Who is “Foreign” & Who Is Not? Mysteries Of FCRA 2010

Until recently if you received a donation or a grant from a company like HDFC Ltd., which is an Indian company and sanctioning that donation or grant in India, in Indian rupees, it was to be treated as a foreign contribution. Not only that, if you received a donation or grant from the H.T. Parekh Fountain (the company’s foundation) which is registered in India and making the contribution in India, in Indian Rupees, that too would be a foreign contribution under FCRA 2010. 

What was the reason for this? The problem had its roots in the definition of what is “foreign source” under FCRA 2010. Section 2(1)(j)(vi) of FCRA 2010 treated any Company even if registered under the Indian Companies Act a “foreign source” if more than fifty per cent of the company’s share capital was held by foreigners (e.g: FDIs or FIIs).

However, Section 2(1)(j)(vi) has now been amended vide Finance Act, 2016 which was passed by the Parliament, received the assent of the President of India on 14^th May, 2016 and has been duly published in the Gazette of India. (The Amendment to FCRA 2010 can be found on page 91 under Part XIII.)

The relevant extract is as follows:

PART XIII

AMENDMENT TO THE FOREIGN CONTRIBUTION (REGULATION) ACT, 2010

236. In the Foreign Contribution (Regulation) Act, 2010, in section 2, in sub-section (1), in clause (j), in sub-clause (vi), the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 26th September, 2010, namely:—

“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 there under, 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;”.

“Foreign source” is defined in Section 2(1) (j) of FCRA, 2010. It has ten sub-clauses and the recent amendment is only with regard to one sub-clause (i.e.: sub-clause (vi)

Please read the amendment carefully and note that the amendment is specific only sub-clause (vi) of Section 2(1)(j).

There is no amendment to sub-clause (iii) or sub-clause (v) of Section 2(1)(j).

“Foreign source”, as defined in Section 2(1) (j) of FCRA, 2010 includes:-

1. the Government of any foreign country or territory and any agency of such Government;
2. any international agency, not being the United Nations or any of its specialized agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;
3. a foreign company;
4. a corporation, not being a foreign company, incorporated in a foreign country or territory;
5. a multi-national corporation referred to in Section 2(g) sub-clause (iv) of FCRA, 2010;
6. a company within the meaning of the Companies Act, 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 following, namely:- a. the Government of a foreign country or territory; b. the citizens of a foreign country or territory; c. corporations incorporated in a foreign country or territory; d. trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;
7. a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;
8. a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;
9. a society, club or other association or individuals formed or registered outside India;
10. a citizen of a foreign country.

 

The recent amendment under Finance Act 2016 is only concerning: sub-clause (vi) or a company within the meaning of the Companies Act, 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 following, namely:-

a) the Government of a foreign country or territory;

b) the citizens of a foreign country or territory;

c) corporations incorporated in a foreign country or territory;

d) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;

Thus Indian companies such as HDFC Ltd., which have more than 50% FDIs or FIIs will not be treated as 'foreign source' with retrospective effect from 26^th September 2010, thanks to this amendment.

However a ‘Foreign company’ or ‘Multi National Company’ will continue to be treated as 'foreign source'.

Section 2(42) of the Indian Companies Act 2013 defines “foreign company” to mean any company or body corporate incorporated outside India which:

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.

Under Section 2(g) of FCRA 2010, ‘foreign company’ means any company or association or body of individuals incorporated outside India and includes:

(i) a foreign company within the meaning of section 591 of the Companies Act, 1956;

(ii) a company which is a subsidiary of a foreign company;

(iii) the registered office or principal place of business of a foreign company referred to in sub-clause (i) or company referred to in sub-clause (ii);

(iv) a multi-national corporation.

In Explanation to sub-clause (iv) [regarding multi-national corporation] FCRA 2010 states:

“For the purpose of this sub-clause, a corporation incorporated in a foreign country or territory shall be deemed to be a multi-national corporation if such corporation:

(a) has a subsidiary or a branch or a place of business in two or more countries or territories; or

(b) carries on business, or otherwise operates in two or more countries or territories.

Noshir H. Dadrawala