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Curious case of CSR, FDI and FCRA

March 16, 2017[2017] 79 taxmann.com 164 (Article)
324 Views

Krishna Sharan Mishra

Partner, KSM Associates, Company Secretaries

In 2015 India emerged on top of the foreign direct investment (FDI) league overtaking China and US1. Given that India has become one of the favourite destinations for foreign corporations to set up companies or joint ventures, there are a large number of companies which are classified as subsidiaries of a foreign company or having foreign shareholders owning more than one half of the capital (hereinafter Indian Subsidiaries, for convenience).

Mandatory CSR spend for Indian Subsidiaries

On 1st April 2014 India became the first country, to have legislated Corporate Social Responsibility (hereinafter CSR or Legislated CSR, for convenience)2. A company incorporated in India has mandatory social responsibility to be performed by it if it has a net worth of Rs. 500 crores or turnover of Rs. 1000 crores or net profit of Rs. 5 crores, as mandated by the Companies Act, 2013.

Therefore, Indian Subsidiaries too will be bound by section 135 of the Companies Act, 2013 to spend either directly towards CSR or give grants to other entities towards CSR purposes.

Schedule VII of the Companies Act, 2013 lists out the activities which are considered as CSR initiatives. It is interesting to note that these CSR purposes listed out in the Schedule are very closely related with those which Foreign Contribution (Regulation) Act, 2010 (hereinafter FCRA, for convenience) regulates - cultural, economic, educational, religious or social program.

What is under FCRA?

Any money, amongst other things, received from a 'Foreign Source' is categorized as 'Foreign Contribution' in terms of section 2(1)(h) of FCRA. Definition of the term 'Foreign Source' covers 'Foreign Company', and definition of 'Foreign Company' covers an Indian Subsidiary. Therefore, any contribution by an Indian Subsidiary to another organization in India will qualify as Foreign Contribution. Receipt of Foreign Contribution is regulated. It cannot be received in India without the recipient entity having been registered or having obtained prior permission.

In terms of section 2(1)(h) of FCRA, "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 (42 of 1956) and includes any foreign security as defined in clause (o) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999).

In terms of section 2(1)(j) of FCRA, the term "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 (1 of 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;

In terms of section 2(1)(g) of FCRA, the term "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 (1 of 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.

Section 11(1) of FCRA prohibits receipt of any foreign contribution unless the recipient organization having a definite cultural, economic, educational, religious or social program is registered under FCRA or has taken prior permission from the Central Government (administered by the Ministry of Home Affairs).

Interplay of FCRA and Legislated CSR - makes it curious

The Companies Act makes CSR spend mandatory regardless of its ownership – Indian or foreign. In order to comply with this Legislated CSR, the Indian Subsidiaries will find themselves violating the provisions of FCRA - as Foreign Sources cannot undertake social activities directly for reasons of national interest. On one hand, the Companies Act mandates; on the other hand, FCRA stops - making it a curious case.

Therefore, such Indian Subsidiaries can only contribute to the CSR efforts carried out by other entities. Even here, the hands of the recipient are tied. FCRA requires that the organisations engaged in cultural, economic, educational, religious or social program (hereinafter Social Organisations, for convenience) should either be registered or has taken prior permission from the Ministry of Home Affairs before accepting the contribution from foreign companies.

Social Organisations are ever willing to receive any penny which anybody wants to give. Ever since the CSR has become mandatory, Social Organisations have started approaching companies for contribution towards social works mindless of company's ownership - whether Indian ownership or foreign ownership. It is seen that such Social Organisations are not aware of the shareholding pattern of the companies whom they approach.

Options to such Indian Subsidiaries

Given that the Indian Subsidiaries are not incorporated with social work in the list of main objects in their Memorandum of Association, it is likely that instead of undertaking such social works directly, they will only fund such works carried out by other Social Organisations. If at all, such Indian Subsidiaries wish to undertake CSR initiatives by themselves, FCRA requires them to register or obtain prior permission. It is unlikely that they will be given registration or prior permission in view of national interest under FCRA.

In order that contributions of the Indian Subsidiaries are utilized fruitfully, it will be wise to advise the recipient Social Organisation to get the registration under FCRA, if already not taken. This can be done by conducting Eligibility Test of the recipient organization. Indian Subsidiary can protect themselves by ensuring these:

(i)   has the recipient obtained FCRA registration or has the recipient obtained prior permission?
(ii)   keep a copy of the certificate of registration or prior permission
(iii)   get declarations from the recipient that they will abide by the provisions of FCRA and intimate the donor immediately in case the FCRA registration/prior permission is withdrawn/revoked by the Central Government.

Options to Social Organisations

The Legislated CSR has given a shot in the arms of Social Organisations. It would do good to keep their excitement in check and conduct Ownership Test of the donor entities. In case it is found that the donor entity has foreign ownership in excess of one half of its paid up capital, the recipient organization needs to be cautious. To benefit from the CSR legislation, it will be important for such willing organisations to get registration in terms of section 11(1) of FCRA. This will broaden their donors-base. Such a registration will be valid for a period of five years. These organizations will prefer "Registration" over "Prior Permission" as it will eliminate the necessity of approaching the Ministry of Home Affairs for every case of grant.

What Government can do

One hand of the government requires to donate, while the other hand prohibits receipt of this donation! Enable the receiving hand – this is the least the government can do. There are three options before the government, to resolve this quandary.

One, the Ministry of Corporate Affairs may issue a notification/circular giving over-riding effect to section 135 of the Companies Act, 2013 notwithstanding anything contained in any other Act.

Second, Ministry of Home Affairs may pass a notification/circular exempting Indian Subsidiaries from the requirements of registration or prior permission in case they fall within the mandate of section 135 of the Companies Act, 2013. Section 50 of FCRA vests the Central Government with power to exempt.

Third, in exercise of its power under section 5o of FCRA, the Ministry of Home Affairs can alternatively pass a notification/circular exempting receipt of funds from Indian Subsidiaries, in discharge of latter's CSR duty, from the definition of Foreign Contribution.

It will be really difficult for the government to pass any of these three notifications/circulars given the underlying national interest which is the prime reason for existence of the Foreign Contribution Regulation Act, 2010.

Summary

CSR mandate by the Companies Act conflicts with the restrictions imposed by the Foreign Contribution Regulation Act (FCRA). Given that FCRA has an element of national interest, Companies which have received Foreign Investment amounting to more than one half of their paid-up capital and to whom CSR also is applicable will need to tread carefully. The recipients of grants from such companies will need to be even more cautious. A basic Ownership Test of the grantor company will help the recipients.

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1. http://timesofindia.indiatimes.com/ india/ India- pips-US-China - as-No-1 – foreign – direct – investment –destination / articleshow / 49160838.cms

2. http://www.business-standard.com / article/ companies/ india-now- only-country- with-legislated-csr-114040300862_1.html

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