infrastructural upkeep and maintenance are integral for proper functioning of any institution. The objective of the FCRA is to ensure greater transparency and accountability, and although no rationale has been provided with respect to reducing the cap on administrative expenses, it can possibly do more harm than good.

Second, the FCRA makes a clear distinction between ‘essential’ and ‘non-essential’ workers, as the proviso to rule 5 of the FCRA Rules states that “expenses incurred directly in furtherance of the stated objectives of the welfare organisation” would be excluded from the ambit of administrative expenses. These include salaries to teachers in a school, and doctors in a hospital. Earlier, with the cap of 50%, this differentiation was not as prominent. However, the Amendment Act seeks to further the gap between the categories of essential and non-essential workers. Although the intended effect could be a reduction of expenditure on members of Governing Council and their upkeep, a simpler alternative could have been to amend the definition of administrative expenses, so as to ensure that infrastructural expenses (or other expenses integral to the functioning of the association), and salaries of other staff are not adversely affected.

Conclusion

While the Amendment Act is possibly aimed at tackling the various problems plaguing the utilisation of foreign contributions, the Amendment Act, as it stands, is ridden with shortcomings. Inter alia, it fails to introduce any substantive provisions to check the increasing non-compliance with rules mandating filing of annual returns. Further, to ensure that the foreign contribution amount is fully utilised, the Central Government, referring to the Report of the High Level Committee on Corporate Social Responsibility 2018, could have introduced a fixed time limit of a certain number of years, within which the full amount is either mandatorily utilised for furthering the intended purpose of the association, or remitted to any of the designated funds of the Central or State Government, which aid the objects of the association. Instead, the Amendment Act makes the utilisation of foreign contribution more onerous, by prohibiting transfers even between FCRA registered organisations. Finally, to deal with non-filing of annual returns, the Central Government could have provided associations with incentives, including tie-ups with government departments, in furtherance of their stated objectives; however, no such mechanisms are present in the Amendment Act.

A public notice dated 13 October 2020 was released by the MHA to provide NGOs with time until 31 March 2021 to open the mandated SBI Account at the New Delhi Main Branch, while also enabling them to do so from their nearest SBI branches. This measure seeks to provide the FCRA associations with some form of immediate relief.  However, it may be inadequate in light of the adverse structural impacts the Amendment Act will have on the non-profit sector.

Shreya Mishra & Ayesha Bhattacharya

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