Despite requests for parliamentary committee consultations, on September 29, 2020, the controversial Foreign Contribution (Regulation) Amendment Act, 2020 (“Amendment Act”) came into force, i.e. a week after the bill was introduced in the Lok Sabha. This alert analyses some key changes under the Amendment Act.
1. Prohibition to transfer foreign contribution to “any other person”: The amended section 7 prohibits a person registered or having prior permission under the Foreign Contribution (Regulation) Act, 2010 (“FCRA”) to transfer foreign contribution received by it to “any other person”.
PSA view: Non-profits that are registered or have obtained prior permission under FCRA can no longer sub-grant foreign contribution received by them to “any other person”. As per section 2(1)(m) of FCRA, the term person includes individuals, HUFs, associations and companies with charitable objects registered under the Companies Act. Prior to the Amendment Act, non-profits were allowed to transfer foreign contribution to (i) persons registered or having prior permission under FCRA and/or (ii) persons not registered or having permission under FCRA, with prior approval of the Indian government.
Typically, smaller non-profits and individual social workers operate through collaborations with larger non-profits wherein the latter sub-grants portions of foreign funding received by it to the former. With complete prohibition on such transfers pursuant to the Amendment Act, functioning of smaller non-profits and individual workers is likely to be severely impacted. Agreements between such organizations for sub-grants will also have to be re-evaluated.
2. Reduction in percentage of “administrative expenses”: Per amended section 8 the percentage of foreign contribution received in a FY which can be utilized by a person registered or having prior permission under FCRA towards “administrative expenses” has been reduced from 50 to 20%.
PSA view: Pursuant to rule 5 of the Foreign Contribution (Regulation) Rules, 2011, administrative expenses inter alia include payment of (i) salaries, wages, travel expenses or other forms of remuneration; (ii) utilities such as water and electricity charges; (iii) real-estate related costs; and (iv) legal and other professional costs. These expenses are essential for the smooth and proper functioning of non-profits. A 30% reduction can severely impact operations of non-profits and may lead to decline in talent acquisition, retention of experts or restrict expansion and outreach programmes.
3. Increase in compliances: The Amendment Act has introduced section 12A. This section states that Indian government may mandates persons applying for FCRA registration or renewal to furnish Aadhar Card or Passport or Overseas Citizen of India card (in case of foreign nationals) for all its directors and key personnel. Addtionally, section 17 has been amended to now mandate receipt of foreign contributions into a designated FCRA Account to be maintained with a notified State Bank of India branch at New Delhi.
PSA view: The aforesaid compliances seem to be a step towards over-regulation and excessive scrutiny since it is unclear as to how these will lead to “transparency and accountability” among non-profits. In fact, this amendment seems to suggest that the government intends to keep a close watch on the functioning of non-profits.
Non-profits play a significant role as catalysts of social change and economic development due to their extensive reach across the length and breadth of India. In fact, during the current pandemic, non-profits have worked extensively to assist communities across rural India. While, the Indian government’s intent to improve transparency and accountability and keep a check on corrupt/money laundering practices is appreciated, it is unclear as to how the aforementioned amendments will achieve that. In fact, the amendments are likely burden to non-profits with additional compliances, reduce opportunities of funding and collaboration, lead to decline in talent acquisition and compel them to re-assess their contractual obligations. Overall, this could discourage social entrepreneurship and deter talented individuals from exploring opportunities in the development sector.