Tuesday, 12 June 2018

CAP’s CEO takes a bow at ICNL

On Saturday, 9th June 2018 CAP’s chief executive Noshir Dadrawala completed his two terms of office as Director of the Board of the International Centre for Nonprofit Law (ICNL). He was appointed in June 2012. 
As per ICNL’s charter, no Director is allowed to continue beyond two terms of three years each. However, he will continue as member of ICNL’s Advisory Board.

ICNL works in over a hundred countries worldwide and its mission is to promote an enabling environment for civil society, philanthropy, and civic participation around the world.

Noshir has actively worked with ICNL on several research programs, the most recent being “The Philanthropy Law Reports” supported by the Bill & Melinda Gates Foundation. Noshir’s Report can be read online at: http://www.icnl.org/research/Philanthropy/india.html

He has also contributed his expertise for the “Civic Freedom Monitor” and his Report on India can be read online at: http://www.icnl.org/research/monitor/india.html

Through ICNL, Noshir has also been contributing for the last several years to the Council on Foundation’s country codes and laws which are intended to assist grant-makers and their advisers when undertaking equivalency determinations for foreign grantees under IRS Revenue Procedure. 
Noshir’s country note can be read online at: https://www.cof.org/content/india 

ICNL’s Chairperson, Dr. Oonagh B. Breen, who is also Professor of Law at the Sutherland School of Law, University College Dublin (where she teaches and researches on NGO Law, Governance, and Social Change) while giving Noshir a formal farewell referred to him as a “reliable Indian knowledge source”. 

ICNL’s President and CEO, Prof. Douglas Rutzen, who also teaches at Georgetown University Law Center and serves on the Advisory Board of the United Nations Democracy Fund said: “You are an inspiration to me.  You’ve worked on issues of philanthropy and civil society for many years and despite challenges, you’ve retained your optimism, dedication, and constructive engagement.  It’s an honor working with you”.


Sunday, 10 June 2018

Penalties for FCRA offences – Is there cause for Worry? Simply remember the Nine Commandments of FCRA!

This is further to our Blog post of 7th June 2018 titled “New Penalties to compound FCRA offences”. 
We have received a number of calls and messages from individuals who are naturally feeling very concerned regarding potential offences like: “what if a foreign donor accidentally credits funds into our local account” or “what if an Indian donor accidentally credits funds into our FCRA account”? 
“Does this mean penalty of minimum INR 100,000 will be imposed if an Indian donor accidentally sends INR 500 to our FCRA account? 
The Irish lawyer and politician John Philpot Curran in a speech in Dublin on July 10, 1790, had said: “The condition upon which God hath given liberty to man is eternal vigilance.” In the Indian context one could rephrase this as: “The condition upon which Ministry of Home Affairs (MHA) hath given FCRA registration or prior permission to NGOs is eternal vigilance.”. 
Exercise vigilance and due diligence everyday and at all times … there is no other way!

Let’s look at the potential offences once again and how best one can avoid penalties.

One may call these the Nine Commandments of FCRA 2010!

Commandment No. 1: If Thou art a politician, bureaucrat, judge etc., thou shalt not accept any ‘foreign hospitality’ without prior permission of MHA.

Thus, if you are a politician or bureaucrat and accidentally or knowingly relish foreign hospitality without prior permission of MHA, there will be a penalty of INR 10,000!

As NGOs let’s not concern ourselves much with this commandment, except wonder why this is the only offence with a penalty of just INR 10,000 while all other offences attract a minimum penalty of INR 100,000!

Commandment No. 2: Thou shall pass on or transfer your foreign contribution funds only to NGOs having FCRA registration or prior permission.

In other words, if you are the primary recipient of foreign funds and are routing foreign contributions to other program partners (NGOs) make sure the second recipient/s also has/have FCRA registration or prior permission to receive these funds and that too only in their FCRA Bank account, even though the second recipient/s will be receiving the funds in India, from an Indian NPO in Indian Rupees. 

The Banks here need to be given all the necessary details regarding why these funds need to go into the FCRA account.

Failure to comply with this regulation will be treated as an offence attracting penalty of INR 100,00 or 10% of the funds transferred to the second recipient, whichever is higher. 

In other words, even if the first recipient transfers INR 10,000 from its FCRA account to an NGO not having FCRA registration or prior permission, the penalty would be INR 100,000!

Commandment No. 3: Thou shalt not incur more than 50% of your foreign funds received during any financial year on administrative expenses.

As per Rule 5 of Foreign Contribution Regulation Rules 2011 under "Administrative expenses". - The following shall constitute administrative expenses: -

  • salaries, wages, travel expenses or any remuneration realised by Members of the Executive Committee or Governing Council;
  • all expenses towards hiring of personnel for management of activities and salaries, wages or any kind of remuneration paid, including cost of travel, to such personnel;
  • all expenses related to consumables like electricity and water charges, telephone charges, postal charges, repairs to premise(s) from where the organization or Association is functioning, stationery and printing charges, transport and travel charges by the Members of the Executive Committee or Governing Council and expenditure on office equipment;
  • cost of accounting for and administering funds;
  • expenses towards running and maintenance of vehicles;
  • cost of writing and filing reports;
  • legal and professional charges;
  • rent of premises, repairs to premises and expenses on other utilities;

Provided that the expenditure incurred on salaries or remuneration of personnel engaged in training or for collection or analysis of field data of an association primarily engaged in research or training shall not be counted towards administrative expenses:

Provided further that the expenses incurred directly in furtherance of the stated objectives of the welfare-oriented organisation shall be excluded from the administrative expenses such as salaries to doctors of hospital, salaries to teachers of school etc.

This ‘offence’ can be compounded by coughing up penalty of INR 100,000 or 5% of such foreign contribution so defrayed beyond the permissible limit, whichever is higher.

Commandment No. 4: Thou shalt not receive any funds from any ‘foreign source’ unless you have FCRA registration or prior permission.

NGOs not having FCRA registration or prior permission should be ultra-careful if they have a payment gateway on their own website or receive funds from other payment gateways, (e.g. crowd funding platforms) which invite funds from both local and international donors.

If your NGO is not registered under FCRA, please let your crowdfunding service provider know this and instruct them to receive funds on your behalf only from local sources, though even here there is scope for potential offence if an overseas citizen of India (OCI) is contributing. 

Hence, where ‘retail fundraising’ from unknown individuals is concerned, one must ascertain their Nationality first, failing which, if an OCI transfers a sum of just INR 1,000 to your account and you do not have FCRA registration or prior permission under FCRA, this would be an offence attracting penalty of INR 100,000.

Commandment No. 5: Even if your NGO has FCRA registration please ensure that foreign funds are received only in your FCRA Bank account specified in your registration or prior permission certificate issued by MHA.

If your NGO maintains FCRA utilisation accounts please ensure that funds from foreign sources are first deposited in your specified main FCRA account and then to your specified FCRA utilisation account.

Any change in FCRA specified bank account or specified utilisation account must be immediately intimated to MHA in online form FC 6.

But, now what if the foreign donor accidentally credits funds to your utilisation account or your local account? 

Well, first of all, one hopes your Bank is vigilant enough and will block the payment till you clarify. 

However, if this does not happen, it would be best for your NGO to instruct the Bank in writing that the funds have inadvertently been credited to the wrong bank account and that the bank should immediately transfer funds to the right bank account or simply return the funds to the donor with instructions from your NGO and/or your bank to re-transfer funds to the correct specified FCRA Bank account.

Any, lapse in this regard would attract penalty of INR 100,000 or 5% of the amount credited to the wrong bank account.

Moral: Check your bank statements regularly or daily or face large penalty!

Commandment No. 6: Thou shalt not deposit local funds in your specified FCRA Bank account.

As stated in our response to Commandment No. 5, if such an inadvertent mistake occurs, one would hope that your Bank would be vigilant. However, if not, please request the bank to immediately correct the mistake or return the money to the donor with a request to re-transfer to the correct Bank account.

This offence can set your NGO back by INR 100,000 or 2% of the amount which was meant to go in your FCRA Bank account but, inadvertently got credited to your specified FCRA Bank account.

Commandment No. 7: If thou art a bank or an ‘authorised person’, thou shalt report or provide intimation to MHA regarding the prescribed amount of foreign remittance and the source and manner of such remittance.

The onus of compliance is mainly on your Bank, but, don’t forget to upload intimation of quarterly receipts of foreign contribution, preferably on MHA’s (FCRA) online portal.

Commandment No. 8: Thou shalt file your FCRA annual returns online before 31st December.

Most NGOs file their tax returns by 30th September but, it’s strange why so many wait, till December to file their FCRA returns. 

Be diligent. Filing your annual return is mandatory even during the year or years that you do not receive any foreign contribution.

Filing your return in FC 4, even during the year or years that you do not receive any foreign contribution is indicative to MHA that you wish to keep your registration alive. 

If you miss the due date, be prepared to shell out a minimum penalty of INR 100,000.

Commandment No. 9: Thou shalt maintain proper books of account (or proper company account or cost centre in your accounting software like Tally) and records of foreign contribution received and manner of its utilisation.

Non-compliance would attract penalty of INR 100,000 or 5% of the foreign contribution received during the relevant period of not maintaining accounts, whichever is higher.

End Note
Remember, managing compliance takes resources, but, it’s nowhere near as expensive as the costs associated with a breach!

Noshir H. Dadrawala

Thursday, 7 June 2018

New Penalties to compound FCRA offences

Ministry of Home Affairs has issued Notification dated 5th June, 2018 S.O. 2291(E) listing offences which hitherto were not compoundable (e.g. defraying of foreign contribution beyond fifty per cent of the contribution received for administrative expenses). 
For virtually every offence (save the offence of accepting any foreign hospitality in contravention of FCRA where penalty is Rs. 10,000/) the minimum penalty is a sum of Rs. 100,000/-. 
The Notification also lists officers competent for compounding such offences. In all cases it is the Director, or as the case may be, the Deputy Secretary in-charge of the section responsible for the administration of the Act.

The Notification can be seen or downloaded at:

This latest Notification of 5th June 2018 is in suppression of the notifications of the Ministry of Home Affairs Numbers S.O. 1976(E), dated the 26th August, 2011 and S.O. 2133(E), dated the 16th June, 2016. Under these earlier Notifications offences which could be compounded were limited. However, penalties were lower, especially with regard to late filing of returns.


1. Whoever accepts, or assists any person, political party or organization in accepting, any foreign contribution or any currency or security from a foreign source, in contravention of any provision of FCRA or any Rule or Order made there under, shall be punished with imprisonment for a term which may extend to five years, or with fine, or with both.

This offence can now be compounded with a penalty of Rs. 10,000/-

2. No person who is registered and granted a certificate under FCRA or has obtained prior permission under this FCRA and receives any foreign contribution, shall transfer such foreign contribution to any other person unless such other person is also registered and had been granted the certificate or obtained the prior permission under this Act.

Contravention of this provision can be now compounded with a penalty of Rs. 1,00,000/- or 10% of such transferred foreign contribution, whichever is higher.

3. Organisations registered under FCRA or having prior permission are required not to defray as far as possible such sum, not exceeding fifty per cent of such contribution, received in a financial year, to meet administrative expenses, without prior permission of MHA.

Contravention of this provision can now be compounded with penalty of Rs. 1,00,000/- or 5% of such foreign contribution so defrayed beyond the permissible limit, whichever is higher.

4. No person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution without either having prior permission or registration under FCRA.

Contravention of this provision can now be compounded with penalty of Rs. 1,00,000/- or 10% of the foreign contribution received, whichever is higher.

5 a. All foreign contributions must be received only in the FCRA Bank account specified in the application for grant of prior permission or registration certificate under FCRA. Receiving foreign contribution in any account other than the specified account is an offence.

This offence can now be compounded with penalty of Rs. 1,00,000/- or 5% of the foreign contribution received in such account, whichever is higher.

5b. Not reporting the prescribed amount of foreign remittance or source and manner of such remittance by banks and authorized persons too is an offence but now compoundable with penalty Rs. 1,00,000/- or 3% of the foreign contribution received or deposited in such account, whichever is higher.

5c. Receiving & depositing any fund other than foreign contribution (local or non FC funds) in the account or accounts opened for receiving foreign contribution or for utilizing the foreign contribution is also an offence, but, now compoundable with penalty of Rs. 1,00,000/- or 2% of such deposit, whichever is higher

6. Organisations are required to intimate the amount of each foreign contribution received and the source from which and in the manner in which, such foreign contribution is received both quarterly as also by filing annual return in Form FC 4.

Failure to comply can now be compounded with penalty of Rs. 1,00,000/- or 5% of the foreign contribution received during the period of non submission, whichever is higher.

7. Every organization which has prior permission or registration under FCRA is required to maintain books of account and records of foreign contribution received and manner of its utilization.

Contravention of this provision can now be compounded with penalty of Rs. 1,00,000/- or 5% of the foreign contribution during the relevant period of not maintaining accounts, whichever is higher.

In case of multiple offences
MHA has clarified that in case more than one offence has been committed by a person/organisation, the total amount of compounding for such offences shall not be more than the value of the foreign contribution involved.

Tuesday, 5 June 2018

CSR Compliance getting ‘Curiouser & Curiorsor’!

In the wonderland of Indian Corporate Social Responsibility, CSR Compliance seems to be, as Alice would have said in Lewis Carroll’s wonderland, getting "curiouser and curiouser".
General Circular No. 06/2018 dated 28th May 2018 issued by the Ministry of Corporate Affairs (MCA) seeks to address concerns raised by some stakeholders regarding non-compliance of the first proviso to sub-section (5) of section 135 of the Indian Companies Act 2013, which lays down that the company shall give preference to the local area and areas around where it operates, for spending the amount earmarked for CSR activities.
The circular emphasizes and reiterates that this provision “has to be followed in letter and spirit”.

  1. What would qualify as local area? The City or town where the company operates or the entire district or the State?
  2. Does this mean if the company operates only in Mumbai or Pune, it cannot support activities outside the Municipal boundaries of Mumbai or Pune?
  3. The term ‘preference’ in the context of this law would mean ‘priority’ should be given to issues or programs in and around the area where the company operates. There is nothing wrong with this principle. However, if one goes strictly by the letter of the first proviso to sub-section (5) of section 135 of the Companies Act 2013, supporting any activity outside the area where the company operates would be disallowed and considered non-compliance under Section 135(5)!

In our opinion, MHA owes yet another clarification to stakeholders in terms of what would be MCA’s definition of “local area and areas around where it (the company) operates”!

We have repeatedly been saying this, and we have no hesitation in reiterating that excessive regulation will ultimately destroy the very spirit of CSR.

Noshir H. Dadrawala

Monday, 4 June 2018

MCA proposing ‘Enforcement’ & ‘Prosecution’ to ensure CSR compliance

  • From the ‘Show or Shame’ policy of 2014, the Ministry of Corporate Affairs (MCA) seems to be moving towards ‘Spend or get Spanked’ policy in the year 2018, barely four years after CSR was made mandatory for companies having either Net-worth of INR 500/- crore or more or Turnover of INR 1,000/- crore or more or Net Profit of INR 5 crore or more.
  • It would appear that merely providing explanation for not undertaking expenditure on CSR activities would not be considered as adequate compliance of law and the Government seems intent on strictly dealing with issues encompassing CSR and its compliance.

Stricter Enforcement & Prosecution
The Ministry of Corporate Affairs (MCA) has commenced review of the functioning of CSR implementation and this exercise has been initiated to recommend a uniform approach for its enforcement amongst corporates.

Government is also revisiting the guidelines for enforcement of CSR provisions, including: 

  • structure of Centralized Scrutiny and Prosecution Mechanism; 
  • methodologies for monitoring compliance; 
  • criteria to identify responsibility for non-compliance; 
  • draft standard Show Cause Notice, 
  • standard sanction letter for prosecutions, 
  • power to withdraw prosecutions, etc.

CSR was practiced even before legislative mandate
Several companies have been involved in CSR related activities long before the Indian Companies Act 2013 made it mandatory for certain companies and such companies have been undertaking such activities because they genuinely believed and still believe that they have a social obligation towards society.

To the best of our knowledge and belief nowhere in world is CSR mandated under law and yet, companies in large economies like the USA and the UK as also smaller economies like the Philippines and Singapore voluntarily practice CSR.

Rationale behind Section 135(5)
When CSR became mandatory for certain companies from the fiscal year 2014-15 the assurance given was that companies will be allowed to undertake CSR activities as per their own policies.

Sub-section (5) of Section 135 was clearly drafted so as not to put undue pressure on companies. 

The second proviso of sub-section 5 of Section 135 of the Indian Companies Act 2013 states: “Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.” 
This provision was specifically inserted in the Act to allow companies to follow the ‘Comply or Explain’ philosophy on CSR. The company and its officers were liable to be penalized only in case of non-disclosures of CSR.

Regulatory excesses will kill the voluntary spirit of CSR
In our view what MCA is contemplating now is regulatory excesses which will kill the very spirit of voluntary CSR which has and should stem from the heart of corporate India.

The role of the regulator should be restricted to regulating and not control.

Statistics reveal that CSR spend by companies is growing and far from diminishing. Why then should there be CSR “enforcement”? 

CSR as the name itself suggests, is a ‘social responsibility’ which is a voluntary corporate value and MCA should refrain from creating an enforcement and prosecution regime.

Law should create an enabling environment
The law should create an “enabling environment” for CSR and not one of “enforcement”.

CSR spend is not even allowed as a business expenditure under section 37 of the Income tax Act and thus smaller companies do not even see any incentive for spending on CSR. In fact, some even see this as an additional “charity tax” over and above corporate taxes.

Insisting that two percent of the net profits should be utilized fully will create unnecessary pressure on companies to spend only in order to meet compliance requirement. This sort of pressure will lead to giving to easy causes, thus defeating the very essence of strategic and sustainable CSR.

In our opinion, government should allow CSR to take root and grow at its own natural pace without threats of ‘enforcement’ and ‘prosecution’. There is significant growth in CSR spending over the last four years and in our opinion, additional controls and enforcement will prove detrimental to the essence of CSR.

Noshir H. Dadrawala