Foreign
Contribution (Regulation) Act, 2010
and
CSR spend
Section 135 mandates all companies that are warranted under its
subsection (1) to have Corporate Social Responsibility Policy and spend funds
at least 2% of its average net profit in accordance therewith. The CSR policy as recommended by the company’s CSR committee be laid out in line with
Companies (CSR Policy) Rules, 2014 and need to be approved by the Company’s Board
of Directors.
Rule 3 of Companies (Corporate Social Responsibility Policy) Rules,
2014 it its sub rule (1) unambiguously requires even foreign companies to
comply with CSR regulations and it reads as under:
(1) Every company including
its holding or subsidiary, and a foreign company defined under clause (42) of
section 2 of the Act having its branch office or project office in India which
fulfills the criteria specified in sub-section (l) of section 135 of the Act
shall comply with the provisions of section 135 of the Act and these rules:
Provided that net worth,
turnover or net profit of a foreign company of the Act shall be computed in
accordance with balance sheet and profit and loss account of such company
prepared in accordance with the provisions of clause (a) of sub-section (1) of
section 381 and section 198 of the Act.
Therefore, foreign companies
which have a branch office or a project office within India shall also need to
make CSR spend and follow all the rules and related regulations in compliance.
Howsoever, such foreign company’s CSR spend shall be of such magnitude as it
relates to the profits germane to its Indian part only.
Foreign Company is defined in section 2 of the Companies Act, 2013
as under:
2 (42)
“foreign company” means 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.
Liaison offices
Therefore, the companies which are incorporated outside India and
has a business presence by whatever mode and modality enumerated in its
definition shall fall within the definition of a foreign company. Though prima
facie a liaison office of a foreign company also gets covered within the
definition of a foreign company, a doubt may arise if the business conducted by
a liaison office shall give rise to obligation of CSR spending. Despite of the
fact that liaison offices as established within the purview of the Foreign
Exchange Management (Establishment in India of Branch or Office or Other Place
of Business) Regulations, 2000 shall fall within the definition of a foreign
company, these may not get obligated to
spend under CSR regulations of Companies Act, 2013. The regulations under FEMA supra define a ‘Liaison Office’ as follows:
2 (e) 'Liaison Office'
means a place of business to act as a channel of communication between the
Principal place of business or Head Office by whatever name called and entities
in India but
which does not undertake
any commercial /trading/ industrial activity, directly or indirectly, and
maintains itself out of
inward remittances received from abroad through normal banking
channel;
Therefore, when the liaison offices
are supposedly to act as a channel of communication between principal place of
business overseas vis-à-vis its
Indian operations; and, are not permitted to carry out any business activity,
it is unlikely that they shall generate net profit as envisaged by the Companies
Act, 2013 so far as application of CSR provisions are concerned. Primarily also
in view of the fact, that these outfits are obligated to maintain their Indian
activities through inward remittances from overseas.
However, other forms of outfits of a
foreign company may get to comply with CSR regulations , if these are operating
as a ‘branch’ or a ‘project office’ or a ‘site office’ within the ambit of FEM (Establishment in
India of Branch or Office or Other Place of Business) Regulations, 2000 since
these are permitted to carryout businesses that may germinate turnover, net worth
or net profit as necessitated by sub section (1) of section 135 of the
companies act, 2013.
Determination of Net worth, turnover and net profit of a foreign company
The proviso to sub rule (1) of rule
3 of Companies (CSR Policy) Rules, 2014 requires that net worth, turnover and
net profit of a foreign company are to be computed in accordance with the
accounts prepared by such foreign company in accordance with clause (a) of sub-section
(1) of section 381 and section 198 of the Act.
The foreign companies are required to prepare its financial statements as
per rule 4 sub rule (1) of the Companies (Registration of Foreign Companies)
Rules, 2014 as promulgated under subsection (1) of section 381 of the Companies
Act, 2013. These companies must prepare
financial statements of its Indian
business operations in accordance with Schedule III or as near thereto as may
be possible for each financial year. Thus, these accounts shall be made as if
such Indian operations are carried out by any other Indian company. Rule 5 also
stipulates that these accounts shall be audited by a practicing chartered
accountant or a firm of practicing chartered accountants.
Thus once the financial
statements are prepared and audited as prescribed under rule 4 and rule 5 supra, the determination of net worth,
turnover or net profit shall be done in accordance therewith.
Complying with FCRA
The law permits a company
that is covered under CSR provisions to undertake CSR activities in accordance
with approved CSR Policy either directly or through a trust or society etc.
Rule 4 of Companies (CSR Policy) Rules, 2014 in its sub rule (2) permits so.
Use of phrase ‘or otherwise’ as the part of sub section (2) in its culmination
very clearly gives a leeway to the companies to either undertake CSR activities
directly under its own corporate umbrella or entrust the same to a trust or
society or section 8 company (section 25 company in previous
dispensation).
4. CSR Activities.-
(l)…
(2) The Board of
a company may decide to undertake its CSR activities approved by the CSR Committee,
through a registered trust or a registered society or a company established by
the company or its holding or subsidiary or associate company under section 8
of the Act or otherwise:
Provided that-
(i) if such
trust, society or company is not established by the company or its holding or
subsidiary or associate company, it shall have an established track record of
three years in undertaking similar programs or projects;
(ii) the company
has specified the project or programs to be undertaken through these entities,
the modalities of utilization of funds on such projects and programs and the
monitoring and reporting mechanism.
It is when the activities are
undertaken through a trust or society etc. in pursuance to rule 4 sub rule (2),
the issue of compliance with Foreign Contribution (Regulation) Act, 2010 (FCRA)
shall crop up. When the foreign company delivers or transfers anything either
as money or as other article, the recipient entity shall need to test its
admissibility or otherwise under FCRA.
Compliance with the Foreign
Contribution (Regulation) Act, 2010 (FCRA) and the Foreign Contribution
(Regulation) Rules, 2011 (FCRA Rules) primarily is the responsibility of the recipient
entity. However, as a matter of good corporate governance practice, it is
expected from a foreign company that comes within the fold of CSR regulations, to
ensure that nothing is faltered when it comes to spending funds under the
Corporate Social Responsibility endeavours. Needless to add that Corporate
Social Responsibility in its very root presupposes complying with all the laws
of the land responsibly by the
company at its own end; as well as,
it takes adequate safeguards to assure the same level of compliance at the recipient’s
end when undertaking CSR activities in pursuance of the regulatory framework
prescribed. Monitoring of the CSR Policy and CSR spend also are the obligations
cast upon the CSR committee by the statute.
FCRA and Rules framed there under
regulates certain foreign contributions either by prohibiting or through the
medium of permission these contributions subject to the prescribed regulations
and procedures. Foreign contribution has been
defined in section 2 clause (h) as under:
(h) “foreign
contribution” means the donation, delivery or transfer made by any foreign
source,—
(i) of any article, not
being an article given to a person as a gift for his personal use, if the
market value, in India, of such article, on the date of such gift, is not more
than such sum as may be specified from time to time, by the Central Government
by the rules made by it in this behalf;
(ii) of any currency,
whether Indian or foreign;
(iii) of any security as
defined in clause (h) of section 2 of the
Securities Contracts (Regulation) Act, 1956 and includes any foreign security
as defined in clause (o) of section 2 of` the
Foreign Exchange Management Act, 1999.
Explanation
1.—
A donation, delivery or transfer of any article, currency or foreign security
referred to in this clause by any person who has received it from any foreign
source, either directly or through one or more persons, shall also be deemed to
be foreign contribution within the meaning of this clause.
Explanation
2.—
The interest accrued on the foreign contribution deposited in any bank referred
to in sub-section (1) of section 17 or any
other income derived from the foreign contribution or interest thereon shall
also be deemed to be foreign contribution within the meaning of this clause.
Explanation
3.—
Any amount received, by any person from any foreign source in India, by way of
fee (including fees charged by an educational institution in India from foreign
student) or towards cost in lieu of goods or services rendered by such person
in the ordinary course of his business, trade or commerce whether within India
or outside India or any contribution received from an agent of a foreign source
towards such fee or cost shall be excluded from the definition of foreign contribution
within the meaning of this clause;
Therefore, if any delivery or transfer of an article, foreign
currency or foreign security is made by a ‘foreign source’ except as a personal
gift not exceeding monetary limit of Rs. 1000, then such transfers must comply
with the requirements of FCRA and Rules thereof. Transactions done on
commercial terms for goods and services with a foreign source shall not attract
provisions of FCRA. However this excludes earnings
from a foreign source by an NGO/ association
in lieu of goods sold or services rendered by it as this shall be a transaction
of commercial nature. [Explanation 3 to clause (h)]
Further, indirect transfers
from one recipient to another recipient shall also get covered under the
definition of Foreign Contribution by virtue of explanation 1 to clause (g) of
section 2, which reads as under:
Explanation
1.—
A donation, delivery or transfer of any article, currency or
foreign security referred to in this clause by any person
who has received it from any foreign source, either directly or through one or
more persons, shall also be deemed to be foreign contribution within the
meaning of this clause.
Foreign Source
A look at the definition of
‘foreign source’ demonstrates that foreign companies as well as Indian
companies that have more than 51% of its shareholding held by any other foreign source shall also get covered
under its ambit. The definition reads as,
2 (j) “foreign source”
includes,—
(i) the Government of
any foreign country or territory and any agency of such Government;
(ii) any international
agency, not being the United Nations or any of its specialised agencies, the
World Bank, International Monetary Fund or such other agency as the Central
Government may, by notification, specify in this behalf;
(iii)
a foreign company;
(iv) a corporation, not
being a foreign company, incorporated in a foreign country or territory;
(v) a multi-national
corporation referred to in sub-clause (iv) of clause (g);
(vi)
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;
(E)
foreign company;
(vii) a trade union in any
foreign country or territory, whether or not registered in such foreign country
or territory;
(viii) a foreign trust or a
foreign foundation, by whatever name called, or such trust or foundation mainly
financed by a foreign country or territory;
(ix) a society, club or
other association of individuals formed or registered outside India;
(x) a citizen of a
foreign country;
Foreign Company under
FCRA
FCRA
also has its own definition of a foreign company, which reads as under:
2 (g) “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.
Explanation.— For the purposes of
this sub-clause, a corporation incorporated
in a foreign country or territory shall be deemed to be a
multi-national corporation of
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;
Therefore,
the non-commercial entities such as trusts, societies or not-for-profit
companies receiving foreign funds from a
foreign company that have been incorporated outside India and fall within the
meaning of erstwhile section 591 (1) of the Companies Act, 1956 corresponding
to section 2(42) of the Companies Act, 2013 as well as those that are
subsidiary of such foreign company even if incorporated in India shall be
covered under the ambit of a foreign company within its definition under FCRA. Therefore
the non commercial entities receiving CSR funds even from an Indian company may
be advised to check the composition of its shareholding and ensure that such
company incorporated as Indian company is not a subsidiary of a foreign
company.
CSR spend
It
is pertinent to note that the provisions of Foreign Contribution (Regulation)
Act, 2010 shall not be subservient to but assertive to section 135 of the
Companies Act, 2013. Section 52 of FCRA makes it abundantly clear that the
provisions of FCRA shall be in addition to, and not in derogation of, the
provisions of any other law for the time being in force.
In
conclusion, whenever the trusts, society or a not-for-profit company is
contemplating to undertake any initiative and considering a proposal from any
company that falls within the parameters of the provisions overlaying the
Corporate Social Responsibility, it must act diligently and professionally. Since
foreign contributions received directly from a corporate as well as those
received indirectly from another not-for-profit entity are regulated under
FCRA, the level of due diligence to determine the nature of these funds, going
forward now shall need to be higher. It must be ensured that the monies or
other non-monetary contribution these entities receive from any source be
tested appropriately to avoid committing the breach of FCRA provisions that are
very stringent.
-
Views
expressed in this work are personal to the author CA Avineesh Matta. Professional counsel may be solicited before
relying completely on the work
