FCRA Compliance Barriers - A Succinct Analysis

Introduction

The Foreign Contribution (Regulation) Act was enacted in the year 1976 in order to regulate the utilization of foreign funding received in the form of contributions/ donations in India for philanthropic causes. Thereafter, a new regime was enacted i.e. Foreign Contribution (Regulation) Act, 2010 (“Act”), which endeavoured to bring transparency and accountability on receipt and utilization of foreign donations received in the country by associations and other voluntary organizations as well as acceptance of foreign hospitality by those holding public offices (like judges, public servants, office bearers of political parties, etc.) to ensure national security.

The Act requires all organizations seeking foreign contributions to be registered or to obtain prior permission for receiving such funds, for social, educational, religious, economic and cultural purposes.  Though the purpose of this Act is to streamline the process of acceptance and utilization of foreign contributions by Indian entities which are engaged in philanthropic initiatives, the provisions of the Act are onerous and cumbersome and pose practical and operational difficulties for organizations to obtain the prior permission or registration, as well as in sustaining the registration obtained. This has led to cancellation of various licenses on account of non-compliances of the provisions of the Act. As per the data available on FCRA website, more than 20,000 voluntary organisations including non-governmental organisations (NGOs) have got their registrations cancelled by the Ministry of Home Affairs, between 2011 and 2019.

Moreover, on September 29, 2020, Foreign Contribution (Regulation) Amendment Act, 2020 (“Amendment Act”) was notified to amend the Act, in order to bring greater transparency and prevent money laundering, and strengthening of security to increase accountability on receiver of foreign donations. It was expected that the Amendment Act will do away with the practical difficulties under the Act and will make the process of obtaining foreign contribution and other compliances swifter, however it did not address such issues. In-fact, it introduced more barriers, regulating the utilisation of the foreign contribution (such as stricter requirements on disclosure of information, restriction on transferring foreign contributions, requirement of a single designated bank account), thus adding extra burden of compliances on organizations receiving foreign contribution.

This article discusses the practical challenges (as below) that various NGOs and other organisations encounter at the time of seeking registration and on day-to-day compliances of the provisions of the Act, and the need to bring in more clarity around such challenges.

Challenges

1) Time limit for granting registration or prior permission - The Act do not provide for any specific time limit either for granting or rejecting the application for registration or prior permission. Typically, the processing time for an application is six months approximately, however it is seen that applications for registration are delayed for even two to three years. This at times act as a deterrent for organizations which aim to operate through utilization of foreign funds on a time sensitive project.

2) Receiving foreign contribution in designated bank account - As per the Act the foreign contribution can be received only in an exclusive single “FCRA Account”. Additionally, one or more accounts (i.e. Utilization Account(s)) may be opened for ‘utilising’ the foreign contributions, provided that no fund other than foreign contribution shall be received or deposited in such accounts, including any domestic funds. This requirement of receiving and utilization of only the foreign funds from the FCRA Account or Utilization Account(s) poses a challenge for organizations which have multi-location projects/offices in India, for making all their operational payments (such as establishment costs, employees’ salaries etc.) from such locations. Furthermore, the Amendment Act has introduced a ban on transfer of any foreign funds by an organisation, thus paralysing the operations of NGOs because of their inability to transfer funds to partner NGOs within the country. Smaller NGOs which work in collaboration with bigger organizations (which have capacity to raise foreign funds and obtain registration under the Act) might be eliminated under this process.

3) Categorisation of permitted activities - The Act provides that an organisation having a definite cultural/ social/ educational/ religious/ economic object only will be allowed to accept foreign contribution. However, the activities that fall under these specific heads are not specified under the Act and the applications for registration or prior permission are decided by the authorities at their discretion. There is, therefore, a need to define or categorise the activities which will fall under the definite cultural, social, educational, religious or economic object, in order to eliminate ambiguity from the scope of activities for which foreign contribution can be received.

4) Stricter provisions under Amendment Act - The additional compliance barriers introduced under the Amendment Act, have further lurked fear in the organizations who are dependent on the foreign donations for their operations. Some of the barriers are as follows:

(i) Reducing limit of administrative expenses - The limit on the percentage of foreign funding allowed to be used for administrative purposes has been reduced to 20% from 50%. This may pose a major challenge on the operations of various NGOs, while covering their day-to-day administrative expenses (such as salaries of employees, professional fees, travel expenses, utility bills, etc.). More particularly, as the amendment has come into effect mid-year, the administrative expenditures of some of the NGOs may have already crossed 20% threshold.

(ii) Designated bank account in specified branch - The Amendment Act now requires that foreign funding must be deposited into a designated bank account with a specified branch of the State Bank of India in New Delhi. However, even on submitting all the documents and completing KYC formalities, the new bank account will not be operational till the Ministry of Home Affairs approves it. This is causing delay and creating hurdles in operationalising the bank account for receiving foreign funds, particularly during the pandemic situation, when the donations are urgently required by various under-funded NGOs to operate and to help families impacted by Covid-19.

Whilst a few amendments suggested under the Amendment Act, are a welcome step, it generally has faced criticism by various international organisations including the International Commission of Jurists, condemning it for failing to comply with India’s international obligations, by restricting the rights of civil society organisations to receive foreign funding.

Conclusion

The framework provided under the Act for receiving and utilization of foreign funds by organizations was introduced with an objective of maintaining national security and misuse of foreign donations received in the country, but the compliances put in place had its own shortcomings, which with time led to plaguing the entire process. There is a need to smoothen the mechanism by addressing the practical and operational challenges faced by organisations to obtain the prior permission and registrations, in order to encourage such organizations to take up more charitable and social initiatives. Though the Amendment Act aimed to ensure effective monitoring of receipt of foreign donations and their utilization, it seems there are various other issues which need to be re-evaluated to attain the true spirit of the Act, by simplifying the mechanism and enabling a more encouraging system for NGOs to utilise the foreign funding to achieve their philanthropic pursuits.