2016 Amendment to the FCRA

2016 Amendment to the FCRA

  1. This article briefly examines the 2016 amendment to the Foreign Contribution (Regulation) Act, 2010 (“FCRA”), which allows Indian companies owned/controlled by foreign persons to be excluded from the purview of FCRA and how it directly defeats the very purpose of FCRA.

Background

  1. The FCRA regulates receipt of foreign contribution from any foreign source. “Foreign Source”, under Section 2(1)(j) is defined to include “a company within the meaning of the Companies Act, 1956 (1 of 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:—
  2. the Government of a foreign country or territory;
  3. the citizens of a foreign country or territory;
  4. corporations incorporated in a foreign country or territory;
  5. trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory;
  6. foreign company;”[1]
  1. Further, Section 2(1)(g) of the FCRA defines a “foreign company” as any company or association incorporated outside India and includes a foreign company as defined under the Companies Act, 1956; a company which is a subsidiary of a foreign company; a company whose registered office is outside India or a multi national company.
  1. Similarly, the repealed FCRA, 1976 also prohibited/regulated receipt of funds from foreign sources which included foreign companies and any company with more than 50% foreign shareholding.[2]
  1. Therefore, under the FCRA 2010 and FCRA 1976, a foreign company or an Indian company in which more than 50% shareholding was held by an offshore/foreign entity or person, would automatically become a “foreign source” and receipt of funds from such companies would become “foreign contribution” for the purpose of the FCRA.

Challenge to Vedanta’s funding of political parties

  1. In 2014, the Association for Democratic Reforms filed a writ petition before the Delhi High Court regarding the blatant violation of the FCRA by various political parties wherein they were receiving foreign contribution from Indian companies which were in turn held by foreign companies.
  1. In Association for Democratic Reforms v. Union of India, W.P.(C) 131/2013, the issued specifically was whether contributions received by political parties, upto 2009, from two companies- Sterling Industries India Ltd. and Sesa Goa Ltd. in which more than 50% shareholding was held by Vedanta Resources Plc. a company incorporated in the UK, would qualify as “foreign contribution” under the FCRA, 1976.
  1. The Delhi High Court held that, firstly, Vedanta Resources PLC would qualify as a “foreign company” under the Companies Act, 1956 and therefore under the FCRA, and secondly, the actual donor companies would come within the definition of foregin source under 2(e)(vi) of the FCRA, 1976, and therefore, ordered the re-examination of receipts of contributions of respondent political parties.

Amendment to the FCRA in May 2016

  1. The FCRA was amended by the Finance Act, 2016 (which was introduced as a money bill) and the following new proviso, to the abovementioned Section 2(1)(j)(vi), was introduced:

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 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;”.

  1. This effectively allows for an intersection of the FEMA and the FCRA whereby it allows a company which is compliant with the foreign direct investment sectoral caps prescribed by the DIPP and the RBI, to freely contribute to any person (as defined under the FCRA) in India without adhering to the restrictions thereon since they are excluded from the definition of “foreign source”, as defined under S.2(1)(j).

 

Retrospective amendment and effect on ADR v. Union of India     

  1. The 2016 amendment has introduced the new proviso with retrospective effect from the 26th September, 2010.
  1. The Delhi High Court order was limited to an analysis of the provisions of the FCRA, 1976 which has since been repealed. Though prior to the 2016 amendment, the FCRA and FCRA 1976 were pari materia, the 2016 amendment has changed the basis of the order.
  1. An appeal against the Delhi High Court order in Association for Democratic Reforms v. Union of India, W.P.(C) 131/2013, was filed in the Supreme Court and thereafter withdrawn in November 2016.

 

Issues

 A. Effect on the aims of FCRA

  1. The 2016 amendment to the FCRA strikes at the very fundamental basis of the FCRA.

 

  1. The historical context of controlling foreign funding clearly shows that the basis for introducing, both, the (now repealed) Foreign Exchange Regulation Act, 1973 and the FCRA, 1976 was to address the threat of control of the Indian economy and polity by foreign powers.

 

  1. The Parliamentary debates at the time of introduction of the FCRA, 1976, shows that fear of neo-colonialism of India by way of economic means would ultimately result in foreign interference and would therefore be against national interest

 

  1. On this basis, the Delhi High Court had concluded that the FCRA, 1976 was enacted to shield the legislative armoury with in conjunction with other laws like the FERA, 1973.[3]
  1. At the time, foreign funds received through investments by companies under FERA or by other non-profit organisations under the FCRA, 1976, were treated and regulated so as to not compromise the interest of the country.
  1. This purpose apparently resonated with the Indian legislature even in 2010 when the FCRA was passed. That is, P. Chidambaram, the then Minister of Home Affairs, during the Lok Sabha debates on the introduction of the FCRA had stated that it aimed to ensure that legitimate activities are allowed and that “foreign money does not dominate social and political discourse in India”. [4]
  1. The aim to separate foreign funding from any power over Indian politics is clear from the plain reading of the FCRA itself since it even prohibits office bearers of political parties under Section 3, thus bringing within its purview persons who are not in any manner connected with the Government.

 

  1. Therefore, with the 2016 Amendment the way is paved, retrospectively, for all political parties to receive foreign funding from Indian companies as long as they are FEMA compliant, and thus be unregulated by the FCRA.

 

  1. If one views this along with the opening up of the Indian economy to foreign companies, this gives rise to much graver and direct risk of control over Indian politics by foreign nationals through companies.

 

  1. For example, Press Note No.12 (2015 Series) dated November 24, 2015, introduced by the Ministry of Finance, allows upto 49% foreign investment in the defence sector through the automatic route and beyond that with prior Government approval. The 2016 amendment now directly allows for a foreign owned defence company to contribute to a political party which can directly compromise our physical national security.[5]

 

 B.Foreign Source

  1. By allowing FEMA compliant Indian companies which may be fully owned and controlled by foreign persons, to be excluded from the definition of foreign source, amounts to allowing foreign Governments, international agency funded companies, etc. who set up Indian companies to contribute freely to political parties and other organisations, this in effect defeats the very definition of foreign source under Section2(1)(j) of the FCRA.

C.Manner of amendment

  1. The 2016 Amendment to the FCRA, was brought about by the Finance Act, 2016, which was introduced as a money bill.
  1. Therefore, in effect, the Government amended the FCRA through the Finance Bill, which is a money bill. This issue was also raised by Mr. Asaduddin Owaisi, in the Lok Sabha during the debate over the Finance Bill.
  1. Given that the FCRA would not qualify as a matter pertaining to a “money bill” as defined under Article 110 of the Constitution, the constitutionality of this amendment is questionable.
  1. Therefore, the 2016 Amendment to the FCRA has given rise to multiple issues of law and sovereignty which unfortunately very few are raking up currently.

 

[1] Section 2(1) (j) (vi) of the FCRA.

[2] Section 2(1)(e) (iii) and (vi) of the FCRA, 1976.

[3] Order dated March 28, 2014, of the Delhi High Court in Association for Democratic Reforms v. Union of India, W.P.(C) 131/2013, paras 18-22

[4] Lok Sabha Debates, August 19, 2010

[5] Press Note No.12 (2015 Series) dated November 24, 2015, Ministry of Finance

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About Chitralekha Das

Chitralekha Das | Lawyer

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