Amendment to FCRA via Finance Bill Route Controversy

In the first week of April, 2016, the government amended the Foreign Contribution Regulation Act (FCRA), 2010 through the Finance Bill, 2016. The main objective of this amendment was to make way for the political parties to receive donations from foreign companies such as Vedanta as “Indian Source” despite of their being “foreign”.

Background

The current CSR {Corporate Social Responsibility} rules as per Companies Act 2013 provide that a firm which has either net-worth of Rs. 500 Crore or annual revenues of Rs. 1000 Crore or annual net profit of Rs. 5 crore has to spend 2% of its average profit in past three years on social development works either on their own or via some philanthropic foundation or in partnership with some not-for-profit organizations.

However, such contribution from companies with 50% foreign share-holding is treated as “foreign source“. This treatment requires these companies to partner only with those not-for-profits which are registered with Ministry of Home Affairs under the FCRA.

The Government wanted to do away this treatment by amending the FCRA in such a way that the contribution from foreign companies to not-for-profit, political parties and candidates contesting elections, newspapers, government employees etc. does not come under definition of foreign source. The recent amendment provides that such companies will be treated as “Indian” for the purpose of FCRA. This would not only help foreign-origin companies to fund NGOs but has also cleared the way for them to give “donations to political parties.”

Implications for political parties

The move will benefit the Political parties, especially BJP and Congress. Between 2004 and 2010, there were at least 25 instances of these parties receiving funds from the Indian subsidiaries of the foreign companies. In March 2014, the Delhi High Court in its judgement {on a writ petition filed by Association of Democratic Reforms} found both BJP and Congress in violation of FCRA-2010 for their receipt of donation from Vedanta. The High Court declared that these donations were illegal and directed the government to take action against these two parties within six months. The parties challenged the decision into Supreme Court.

Thus, the real reason of recent amendment was to overcome the legal challenge of “illegally” accepting foreign donations and violating the FCRA. The government has also amended the law “retrospectively since 2010” to be in better position to handle the case against them pending in Supreme Court.

Implications for companies

As many as two dozen companies have lobbied with the government to tweak the law so that this “foreign source” tag is removed from their CSR spending. They also contended that every time they were forced to get MHA’s clearance whenever money was to be disbursed.

Passing the amendment as Finance Bill – Is it suppression of democracy?

Since the amendment has to come in to effect by March 31, 2016 beyond which the companies would not be able to spend the money of the last fiscal, the amendment was passed through Finance Bill. It was felt that drafting a new bill and waiting for the Parliament’s nod might delay the process. However, this move had a political twist also. Though Congress did not criticise the move of making this amendment via Finance Act; the JDU and other parties tried to attack the government for bringing such bill via a money bill. {This is second such instance when a key bill was passed via money bill route, the other being Aadhaar Bill}. They said that this move would “endanger the democracy” and now “there would be no limit to foreign influence” in the government.

This leads us to analyze if such move by the government can really endanger the democracy? We note here that the existing treatment of such donations was a technical glitch and created problems with both donor and recipient. The companies were still making donations but every time they needed to get MHA permission to make such donations. The political statements that such moves would endanger democracy seem to be mere political rhetoric. The move will make life easier for companies as well as development industry / not-for profit sector, consultants and accounts. There are many sectors in which FDI caps are above 50%. For example, in agriculture, 100% FDI is allowed so companies such as Monsanto, Advanta etc. make contribution to development industry as well as political parties. Similarly, in Pharma sector 100% FDI is allowed, so companies such as Glaxo, Abott etc. make such donations.

Thus, in inclusion, such amendment should be seen as a step further to make it easy for the companies to manage their CSR obligation without putting energy in FCRA compliance. This amendment was a much needed correction in an anomaly in the law.