Note : This note is only to cover the changes made by the Finance Act 2016 and Finance Act
2018 redefining the concept of foreign source in respect of companies registered in India and compliant under FEMA.
The FCRA regulates receipt of foreign contribution from any foreign source.
“Foreign Source”, under Section 2(1)(j) subclause (vi). is defined to include “a company within
the meaning of the Companies Act, 1956 (1 of 1956), and more than one-half of the nominal
value of its share capital is held, either singly or in the aggregate, by one or more of the
- The Government of a foreign country or territory;
- The citizens of a foreign country or territory;
- Corporations incorporated in a foreign country or territory;
- Trusts, societies or other associations of individuals (whether incorporated or not),
- Formed or registered in a foreign country or territory;
- Foreign company;”
Further, Section 2(1)(g) of the FCRA defines a “foreign company” as
- Any company or association incorporated outside India and includes a foreign company as defined under the Companies Act, 1956;
- A company which is a subsidiary of a foreign company;
- A company whose registered office is outside India or a multi-national company.
Therefore, under the FCRA 2010 and FCRA 1976, a foreign company or an Indian company in which more than 50% shareholding was held by an offshore/foreign entity or person, would automatically become a “foreign source” and receipt of funds from such companies would become “foreign contribution” for the purpose of the FCRA.
Amendment to the FCRA in May 2016
The FCRA was amended by the Finance Act, 2016 and the following new proviso, to the above mentioned Section 2(1)(j)(vi), and was introduced with retrospective effect from September 26, 2010.
“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made thereunder, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source;”.
The insertion of this proviso creates an alignment of FEMA and FCRA and creates a situation where a company, compliant with the foreign direct investment sectoral caps, to contribute to any person (as defined under the FCRA) in India without any restrictions as such companies are now excluded from the definition of “foreign source”, as defined under S.2(1)(j).
Context of the Amendment
This amendment was brought about after the ruling of the Delhi High court in the case of Association for Democratic Reforms vs Union of India where the funding of contributions by political parties by Indian companies where more than 50% of the shareholding was held by Vedanta Resources PLC which was deemed to be a foreign company.
Once the amendment was brought in an appeal in the above case against the order of the Delhi High court filed in the Supreme Court was withdrawn.
Impact of the Amendment
The 2016 Amendment has now paved the way for all entities to receive foreign funding from Indian companies as long as they are FEMA compliant, and thus be unregulated by the FCRA.
As the amendment is retrospective in nature even violations of the erstwhile definition under 2(1)(j) by receiving donation from entities covered under the provision have escaped any penalty of whatsoever nature.
By allowing FEMA compliant Indian companies which may be fully owned and controlled by foreign persons, to be excluded from the definition of foreign source, amounts to allowing foreign Governments, foreign citizens, foreign corporations, trusts, societies or other association of persons (whether registered or not) international agency funded companies, etc. who set up Indian companies to contribute freely to any organisations.
A foreign company or a multi-national company will continue to be a foreign source.
Note : a corporation incorporated in a foreign country or territory shall be deemed to be a multi-national corporation if such corporation:
- Has a subsidiary or a branch or a place of business in two or more countries or territories; or
- Carries on business, or otherwise operates in two or more countries or territories.
Due Diligence to be carried out by Associations while accepting Donations / Funding
Both donors and recipients (NGOs)S should understand that a company could be a ‘foreign source’ for any of the following reasons:
- The company is incorporated or registered outside India and is therefore a ‘foreign company’. A foreign company would not become a local source even if it is acquired by an Indian company or all its shareholders are Indian.
- Although registered under the Indian Companies Act, it could be a subsidiary of a foreign company.
- It could be a branch of a foreign company
- It could be a multi-national company controlled from outside India.
- It could even be an Indian company where foreigners hold more than fifty per cent share-holding, but the share-holding exceeds the FDI norms.
Steps to be taken by Recipient NGO
- Whenever your organization accepts CSR funds or donation from a company (even if registered under the Indian Companies Act) ask specifically whether it is a ‘foreign company’ or a ‘subsidiary of a foreign company’ or a MNC.
- Request and obtain a letter in writing from the company or
- Incorporate a disclaimer in the CSR grant agreement or
- Issue an acceptance letter / receipt which states that in your understanding the company is not a ‘foreign source’ or MNC under FCRA 2010 and requesting the company if the understanding is incorrect to refute the same. For such a letter please ensure you have an acknowledgment form the recipient on your copy of the letter or send by Registered Post with AD.