May 10, 2022

FCRA, FDI and Section 8 Companies

The Foreign Contribution (Regulation) Act, 2010 (“FCRA”) has been enacted “to consolidate the law to regulate the acceptance and utilization of foreign contribution” and “to prohibit acceptance and utilization of foreign contribution for any activities detrimental to national interest”. In the recent past, there have been some significant amendments to the FCRA; and our previous articles are available on this portal where we dwelled into such FCRA amendments.

A brief background:

FCRA defines the term “foreign contribution” as “donation, delivery or transfer of, inter alia, currency (whether Indian or foreign) by a foreign source”; and the foreign source shall mean “to include, inter alia, any foreign company, foreign Government, citizen of foreign country, a foreign trust or a foreign foundation”. The term “contribution” is generally intended to mean something given by the contributor for free or without any reciprocal consideration. Once contributed, the contributor does not have any claim or title over the thing contributed. So, by its very nature, contribution lacks the element of quid pro quo and is essentially a unilateral flow of value. This was important in the present context examined here.

Further, FCRA requires that “no person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution” unless such person obtains a certificate of registration from the Central Government. The term “person” in FCRA is defined to include, inter alia, companies registered under Section 25 of the Companies Act, 2013 (now replaced with Section 8 of the Companies Act, 2013) (“Section 8 Company(ies)”).

Section 8 Companies:

Under the Companies Act, 2013, formulation of companies with charitable objects, etc. is set out at Section 8. The said Section 8 allows a person or an association of persons to be registered as a limited company if it proves to the satisfaction of the Central Government that, it:

  • has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
  • intends to apply its profits, if any, or other income in promoting its objects; and
  • intends to prohibit the payment of any dividend to its members.

A Section 8 Company enjoys all the privileges and is subject to all the obligations of limited companies. So, a Section 8 Company can be like any company and it can own and operate a hospital or a water treatment plant/ facilities or any sports club or undertake any other permitted activities, except that it cannot distribute profits to its members.

Foreign Contribution into Section 8 Companies:

We examined the much debated issue of whether share capital infused by non-residents into a Section 8 Company be treated as “foreign contribution” for the purposes of FCRA.

Historically, earlier, as per one of the frequently asked questions and response thereof issued by the Ministry of Home Affairs (MHA) on FCRA, it was stated that infusion of foreign share capital in the Section 8 Companies must be treated as foreign contribution, thereby implying a requirement of prior registration or permission under FCRA by the Section 8 Companies for any such capital infusion. However, in our view, the said clarification was contradictory to the very concept of ‘contribution’ discussed above. Unlike a standard contribution or donation, whereby the element of quid pro quo is usually missing, infusion of share capital in the Section 8 Companies results in the investor receiving securities of the investee entity. Further, the said securities can also be transferred by the investors in future to recover the capital contributed in the Section 8 Companies, which may usually not be the case with respect to a standard contribution or donation. Also, we have come across government approvals granted for FDI into the Section 8 Companies, which suggest that foreign investments can be made (without necessarily obtaining a certificate of registration under FCRA).

While the relevant FAQ regarding infusion of foreign share capital in the Section 8 Companies now has been omitted from the latest set of frequently asked questions and responses thereof issued by MHA on FCRA, no separate clarification has been issued by MHA till date in respect of foreign capital infusion in the Section 8 Companies and requirement of registration under FCRA in pursuance thereof.

In the recent past, the Government has been very strict on any non-compliance by NGOs and has rejected various applications seeking certificate of registration or refused renewals or extensions thereof. Also, recently Supreme Court has upheld the FCRA amendments that regulate how NGOs receive and utilise foreign funds and has said that “no one can claim that receiving foreign funds was an absolute right”. Watch this space for more on this recent landmark Supreme Court judgement.








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