MUMBAI: India is the only country in the world that seeks to make sure companies do good things, by mandating that 2% of their profit be spent on corporate social responsibility or CSR. But for local arms of multinationals and Indian companies with an overseas stakeholding of more than 50%, philanthropy isn’t proving easy because of an old rule that’s part of the Foreign Contribution Regulation Act (FCRA).
They’re finding it hard to set up CSR foundations through which to route such activity because donations from such companies are treated as funds from a “foreign source” and are lobbying for a change in stance. “We have been approached by a few companies facing this problem.
The FCRA rule is a hindrance in the path of MNCs and foreign banks wanting to set up their foundations in India,” said Noshir H Dadrawala, CEO, Centre for Advancement of Philanthropy, which advises on giving.
Housing Development Finance Corp., the country’s largest mortggage financier, which has the largest foreign holding among listed companies, and the local arm of a prominent European bank are among the organisations that have faced this issue in the recent past.
The FCRA norms, which are more than 30 years old, require the corporate foundation to be registered or have prior permission to receive funds from an MNC.
But getting this stamp of approval is incredibly hard because of the longstanding suspicion with which overseas funding for non-business activities is regarded.
“One of the first hurdles that any foundation has to cross is the requirement of the organisation being at least three years old to qualify for registration,” Dadrawala said. “The only option available therefore is that each time the company that is deemed as a foreign source wishes to contribute to the foundation it has to seek prior permission of the ministry.
Among all the registrations, getting registration under FCRA is the most difficult as all applications from across the country are processed (only) by the central office based in Delhi.”
The registration can be denied if the foundation has any foreign citizen on its governing board. Companies want the Ministry of Home Affairs — FCRA comes under its ambit — to soften the stand on the issue. “The very wide definition of ‘foreign source’ under FCRA combined with the mandatory CSR obligation could lead to practical challenges for Indian subsidiaries of foreign companies as well as Indian companies which have substantial foreign ownership,” said Siddharth Shah, partner, Khaitan & Co. “Creation of foundations or charitable organisations for undertaking charity work and for fulfilling CSR obligation would require them to obtain FCRA registration.
Not-for-profit recipient organisations (that) may receive any grant or contribution from such foreignowned or controlled entities would also require registration under FCRA,” Shah added.
The CSR requirement has been legislated under the Companies Act and industry estimates that it covers about 8,000 entities, translating into a CSR expenditure of $2.4 billion. The Companies Act doesn’t insist that CSR activities be carried out only through a company’s own foundation and can choose to do so on its own or in partnership with NGOs. But most companies prefer to route funds through their own foundations, said a top executive from a pharma MNC.
“Channeling CSR funds through the foundation could be a more systematic, controlled, accountable and sustainable way,” Dadrawala said.
“Moreover, CSR is not merely donation of money to an NGO or to its own foundation. It has to be project or activity based. A company cannot simply write a CSR report saying that it donated various sums of money to various NGOs and its own foundation. CSR spending must be linked to tangible projects and activities.”
Some MNCs have set up Section 25 companies, or non-profits, to route their social investments. For instance, Hindustan Unilever Foundation operates as a subsidiary of the listed Hindustan Unilever. However, companies generally prefer a trust structure as it gives them greater control over funds and properties compared with a non-profit company.
A similar issue cropped up recently in relation to political parties not being permitted to accept donations from ‘foreign sources’. A PIL was filed in the Delhi High Court questioning donations made by ‘foreign’ entities to political parties, including Congress, BJP and the Aam Aadmi Party. The entities referred to were Sterlite IndustriesBSE 2.79 % and Sesa Goa, the Indian arms of UK-based Vedanta group. In their counter affidavits, the home ministry, Congress and BJP argued that an Indian subsidiary of a foreign company making donations to a political party was legal if the majority stake in the foreign company was held by an Indian.