Section III

Foreign Source ‒ Definition & Clarification

Section III

What is a foreign source?

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

(i)        the Government of any foreign country or territory and any agency of such Government;

(ii)       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;[1]

(iii)      a foreign company; [vide section 2(1)g) of the Act]

(iv)      a corporation, not being a foreign company, incorporated in a foreign country or territory;

(v)       a multi-national corporation; [vide Section 2(1)(g)(iv) of the Act and Explanations (a) & (b) thereunder]

(vi)      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

[2] Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999 (42 of 1999), or the rules or regulations made thereunder, then, notwithstanding the nominal value of 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.

(vii)     a trade union in any foreign country or territory, whether or not registered in such foreign country or territory;

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

(ix)      a society, club or other association of individuals formed or registered outside India;

(x)       a citizen of a foreign country.

[1] Vide Annexure VII

[2] The proviso to section 2(1)(j)(vi) was inserted by the Finance Act, 2016 and was further amended by Finance Act, 2018.  Please see the replies to Q. Nos. 40 to 42 for further explanation.

Which are the bodies/organisations of United Nations and other international agencies that are not treated as foreign source under FCRA?

Answer: The list of agencies of the United Nations, World Bank and some other international agencies/multilateral organisations, which are not treated as ‘foreign source’, is at Annexure -VII.  Please note that funds received from the listed agencies are not treated as foreign contribution.

Whether an individual of Indian origin who has acquired foreign nationality is treated as foreign source?

Answer: Yes.  The holder of Person of India Origin (PIO) card as well as Overseas Citizen of India (OCI)[3] card is also treated as foreign source as he/she has become a citizen of a foreign country.

[3] In terms of MHA Gazette Notification (F. No. 26011/01/2014-IC.I) dated 09/01/2015, all the existing PIO cardholders shall be deemed to be OCI cardholders w.e.f. the date of the Notification.

What is a foreign company? [4]

Answer: As defined in Section 2(1)(g) of FCRA, 2010 —

“foreign company” means any company or association or body of individuals incorporated outside India and includes—

(i) a foreign company within the meaning of section 591 of the Companies Act, 1956[5];

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

(iii) 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);

(iv) a multi-national corporation.

[4] Vide Section 2(42) of the Companies Act, 2013 for the new definition of ‘foreign company’.

[5]  Now, Section 2(42) of the Companies Act, 2013.

What is a multi-national corporation (MNC)?

Answer: According to the Explanation under the definition of ‘foreign company’ vide Section 2(1)(g)(iv) of FCRA, 2010 —

“For the purposes of this sub-clause, a corporation incorporated in a foreign country or territory shall be deemed to be a multi-national corporation if such corporation, —

            (a) has a subsidiary or a branch or a place of business in two or more countries or  territories; or

            (b) carries on business, or otherwise operates, in two or more countries or territories.”

What is a subsidiary?

Answer: The provisions of Section 2(87) of the Companies Act, 2013 are reproduced below to clarify the meaning of a ‘subsidiary’ —

“Section 2(87) – “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation. —For the purposes of this clause, —

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries.”

Whether a company incorporated in India under the Companies Act, 1956/Companies Act, 2013 having its operations in 2 or more countries is to be treated as a MNC under FCRA, 2010?

Answer: No, the company will not be regarded as a multi-national corporation under FCRA, 2010 because as per Explanation under Section 2(1)(g)(iv) of FCRA, 2010, a corporation has to be incorporated in a foreign country or territory and should also have operations in 2 or more countries to be deemed to be a MNC.

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The definition of ‘foreign source’ under FCRA was amended through insertion of a proviso to Section 2(1)(j)(vi). How did that amendment come about?

Answer: The amendment was initially done through the Finance Act, 2016 which was further amended by the Finance Act, 2018.

Before the amendment, Section 2(1)(j)(vi) of FCRA, 2010 stated that ‘foreign source’ included “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;

Before the amendment, there was no proviso to Section 2(1)(j)(vi) of FCRA, 2010.

The 1^st Amendment was through insertion of the following proviso to Section 2(1)(j)(vi) of FCRA, 2010 by Section 236 of the Finance Act, 2016:

“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 and shall be deemed to have been inserted with effect from the 26^th September, 2010, 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 (42 of 1999), or the rules or regulations made thereunder, then, notwithstanding the nominal value of 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.“.

Please note that 26^th September, 2010 was the date when FCRA, 2010 was notified.

The 2^nd Amendment was through amendment of Section 236 of the Finance Act, 2016 by Section 220 of the Finance Act, 2018 by the following:

“In the Finance Act, 2016, in section 236, in the opening paragraph, for the words, figures and letters “the 26^th September, 2010”, the words, figures and letters, the 5^th August, 1976” shall be substituted.”

Please note that FCRA, 1976 was Notified on 31/3/1976 and was in effect from 5/8/1976 till it was replaced by FCRA, 2010.

The 2^nd Amendment through the Finance Act, 2018 implies that Section 2(1)(j)(vi) of FCRA, 2010 stands amended retrospectively from 5^th August, 1976.  Now, there is an entirely new proviso to Section 2(1)(j)(vi) of FCRA, 2010, which read as:

“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999 (42 of 1999), or the rules or regulations made thereunder, then, notwithstanding the nominal value of 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”.

What were the reasons for insertion of a proviso to Section 2(1)(j)(vi) to partially amend the definition of ‘foreign source’ under FCRA, 2010?

Answer: The reason for amending FCRA, 2010 by the Finance Acts of 2016 & 2018 by inserting the aforesaid proviso to Section 2(1)(j)(vi) has not been specifically stated by the Government.  In the Notes on Clauses appended to the Finance Bill, 2016, no reason was stated for amending the FCRA, 2010.  In the Notes on Clauses appended to the Finance Bill, 2018 for amending Section 236 of the Finance Act, 2016, it stated, “It is proposed to bring the said amendment with effect from the 5th August, 1976 the date of commencement of the Foreign Contribution (Regulation) Act, 1976, which was repealed and re-enacted as the Foreign Contribution (Regulation) Act, 2010.“   It is also not clear why this amendment was brought through the two Finance Acts by the Ministry of Finance whereas in usual course of business, the administrative Ministry for FCRA, i.e., the Ministry of Home Affairs, should have piloted the bill for the amendment.

In the Statement of Objects and Reasons appended to the Foreign Contribution (Regulation) Amendment Bill, 2020 introduced in the Rajya Sabha/Lok Sabha by the Ministry of Home Affair for the amendments to FCRA, 2010 in September 2020, it was inter alia stated, “The said Act has come into force on the 1st day of May, 2011 and has been amended twice. The first amendment was made by section 236 of the Finance Act, 2016 and the second amendment was made by section 220 of the Finance Act, 2018.“

What are the implications of the new proviso to Section 2(1)(j)(vi) which has partially amended the definition of ‘foreign source’ under FCRA, 2010 with retrospective effect?

Answer: The Proviso to Section 2(1)(j)(vi) amending FCRA, 2010 is deemed to have been inserted retrospectively from 5^th August, 1976.

Implication of the Proviso:  The Proviso implies that a Company registered under the Companies Act, 1956/Companies Act, 2013 will not be treated as a ‘foreign source’ if its foreign shareholding is within the provisions under FEMA, 1999.  In other words, since the foreign shareholding of all such Companies must be within the limits specified under FEMA, 1999, all Companies within the meaning of the Indian Companies Act, i.e., registered under the Companies Act, 1956/Companies Act, 2013, and having foreign shareholding will be exempt from the definition of ‘foreign source’ notwithstanding their shareholding pattern.

Prior to the amendment all such Companies with more than 50% shareholding by one or more of the foreign sources, as indicated at (A) to (E) under section 2(i)(j)(vi) of FCRA, 2010, were treated as foreign source under FCRA and the Act was applicable in respect of contributions made by such companies.  Simply put, the amendment has excluded all Companies within the meaning of the Indian Companies Act having foreign shareholding in excess of 50% from the definition of ‘foreign source’ retrospectively from August 5, 1976 and, FCRA will not apply in respect of their contributions provided the foreign shareholding is within the limit specified under FEMA, 1999 or the rules or regulations made thereunder.               

Therefore, donations from all such Companies will not be treated as ‘foreign contribution’ and their donations to any organisation will be treated as donation from an Indian source.  Hence, a VO/NGO would not require registration or prior permission under FCRA if it wants to obtain donation from companies registered under the Companies Act, 1956/Companies Act, 2013 and having foreign shareholding. This includes subsidiaries (of foreign companies) incorporated in India under the Companies Act, 1956/Companies Act, 2013.  If a donor Company is registered in India under the Companies Act, 1956/Companies Act, 2013, its donations to any organisation should be treated as Indian/local donation and the donation amount should be deposited in the local/domestic bank a/c of the recipient organisation.

Implication for utilising CSR funds: Many corporates in India having more than 50% foreign shareholding were earlier compelled to work only with FCRA registered organizations. The amendment has removed that obstacle and they are now free to donate to any VO/NGO, whether FCRA registered or not, for any charitable/philanthropic purpose as also for utilising their CSR funds.  After the amendment, such subsidiaries (of foreign companies), which are incorporated under the Companies Act, 1956/Companies Act, 2013, may also undertake its CSR activities through any VO/NGO not having registration or prior permission under FCRA. 

Implication for Political Parties etc.: Persons not allowed to accept foreign contribution, viz., political parties and their office bearers, candidates for election, organisations of political nature etc., have also been made free to accept donations from Indian Companies having more than 50% foreign shareholding and also from subsidiaries (of foreign companies) incorporated under the Companies Act, 1956/Companies Act, 2013. 

Treatment of donations received in the past from such companies: A number of Associations received donations from such companies (which are not to be treated as ‘foreign source’ retrospectively from August 5, 1976) and they had correctly treated the donations as foreign contribution. Amendment of the definition of ‘foreign source’ with retrospective effect has created an issue as to how to treat the donations so received before this amendment.  

It will obviously be an extremely complicated, time-consuming and somewhat impractical exercise if one has to rework and revise all the accounts books from August 5, 1976 onwards to treat the FC received from such companies as local donation.  Further, there is no scope for revising the annual returns submitted by the associations to MHA in the past. Since the annual returns submitted by the associations concerned for the earlier periods cannot be revised, there is practically no point in undertaking the exercise of revising the account books especially where such donations have already been fully utilised unless MHA specifically directs the associations concerned to do so.   As of now, there is no such direction from MHA and it is unlikely that such a direction would ever come. However, there may be cases where such donations have not been fully utilised and the amount or a part thereof is available in the bank (in the savings bank A/c or in the form of FD).  In those cases, it is advisable that the associations concerned should transfer such unutilised amounts from their FC A/c including FC Utilisation A/c (s) to their domestic/local A/c(s) so that the correct position is reflected in their future annual returns.  The Finance Act, 2018, notified on March 29, 2018, is effective from April 1, 2018.   Hence, physically the money transfer of unutilized FC from the FC A/c and FC Utilisation A/c (s) into local A/c(s) could have happened after the amendment was notified.   Therefore, the effect of this amendment and consequent transfer of unutilized FC funds will be reflected in the annual return of 2017-18 onwards, wherever applicable.  The investment register(s) should also be revised accordingly.  As for such donations received in kind, the entries in the assets register(s) may also be revised to reflect the correct position.

Note:  Please note that these implications that have been pointed out are in respect of the past donations received from such companies, which were earlier treated as ‘foreign source’ and now, not to be treated as ‘foreign source’  w.e.f. 5^th August, 1976 because of the proviso to 2(1)(j)(vi) to FCRA, 2010 and where such donations have not been fully utilised and the amount or a part thereof is available in the bank (in the savings bank A/c or in the form of FD) and the investments/assets created with such donations still exist.

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