How FCRA norms may hurt CSR contributions of Indian companies with large foreign shareholding

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By Rohini Mohan

Even as the government — under a directive from the Prime Minister’s Office — is stepping up scrutiny of foreign-funded non-governmental organisations (NGOs), Indian companies with large foreign shareholdings are growing increasingly uncomfortable working in the grey area around their Corporate Social Responsibility (CSR) contributions.

To carry out CSR programmes, companies work with or pay NGOs, schools or hospitals. Some like Infosys, HDFC, ICICI and Hindustan Lever have started their own foundations. Under the Foreign Contribution (Regulation) Act 2010, companies with over 50% foreign shareholding can make donations only to NGOs that have obtained FCRA -Foreign Contribution Regulation Act – clearance. This applies to donations by such companies even to their own foundations.

Many companies like ICICI await clarifications from the government in this grey area. In March 2015, ICICI had a 41.23% foreign shareholding, but has in the past crossed 50%, the foreign shareholding cap under FCRA. The bank, which spends over 2% of its profit in CSR in skills development, livelihood, health, and elementary education, does not give grants to NGOs but to its Foundation, which in turn partners with NGOs.

“ICICI Bank doesn’t invest in ICICI Foundation — it is a donation and contribution for social causes. In that perspective, we made a representation two to three years ago to the ministry of corporate affairs about not putting us under the purview of FCRA, but there has been no response,” says Chinmay Sengupta, COO, ICICI Bank Foundation.

“No doubt there is confusion, and the government should clarify it. The FCRA process is also very tedious,” he adds. As the ministry of home affairs tightens the noose on FCRA compliance this year, NGOs might not be the only victims of the law’s blurriness and inherent suspicion of any foreign source of funds. Companies with large foreign shareholding may also suffer, and in turn the social work many communities count on them to fund.

“Most Indian companies are unconcerned, or confused about the FCRA because it is thought of as an NGO law,” says Sanjay Agarwal, a charted accountant who works exclusively with the non-profi t sector. “But the FCRA governs foreign funds in social and political activities. Many big Indian companies today have both — majority foreign shareholding and CSR activities.”

FCRA is complex, and especially so for publicly held companies whose shareholding pattern varies by the day.

Agarwal says many company accountants insist that their Indian status puts them outside the purview of FCRA. “Believing that is a grave risk,” he says. An Indian company is an Indian source only if majority shares are held by Indian citizens (including NRIs) and institutions. Under FCRA, any entity with over 50% investment from foreigners, PIOs, OCIs, foreign companies or FIIs is considered a foreign source.

FCRA’s applicability depends on the way CSR is implemented. If a foreign source company pays NGOs to do charitable work, the NGO must have FCRA permission. If the company works directly with benefi ciaries, then no FCRA is required. The most common way in which CSR is administered in India, however, is through the company’s own foundation or trust. These trusts should get FCRA registration before accepting any grant or donation from the mother company.

If the foundation contracts another NGO, the latter should have FCRA registration or prior permission. Secondly, the CSR grant and the interest on these funds will be foreign contribution. All the usual FCRA restrictions come into play. These funds cannot be given to political parties, media, and government offi cers. FCRA does not cover use of facilities without charge, or volunteering. It also leaves out some receivers such as hospitals.

The fine line

Companies are becoming aware of this confl ict as they seek to comply with new CSR guidelines in the Companies Act. Every company with a net worth of at least Rs 500 crore, a turnover of Rs 1,000 crore or a net profit of Rs 5 crore, should spend 2% of its average annual profit from the last three years on social development activities.

In November 2014, HDFC Group chairman Deepak Parekh had said in a CNBC interview that “it hurts” to be considered a foreign company. He was responding to the new definition of a foreign-owned company as one with over 50% overseas investment or controlled by foreigners. “Every little donation we make, we have to ask the recipient are you FCRA compliant, because our donation is considered as a foreign donation,” Parekh said.

The law covers donative transactions in fi ve types of activities: cultural, rural, economic, educational, or social. This ranges from skills development to toilets for girl children, and distribution of food or clothes to music training. If HDFC bank, for instance, gave loans directly to small farmers, it would not count as a donation, but if it waived the interest or routed these through its foundation, this would attract FCRA restrictions. Any activity with foreign funds leading to public benefit.

HDFC, which is majority-owned by foreign institutional investors (79.07% on May 29, 2015), is a foreign company, or foreign source in FCRA parlance. Its CSR investment, and therefore that of its subsidiary HDFC Bank where it holds 22% shares, would be counted as foreign funds under FCRA. NGOs that it invests in must have FCRA registration or obtain prior permission from the MHA to accept HDFC’s funds.

ITC, working on e-chaupals and social initiatives, spent over Rs 214 crore on CSR in 2014-15. It did not exceed 50% foreign shareholding as on March 2015, but has a clear view on FCRA. “ITC has put in place a robust process to ensure that the implementing partners for its social investment programmes are FCRA registered agencies. Certain projects like the e-Choupal are direct spends by the Company,” says the ITC Spokesperson. It does not have a Foundation or Trust, but employees working in the social investments department like those in communications, accounts or HR wings.

Infosys is another Indian company that runs its CSR work through the Infosys Foundation, but the spokesperson declined to comment on their experiences with FCRA.

The Companies Act may mandate social responsibility, but the FCRA curtails it, affecting companies, NGOs that seek corporate funding, and social initiatives across the board.

(Article first appeared in Economic Times.) Author’s views are personal. 

 

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