Corporate Social Responsibility (CSR) has been a critical aspect of business operations in India, with multinationals contributing significantly to social causes. These CSR activities often involve donations to trusts or charitable organizations. However, the Foreign Contribution (Regulation) Act, 2010 (FCRA) and related provisions of the Finance Act, 2016, bring certain compliance challenges. This article examines the FCRA compliance requirements for nonprofit institutions receiving CSR contributions from multinational companies with operations in India.

What is CSR?

Corporate Social Responsibility (CSR) refers to the ethical obligation of businesses to contribute to sustainable economic, social, and environmental development. In India, CSR is governed by Section 135 of the Companies Act, 2013 and supported by the Companies (Corporate Social Responsibility Policy) Rules, 2014. The law mandates that companies with a net worth of ₹500 crore or more, a turnover of ₹1,000 crore or more, or a net profit of ₹5 crore or more, allocate at least 2% of their average net profits from the previous three years towards CSR activities.

These activities should align with Schedule VII of the Act, which covers areas like education, poverty alleviation, healthcare, and environmental sustainability, promoting inclusive growth and socially responsible business practices.

FCRA Compliance

The Foreign Contribution (Regulation) Act (FCRA), first enacted in 1976, regulates the acceptance and utilization of foreign contributions by individuals and organizations in India, aiming to prevent foreign influence on electoral politics, social, economic, political, or religious discussions for harmful purposes.

FCRA ensures that foreign-sourced funds, are used responsibly for the intended social and charitable purposes. The receiving organizations must take FCRA approval or Registrations, maintain detailed accounts and file annual returns with the Ministry of Home Affairs (MHA), detailing the utilization of these funds.

Do CSR contributions to non-profits from Foreign Subsidiary require FCRA compliance?

No, CSR contributions to non-profit organizations from Indian companies with 51% or more foreign ownership do not require FCRA approval or permission for acceptance. The reason for the same is as below:

Let us look into some relevant definitions:

Under the Companies Act, 2013, Section 2(42) defines a foreign company as follows:

As per the Companies Act, 2013, a foreign subsidiary is defined in the context of Section 2(87) which provides the definition of a subsidiary company. The relevant part of this section is as follows:

“A company is a subsidiary of another company (the holding company) if:

(a) the holding company controls the composition of the Board of Directors of the subsidiary;

(b) the holding company holds more than fifty percent of the voting rights in the subsidiary;

(c) the subsidiary is a foreign company, which means it is incorporated outside India.”

As per of FCRA, 2010, Section 2(1) (g) “foreign company” means any company or association or body of individuals incorporated outside India and includes—

(a) a foreign company within the meaning of Section 379 of the Companies Act, 2013;

(b) a company which is a subsidiary of a foreign company;

(c) 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);

(d) a multi-national corporation.

Definition of Foreign Source:

Foreign source, as defined in Section 2(1) (j) of FCRA, 2010 includes: –

• the Government of any foreign country or territory and any agency of such Government;

• any international agency, not being the United Nations or any of its specialized agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification, specify in this behalf;

• a foreign company;

• a corporation, not being a foreign company, incorporated in a foreign country or territory;

• a multi-national corporation referred to in sub-clause (iv) of clause (g);

• a company within the meaning of the Companies Act, 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;

• a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

• a foreign trust or a foreign foundation, by whatever name called, or such trust or foundation mainly financed by a foreign country or territory;

• a society, club or other association or individuals formed or registered outside India;

a citizen of a foreign country;”

The 2016 Amendment:

Amendment of section 2 of Act 42 of 2010 –

In the Foreign Contribution (Regulation) Act, 2010, in section 2, in sub-section (1), in clause (j), in sub-clause (vi), the following proviso shall be inserted, namely:

“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made thereunder, then, notwithstanding the nominal value of the share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source;”.

Interpretation:

The 2016 amendment to the FCRA clarified that Indian companies with foreign holding within the limits prescribed by the Foreign Exchange Management Act (FEMA), 1999 are no longer classified as a “foreign source,”. This change excluded such companies from FCRA regulations, easing restrictions on organizations receiving contributions from Indian subsidiaries of foreign companies or those with foreign ownership, provided the investment complies with FEMA norms. The amendment aimed to reduce the regulatory burden on these entities.

In conclusion, CSR contributions from Foreign subsidiary companies will not be classified as “foreign sources” if their foreign investment complies with FEMA limits. This allows non-profits to accept CSR funds without FCRA compliance, simplifying the process for receiving support from foreign-owned Indian companies. However, it is crucial to consult legal experts before making any CSR contributions.