Jul 03, 2022

Supreme Court upholds recent FCRA amendments

Over the years, inflow of foreign donation/ grant in India has increased significantly. Simultaneous to such increased inflow of foreign grants, the instances of said grants being diverted and misused by the recipient organizations also increased. As a result, many NGOs came under the Government scrutiny and also had their FCRA registration cancelled.

FCRA 2020 Amendments:

In order to curb the growing misuse of foreign grants and make the regime regulating the receipt and utilization of foreign contribution more effective and stringent, the Government brought into effect, inter alia, the following amendments to the Foreign Contribution (Regulation) Act, 2010 (“FCRA”) in terms of the Foreign Contribution (Regulation) Amendment Act, 2020 (collectively “FCRA Amendments”):

  • Restriction on transfer of foreign contribution (Section 7): No person receiving foreign contribution shall transfer the same to any other person;
  • Bank account in designated branch (Section 12(1A) read with Section 17(1)): All foreign contribution shall be received only in the “FCRA Account” of the recipient opened in the sole designated branch of the State Bank of India in New Delhi; and
  • Aadhar details of functionaries (Section 12A): Applicants seeking prior permission or registration under FCRA or renewal of registration under FCRA shall provide Aadhaar number or passport/ overseas citizen of India card (in case of non-residents) of all its office bearers or directors or other key functionaries.

Certain writ petitions challenging the constitutional validity of the aforesaid FCRA Amendments were recently dismissed by the Supreme Court pursuant to its judgment dated April 09, 2022 in the matter titled Noel Harper & Ors. vs. Union of India & Anr. (Writ Petition (Civil) No. 566 of 2021) (decided along with Writ Petition (Civil) No. 634 of 2021 and Writ Petition (Civil) No. 751 of 2021). In the said judgment, the Supreme Court provided its views on how the FCRA Amendments were essential to preserve and implement the objectives of FCRA and prevent foreign interference in internal policy matters. The views expressed by the Supreme Court in the aforesaid judgment in support of the constitutional validity of FCRA Amendments are briefly summarized below.

Petitioners’ Grounds for Challenge:

The petitioners (including but not limited to trustees of certain trusts registered under FCRA) challenging the FCRA Amendments, who are engaged in social and charitable activities, such as betterment of orphans/ children below poverty line, rehabilitation of migrant workers, supporting disabled/aged etc., argued, inter alia, that the FCRA Amendments violate the fundamental rights enshrined under Articles 14, 19(1)(a), 19(1)(c), 19(1)(g) and 21 of the Constitution of India and could defeat the objective of FCRA to permit regulated use of foreign contribution by imposing excessive, arbitrary and unreasonable restrictions on the right to receive foreign funding.

The petitioners argued that blanket ban on transfer of foreign contribution coupled with the requirement of opening of a bank account with a designated branch of the State Bank of India in New Delhi directly impacts the implementation of social and charitable schemes and could severally impact the ability of small and grass root level organizations, who do not meet track record/ eligibility criteria under FCRA and are entirely dependent on grants received from FCRA registered organizations, to access requisite funds for their respective social causes.

Government’s Rationale for Amendments:

The Government, in its response, argued that the FCRA Amendments do not bar any person from receiving and utilizing the foreign contribution as long as it is compliant with the provisions of the FCRA. It was submitted by the Government that the FCRA Amendments, which are based on past experiences of the executives and legislative wisdom, do not impact the fundamental rights and uniformly apply to all NGOs receiving foreign contribution.

The Government stated in its reply that Sections 11 and 12 of FCRA require FCRA registration to be granted to organizations that have definite programme for spending foreign contribution on purposes useful for society but various registered NGOs were receiving foreign contribution solely for the purposes of transferring it to other NGOs, which was contrary to the objects of FCRA and made it difficult to track and regulate the ultimate utilization of foreign contribution by the concerned transferee. As per the Government, the FCRA Amendments were necessary to not only improve the monitoring of inflow and ultimate utilization of the foreign contribution but also to prevent foreign State and non-State actors from indulging in activities with ulterior motives to interfere with the internal matters of the country.

It was also submitted by the Government that no absolute right inheres in any one to receive foreign contribution outside the framework delineated by the Parliament and implemented by the executive.

Supreme Court’s Observations:

During the course of analyzing the legislative history of statutory provisions regulating receipt and utilization of foreign contribution, the Supreme Court made several observations in support of the FCRA Amendments.

Dismissing the argument of the petitioner that amendments to Section 7 of FCRA impose arbitrary restriction and violate fundamental rights under, inter alia, Articles 14 and 21 of the Constitution of India, the Supreme Court agreed with the Government that that no fundamental right is vested with anyone to receive foreign contribution.

The Supreme Court, in further agreement with the submissions of the Government, stated that whether any amendments to the principal Act are in consonance with the concerned Act, achieve the object and purpose of the concerned Act and are otherwise just, rational and reasonable, should be the basis for determining any challenge to such amendments. In this regard, while observing that “…rights guaranteed under Part III of the Constitution and Article 19 in particular, are not absolute rights. The same are subject to reasonable restrictions, as predicated in clauses (2) and (6) of Article 19. For, it is open to the State to make a law, so as to impose reasonable restrictions on the exercise of such right [under Article 19(1)(a)] in the interests of the sovereignty and integrity of India, the security of the State, friendly relations with Foreign States, public order, decency or morality or in relation to contempt of Court, defamation or incitement to an offence; in case of Article 19(1)(c) – in the interests of the sovereignty and integrity of India, public order or morality; and in case of Article 19(1)(g) – in the interests of the general public.“, the Supreme Court held that the purport of the FCRA Amendments are only to provide a regulatory framework and not impose complete prohibition.

Reiterating the concerns about the negative impact of widespread inflow of foreign contribution on the sovereignty and democratic values of the country and the requirement to give precedence to sovereignty and integrity of the nation over rights enshrined in Part III of the Constitution, the Supreme Court stated that “It must be borne in mind that the legislation under consideration must be understood in the context of the underlying intent of insulating the democratic polity from the adverse influence of foreign contribution remitted by foreign sources“.

The Supreme Court further observed that the Parliament intervened by way of the FCRA Amendments to strengthen compliance mechanism and enhance transparency and accountability in the acceptance and utilization of foreign contribution in the backdrop of increased instances of several NGOs being primarily involved in routing of the foreign contribution received by them and not utilizing the same themselves for their stated objectives, which often led to layered trail of money that was difficult to trace.

While observing that the FCRA Amendments, which apply uniformly to a class of persons without discrimination, cannot be termed as irrational or arbitrary, the Supreme Court stated that “considering the legislative history and the need for the Parliament to periodically intervene to arrest the increasing influence on the polity of the nation due to the high volume of inflow of foreign contribution and large-scale improper utilisation and misappropriation thereof, as noticed by the authorities and keeping in mind the objective of the principal enactment being to uphold the values of sovereign democratic republic, the dispensation as altered to make it more strict compliance mechanism for ensuring that the foreign funds are accepted in the prescribed manner and utilised by the recipient itself and more so, for the purposes for which it was allowed to be received by that person, the amended provisions ought to pass the muster of reasonable restriction.“.

In light of the aforesaid observations, the Supreme Court further held, inter alia, as follows while dismissing the challenge to, and upholding the validity of, each of the FCRA Amendments:

  • Validity of amended Section 7 of FCRA:

The Supreme Court stated that certificate of registration is not granted under FCRA for acting as an intermediary between the foreign source and grass root level organization and the amendment to Section 7 of FCRA assists in preventing any such transfer of foreign contribution as an intermediary by requiring the recipient to utilize the same itself. In this regard, the Supreme Court elaborated on the term “transfer” used in Section 7 of FCRA to mean “… giving away of the foreign contribution in whole or in part to third person without retaining any control thereon; and such change of hands is obviously without offering any services in return, namely, free of costs.“.

Further, explaining the meaning of “utilization” in the context of the requirement of recipient of foreign contribution utilizing the same itself, the Supreme Court observed that “The ordinary meaning of expression “utilisation” must be understood in the context of the purpose for which a certificate of registration or prior permission under the Act has been granted by the Central Government.” Accordingly, the Supreme Court stated that the restriction under Section 7 of FCRA would not be attracted if the utilization is for the definite purpose for which registration is granted to the recipient, including any utilization towards payment for services outsourced to any third party, while undertaking definite activities itself.

While reiterating that foreign contribution can be brought into the country as per dispensation provided under law and there cannot be any absolute right in that regard, the Supreme Court held the amended Section 7 of FCRA to be reasonable and in the interest of general public by observing that “…. The fact that transfer was permitted under the unamended Section 7, it does not follow that the Parliament is not competent to amend that dispensation to make it more stringent, including to completely prohibit the inflow of foreign contribution. The amended provision is not to completely prohibit inflow of foreign contribution, but is a regulatory measure to permit acceptance by registered persons or persons having prior permission to do so with condition that they must themselves utilise the entire contribution including for administrative expenses within the limits provided under Section 8 of the Act.“.

In furtherance of its aforesaid observation, the Supreme Court also held that there is no violation of Articles 14, 19(1)(c), 19(1)(g) and 21 of the Constitution of India as “The restriction or complete prohibition on transfer to third party, by no standards deprive acceptance of foreign contribution and utilisation thereof in the manner permitted for definite purposes, such as cultural, economic, educational or social programme…..” and the restriction set out in amended Section 7 of FCRA must be viewed as being procedure established by law in the interests of the general public and sovereignty and integrity of the country.

  • Validity of Section 12(1A) and amended Section 17(1) of FCRA:

Noting that the existing foreign remittances do not have structured framework, including disclosures regarding purposes, the Supreme Court held that the requirement of first receiving foreign contributions in the FCRA bank account maintained with the designated branch of the State Bank of India in New Delhi would help resolve these deficiencies and, consequently, enhance the monitoring mechanism, remittance wise, in real-time basis. Rejecting the petitioners’ challenge to the present amendment, the Supreme Court further observed that “The fact that earlier FCRA account could be opened in any scheduled bank, cannot preclude the Parliament from legislating a law which requires inflow of foreign contribution in some other manner specified by law. Merely because the framework of acceptance of foreign contribution had been changed cannot be the basis to question the validity of the amended provisions.“.

Stressing on the settled principle of law that plea of individual hardships cannot interfere with policy matters, the Supreme Court further held that the requirement to open FCRA account in the designated bank, which is only a one-time exercise with defined set of protocols, cannot be set aside on the ground of some inconvenience being caused due to the same and the concerned FCRA account operators cannot claim right of continuity of a deficient and flawed framework.

  • Validity of Section 12(A) of FCRA:

 The Supreme Court held that the growing instances of misuse and diversion of foreign contribution and utilization of the same for activities not connected with the purpose for which the foreign contribution was originally received necessitated the requirement of insertion of Section 12(A) that requires submission of Aadhaar details with respect to directors/ officers/ key functionaries of applicants under FCRA. The Supreme Court set aside the challenge to Section 12(A) of FCRA and observed that “The underlying purpose of this provision is merely to identify the key functionaries of the registered association so that they can be made accountable for violations, if any.“. However, the Supreme Court read down the requirement set out in Section 12(A), which originally required submission of Aadhaar details in respect of resident functionaries, to also allow submission of Indian passport of the resident key functionaries of the applicant in compliance of said Section 12(A).

It can be noted from the aforesaid that the legislature and the judiciary are aligned to take concrete steps towards curbing improper utilization of foreign contributions coming into the country by requiring all such foreign contribution to be utilized by the recipient itself. The changes introduced through FCRA Amendments, which now have the Supreme Court’s stamp of approval, have not only made compliances under FCRA more stringent but have also put an end to a very common mode of funding for the NGOs operating in India i.e. sub-granting of foreign contributions received from donors outside India. This has also resulted in radical shift in the functioning of foreign foundations in India, who often relied on sub-granting through their registered organizations in India to pursue and promote their objectives in India.

We shall keep tracking on all development on FCRA, so do watch this space for more.







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