The Rajya Sabha has passed The Foreign Contribution (Regulation) Amendment Bill, 2020 on Wednesday. It was passed by the Lok Sabha a day earlier. The Bill was opposed strongly by the opposition parties and ‘civil society organisations’. However, the Bill has been passed by both houses of the Parliament.
Parliament passes The Foreign Contribution (Regulation) Amendment Bill, 2020, that will regulate foreign funding of NGOs
— Press Trust of India (@PTI_News) September 23, 2020
A copy of the bill is available at PRS India’s site. We present a small analysis of the implications of the key changes brought about by this bill.
| Amendment | Public servants as defined in Section 21 of the Indian Penal Code are not allowed to take contributions |
| First Order Implication | Court officers, academics in Government institutions/Universities, people on boards of statutory bodies set up by the Government of India or State Governments will have to relinquish their positions in FCRA NGOs. Many such individuals will lose a good source of alternate income and budgets and grants beyond their official academic capacity.However, there is nothing to prevent public servants from being associated with foreign funded NGOs before and after their tenure. This rule only restricts holding both concurrently. |
| Second Order Implication | Positions in statutory bodies and in quasi-Government bodies (say, Women/Child Commission) will lose their attraction. The Government may have to rationalise positions and bodies to account for lower availability of people. Deprived of FCRA income, individuals in such positions may engage in malpractice and utilisation of their position for illegal gratification |
| Workarounds | Non-FCRA organisations will have public servants on board. The same organisation will have a representative in a FCRA NGO, i.e, the public servant controls by proxy. FCRA NGOs can be run through benamis (albeit with additional costs/risks) |
| Gotchas | Look for individuals of ages above 35 that have never filed a IT return and who are added to boards of FCRA NGOs – it is possible it is a domestic help or car driver of an ousted individual. Look for spouses and children/parents of ousted individuals who are added to the board |
| Amendment | FCRA funds cannot be transferred to other organizations but must be spent directly by the organization involved. |
| First Order Implication | Organisations must build their own delivery capacity and not rely on implementation partners.In 2012, the intra-India transfer magnitude was ~10% of total inflow. With increase in the number of FCRA-NGOs in Delhi (total~4500 Crore),the percentage could have risen to 20% now. i.e., ~Rs. 3500 Crore of transfers to be affected. Many large entities, specifically agencies of the Roman Catholic Church, send large sums to official Catholic bodies, which are further disbursed to more than 700 organisations across India.Fund-raisers, ie, the sales end and implementation specialists, would merge instead of remaining separate. Pure play fund-raisers may be affected, as foreign players will cut out middlemen in favour of working directly with ground level NGOs. Many individuals have multiple FCRA entities in play, with fund flows between them. These will have to be consolidated. |
| Second Order Implication | We foresee a lot of redundancy in positions in larger entities.This will affect some large entities in Delhi, which have been liaising with donors abroad and coordinating the disbursal of funds across India. With this new rule, they will turn into pure administrative cost centers and thus becomes nonviable. |
| Workarounds | Various smaller organisations will be opened as for-profit entities and will operate based on contracts from FCRA NGOs. Larger International NGOs will establish Liaison Offices in Delhi, themselves and will coordinate their activities with the FCRA-NGOs all across the country, sidestepping the big Delhi players |
| Gotchas | Look for commonalities between directorships and FCRA NGO functionaries and fund flows between them to identify conflicts of interest and round-tripping of funds. |
| Amendment | Administrative expenses to be restricted to 20% of inflow |
| First Order Implication | Many entities have been supporting individuals for activities such as soft conversions, funding judicial and political and accounting for these expenses under administrative heads. Their operations will be affected. Pay cuts and redundancies across the board are to be expected. Full time positions will be transitioned to contracts. Reduction in rental expenses. More money will be diverted towards purchase of property and towards setting up fixed deposits and line of credit to pay administrative staff |
| Second Order Implication | Increase in travel, conference and research grant expenses is to be expected as an alternate means of income for personnel |
| Workarounds | None |
| Gotchas | Travel and conference expenses of more than 20 lakhs per annum are to be reviewed against receiptsUtilization of funds for advancing line of credit and as collateral to open businesses. |
| Amendment | Primary inflow is to be through a SBI branch in New Delhi |
| First Order Implication | All remittance transactions can be intimated to MHA through the PFMS on a real-time basis. Similarly, all withdrawals can be intimated to MHA on a real-time basis |
| Second Order Implication | A dedicated team can be placed at the branch to service FCRA accounts and to help them manage fund flows The centralisation of inflow transactions will also enable tracking of the source of fund flows. It will be possible to trace funds back to source, cross-verify with source organisation’s tax filings to prevent malfeasance.The process of filing FC4-returns can be simplified. An online tool can show the user a list of remittance and withdrawal transactions. The purpose, source and beneficiary needs to be marked by the filer against each transaction for simple consolidation and return filing. |
| Workarounds | The money can be transferred to other utilization accounts for further usage. |
| Gotchas | Same entity using multiple accounts for remittances |
| Amendment | Section 12 of FCRA 2010 specifies a list of conditions for grant of certificate of registration. The same conditions shall be applied at the time of renewal of registration also. |
| First Order Implication | The registration is to be renewed every 5 years. Earlier, there was no specific requirement for fresh scrutiny at the time of renewal. Any entity found in violation of FCRA rules can now be restricted from renewal of registration and will have to undergo scrutiny afresh. |
| Second Order Implication | Renewals of registration will become as rigorous as initial grant. |
| Workarounds | None |
| Gotchas | Creation of a new Trust/Foundation or Section 8 Company for renwal if an entity is found in violation. |
While listing the gotchas and workarounds for the earlier amendments, we will now begin to appreciate the new requirement to furnish Aadhar of key functionaries in all registered entities. Without this kind of knowledge of persons, none of the amendments can be effective. When KYC norms are applicable, it is equally important to implement a KYB (Know Your Beneficiary) norm.
While it is expected that these regulations will be onerous, here is a background:
- Less than 500 organizations hold 50% of cash and 50% of the inflows
- 90% of the cash is held by 2500 organizations and 90% of the inflow is covered by 3600 organizations
- There are not more than 3000 organizations that receive more than Rs 1 crore in annual inflow
Scrutiny needs to be focused on these organisations. There is a vast number of FCRA organisations – 10,000 odd – which do not receive more than 20 lakhs per annum. Care should be taken that these regulations are not used to harass and extract illegal gratification from these small organisations.
The analysis was co-authored with @by2kaafi.
