New Delhi: The biggest challenge that companies with substantial foreign shareholding have been facing with regard to the Corporate Social Responsibility (CSR) Rules 2014 is the categorisation of funds that they wish to spend on CSR as a ‘foreign source’.
However, an amendment proposed by finance minister Arun Jaitley to the Foreign Contribution (Regulation) Act (FCRA), 2010—part of the budget proposals presented on 29 February— is expected to make life easier for such companies and give a boost to the not-for-profit sector, suggest consultants and accountants.
The amendment proposes to free donations made by firms with substantial foreign holding from the ‘foreign source’ tag with retrospective effect from September 2010, Mint reported on Sunday.
The CSR rules require firms with a net worth of ₹ 500 crore or revenue of ₹ 1,000 crore or net profit of ₹ 5 crore to spend 2% of their average profit in the past three year on social development work either on their own, through a philanthropic foundation or in partnership with not-for-profit organisations on social development-related activities listed in Schedule VII.
However, as per the existing regulations, funds of companies with more than 50% foreign shareholding are treated as foreign source, which requires them to partner with only those not-for-profits that are registered with the ministry of home affairs (MHA) under FCRA norms. Even foundations run by such companies must obtain a licence under FCRA norms to operate.
MHA oversees the implementation and monitoring of FCRA and keeps tabs on donations received by not-for-profits, political parties, candidates contesting elections, printers and publishers of registered newspapers, government employees, among others.
If the proposed amendment to FCRA is cleared, companies with more than 50% foreign shareholding will be able to make donations without ensuring that the not-for-profit receiving the funds has FCRA clearance.
“It (the proposed amendment) will enable not-for-profits without FCRA to be potential CSR partners, and it will make it easier for companies to manage their CSR obligation without doing FCRA due diligence," said Sanjay Agarwal of accountancy firm Sanjay, Aditya & Associates.
Welcoming the amendment, Sanjay Patra, a chartered accountant and head of Financial Management Service Foundation, a not-for-profit organization, said, “This amendment is a much-needed correction of an anomaly which was existing."
He said it will provide an opportunity to all charitable organisations, including those without FCRA registration, to access corporate grants and CSR funds.
“Many of the larger corporates in India have more than 50% foreign shareholding and they were compelled to work with FCRA registered organisations only. As FCRA registered organisations constitute a small portion of the not-for-profit universe, this amendment will promote wider and greater reach of corporate grants to not-for-profit organisations," Patra said.
Voicing a similar sentiment, Adarsh Kataruka, director-CSR at consultancy firm Soul Ace, said: “This will give a boost to the small not-for-profit organisations that do not have the resources to adhere to the cumbersome FCRA registration and licensing procedures but are doing good work at the grassroots level."
According to him, FCRA registration is mostly applied for by large not-for-profits and many smaller organisations prefer to opt out.
Amita Joseph, member of the governing body of the not-for-profit Business and Community Foundation (BCF), cautions against overstating the expected benefits of the proposed amendment.
Joseph believes many not-for-profits working on grassroots issues may anyway find it hard to accept corporate funding if it is in conflict with the work they do. “First of all, the CSR amount is too little to really count. Plus, if not-for-profits are looking to corporate houses for funding, they need to keep in mind the conflict between peoples’ causes and corporate interests," she said.
She believes the amendment will largely help political parties get off the hook for FCRA violations.
Jagdeep Chhokar, founder member and Gujarat regional coordinator for the not-for-profit Association for Democratic Reforms (ADR), says the proposed amendment may be seemingly innocuous but will have a direct impact on the ongoing FCRA violation cases against leading political parties.
ADR works on policy reforms and advocacy and is best known for its election watch website. “My suspicions, based on 15 years of experience in the sector, suggest that political establishments often change the law in a seemingly harmless manner but end up damaging the democratic fabric of the country for politically partisan considerations," he said.
According to him, the amendment, if cleared, will help political parties. ADR, he said, will consider challenging the amendment in court if it is passed and actually becomes law. However, Agarwal said the amendment may not benefit political parties. According to him, foreign source is defined under 10 overlapping clauses in the FCRA and the proposed amendment deals with only one such clause. It is not a blanket exemption of all foreign sources, he insisted.
He clarified that the amendment will alter the definition of only one clause regarding what constitutes a foreign source; other definitions will continue to apply, thus limiting the impact of the amendment.
“This amendment cannot be applied to the case against political parties because while Sesa Goa/Vedanta is exempt under one clause as a foreign source it will continue to be a foreign source under other clauses—Section 2(1)(j)(iii) read with Section 2(1)(g)(ii), Section 2(1)(f) of FCRA 2010 and Section 2(17) of the Income Tax Act, 1961," he said.