On September 20th, the Foreign Contribution (Regulation) Amendment Bill, 2020 was introduced in the Lok Sabha. The amendments broadly redefined terms related to acceptance, transfer, and utilisation of foreign contributions to charitable organisations under the Foreign Contribution Regulation Act (FCRA), 2010. The bill was passed by the two houses of Parliament, and ratified by the President of India, within a week. It passed into law on September 29th, 2020.
Here is a quick read that breaks down the implications of the amendments for nonprofits (with and without FCRA), service providers, CSR funders, and foreign contributors.
1. What is the government’s rationale for these amendments?
The Minister of State for Home Affairs, Nityanand Rai in his statement in the Indian parliament said that the amendments are intended to bring about “greater transparency” and are “not against NGOs or an attack against a religion or community”. He further said that it will not stop foreign contribution but is in the interest of nonprofits doing good work. Additionally, he mentioned that it was meant to “stop misuse of foreign funds by some people” and was required for an Atmanirbhar Bharat, and aimed to ensure that foreign funds are spent in the right direction.
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2. What are some of the repercussions of this Amendment Act?
The amendments which are expected to cause the most concern are:
The blanket ban on transfer of foreign contributions could impact collaborations in the development ecosystem, especially for smaller, less visible grassroots organisations that may not meet the criteria or be able to submit detailed proposals to get access to grants from funders abroad. Equally, such grassroots organisations may not have the track record or meet the eligibility criteria to obtain registration under the FCRA. Intermediary organisations provide the necessary identification, monitoring, and capability building of the smaller nonprofits for them to thrive.
This cap on expenses may hinder efforts on internal capability building, attracting relevant talent, and focus on innovation for nonprofits. Expenses such as travel, rent, and hiring of talent come under the ambit of administrative expenses, among others. Cap on these expenses may impact productivity of smaller nonprofits.
The greater scrutiny (afforded by submission of Aadhaar numbers) of members of boards, trustees, or other management/executive council members of nonprofits may curtail interest in experts wanting to provide their expertise and advisory services to nonprofits. This may deprive the sector of their knowledge, skills, and their network which would be a significant loss for the impact sector.
Extended suspension of FCRA account may affect operations significantly, in case the FCRA-registered organisation comes under government scrutiny, thereby impacting projects on the ground.
3. For an FCRA-registered nonprofit, what are the ramifications of the 2020 amendments?
a) As an FCRA-registered nonprofit, if you have an acting ‘public servant’ on your governing board, then you will be prohibited from receiving any foreign contribution.
b) Sub-grants from and to other FCRA-registered nonprofits will no longer be possible. Each FCRA-registered nonprofit looking to collaborate on a project will have to enter into direct transaction with the foreign contributor to receive funds. Service contracts for specific services provided to an FCRA-registered entity are not impacted. There is an applicability of 18 percent GST and the receipt through provision of such services must be within 20 percent of the total receipts for the service-providing nonprofit (Finance Act 2015).
c) Local branch/offices of international nonprofits or think tanks that were incorporated or established in India to distribute funds locally from the foreign parent entity will no longer be able to do so.
d) Nonprofits will have to take into account their administrative expenses and ensure that they do not exceed 20 percent of the foreign contribution received.
e) Nonprofits will have to ensure that they have the Aadhaar details of all members on their governing board while applying for FCRA registration or while seeking renewal of their registration.
f) Nonprofits will have to set up their designated FCRA bank account to receive foreign contribution in specific branches of State Bank of India in New Delhi, as notified by the government. The funds can be moved to other bank accounts, however, for their utilisation.
g) Given that the FCRA registration expires after five years, FCRA holders will be subject to inquiry at the end of every five years if they wish to renew their registration, rather than a simpler renewal process prior to the amendments.
h) Any nonprofit that would prefer to surrender their FCRA registration may do so, but any assets that have been created using foreign contribution will be transferred to an authority prescribed by the government. These assets may include any schools or institutions that may have been set up using foreign contribution.
There is no clarity on how these changes will impact the existing funds collected for ongoing projects.
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4. For a non-FCRA-registered nonprofit, what are the ramifications of the amendments?
Earlier, non-FCRA registered nonprofits could receive a portion of FCRA funds from FCRA-registered nonprofits, by taking prior permission from the government (up to 10 percent of the foreign contribution). This will no longer be possible. This could impact collaborations in the development ecosystem. Service contracts for specific services provided to an FCRA-registered entity are not impacted, with the applicability of 18 percent GST. The receipt through provision of such services must be within 20 percent of the total receipts for the service-providing nonprofit (Finance Act 2015).
If a nonprofit wishes to apply for an FCRA registration, it would be pertinent to keep in mind the necessary eligibility criteria and documentation required such as Aadhaar, affidavits to be signed by the office bearers/chief functionary, the prohibition of presence of public servants on the board, and the more detailed scrutiny that the organisation would come under after the amendments come into force.
5. As a service provider to FCRA-registered nonprofits, will this Act impact my services?
Any fees earned by a person in lieu of any services rendered by the person in the ordinary course of business is exempted from the definition of foreign contribution and does not fall under the ambit of the FCRA law.
The only ramification of these amendments may apply if the FCRA-registered nonprofit considers the service fees as part of their administrative expenses, which may now be limited to 20 percent of total foreign contribution. Depending on the nature of services rendered, the nonprofit may characterise the service fees payable as ‘administrative expenses’, if such services relate to the management or running of operations of the client itself (as opposed to a specific project). In such a case, the fees could be characterised as ‘professional charges’.
6. For a CSR client who can only support FCRA-registered nonprofits partners, what are the implications of these amendments?
a) CSR funders will have to ensure either by diligence or by taking a warranty from the nonprofit partners that they do not have any public servants on their governing board.
b) CSR funders will have to ensure their funds are not further distributed by the recipient entity by incorporating necessary restrictions in the terms of engagement with the nonprofit partner.
c) CSR funders will also have to ensure that the 20 percent cap on administrative expenses is clearly marked in the budget/purpose of utilisation shared by the nonprofit partners.
d) CSR funders will also need to be aware of the date of validity of the FCRA registration of their nonprofit partners, to ensure that projects do not get stalled midway due to delay in process of renewal of FCRA certificate.
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7. As a foreign contributor to Indian nonprofits, how will the amendments impact my contributions?
a) Foreign contributors will have to ensure, either by diligence or by obtaining adequate warranties from the recipient entities that such nonprofit partners do not have any public servants on their governing board, which would make them ineligible to receive foreign contribution.
b) Foreign contributors will have to ensure their funds are not further distributed by the recipient entity by incorporating necessary restrictions in the terms of grant.
c) Foreign contributors will have to ensure that the 20 percent cap on administrative expenses is clearly marked in the budget/purpose of utilisation shared by the recipients.
d) Foreign contributors will need to be cognisant of validity of FCRA certification of their recipient organisations.
e) Foreign contributors, in case of a collaboration, will need to enter into separate grant agreements with each of their nonprofits partners rather than through one anchor FCRA-registered nonprofit which would further sub-grant it to other nonprofits.
This guide has been put together by Sattva Consulting. A more detailed document is available here.
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