Foreign Contribution (Regulation) Act, 2010: Background and current status

The legislature in 1976 enacted the Foreign Contribution (Regulation) Act to create a mechanism to regulate the acceptance and utilisation of foreign contribution or hospitality in India. This was done with an intent to ensure that individuals, organizations and institutions in the field of politics, media, judiciary, government servant and/or employees of corporations etc, will not be entitled to receive any such contribution and for others it went on regulate the manner of receipt and utilisation.

The background for the 1976 Act was elaborated by the High Court of Delhi in Association for Democratic Reforms v. Union of India as follows:

"It can be safely gathered that amidst a spate of subversive activities sponsored by the Foreign Powers to destabilize our nation, the Foreign Contribution (Regulation) Act, 1976 was enacted by the Parliament to serve as a shield in our legislative armoury, in conjunction with other laws like the Foreign Exchange Regulation Act, 1973, and insulate the sensitive areas of national life like - journalism, judiciary and politics from extraneous influences stemming from beyond our borders."

Since several deficiencies were found in application of the 1976 Act, the government proposed to enact a fresh law on the subject whereby the regime was changed from ‘regulation’ to ‘prohibition’ of acceptance and utilisation of foreign contributions. With this change, the Foreign Contribution (Regulation) Act, 2010 was enacted and came into force from May 1, 2011.

One of the major shifts was in the long title itself; whereas the 1976 Act stated “An Act to regulate...in a manner consistent with the values of a sovereign democratic republic…”, the current Act of 2010 states “An Act to consolidate…for any activities detrimental to the national interest...”

Thus, “national interest” became paramount, requiring certain individuals or associations or companies to be prohibited from accepting foreign contribution.

The other difference between the long titles of both the Acts is that in the old Act, the word ‘persons’ is used, but is not defined. In the new Act, it is replaced by the word ‘individuals’, and though ‘individuals’ is not defined, the definition of ‘persons’ was introduced, with ‘individual’ being part of that definition.

Section 3 of the Act provides for the categories of persons, entities, organisations, corporations and companies who are prohibited from accepting foreign contribution, with exceptions provided for in Section 4. Section 5 gives powers to the Central government to notify an organisation of a ‘political nature’, thus bringing such organisation into the prohibited category. Section 7 prohibits transfer of foreign contribution received by a registered person to any other unregistered person.

Thus, when the economy stared opening up, the world became one global village, licence raj was eased, control over gold, imports and foreign exchange went away, and the Executive decided to put more fetters on the process of receipt of foreign contribution.

Though done with all good intentions to safeguard the interests of the country, the reasons or factors that led to this excessive control being brought in the era of globalization and liberalization, is not apparent even from the objects and reasons. Merely because certain deficiencies were found, the powers that be made the law more regressive by making prohibition and national interest guiding principles to govern the regime of receipt of foreign contribution in India.

With these amendments, the government got more control over the way foreign contribution was received by NGOs, organisations, associations and other entities. However, since the introduction of new Act, the misuse by certain unscrupulous elements did not stop, and ways and means were found to circumvent the procedures and processes.

In response to a starred question asked in the Lok Sabha in August 2018, the Union Home Ministry stated,

“Registration of more than 13000 associations/NGOs had been cancelled during last three years for violation of various provisions of FCRA, 2010 and Rules made thereunder. Offences of 86 NGOs have been compounded by imposing penalties amounting to Rs. 3,14,37,649/- since 2016. Also, four cases have been referred to the CBI for investigation during the last three years...”

The cases being investigated by the Central Bureau of Investigation (CBI) involve some high profile persons and organisations, alleging misuse/diversion of the funds received by them by way of foreign contribution. This was done either for personal or political purposes, or to be distributed amongst person/entities by showing it as business or CSR expenses.

In a recent judgment in Indian Social Action Forum (INSAF) v. UOI, the Supreme Court has held:

“The object sought to be achieved by the Act is to ensure that Parliamentary institutions, political associations and academic and other voluntary organisations as well as individuals working in the important areas of national life should function in a manner consistent with the values of a sovereign democratic republic without being influenced by foreign contributions or foreign hospitality. The long title of the Act makes it clear that the regulation of acceptance and utilisation of foreign contribution is for the purpose of protecting national interest. Candidates for election and political parties or office bearers of political parties are barred from accepting any foreign contribution. The legislative intent is also to prohibit organisations of a political nature from receiving foreign contributions.”

The challenge in the above case was to the power conferred under Section 5 of the Act on the Central government to declare an organization to be an organization of a political nature. The petitioner had sought declaration that Sections 5(1) and 5(4) of the FCRA 2010 and Rules 3(i), 3(v) and 3(vi) of the FCRA Rules, 2011 are violative of Articles 14, 19(1)(a), 19(1)(c) and 21 of the Constitution of India, alleging that the Rules suffer from unreasonableness and arbitrariness. The Supreme Court differentiated between the nature of an organisations and further held that:

“A balance has to be drawn between the object that is sought to be achieved by the legislation and the rights of the voluntary organisations to have access to foreign funds…Prohibition from receiving foreign aid, either directly or indirectly, by those who are involved in active politics is to ensure that the values of a sovereign democratic republic are protected. On the other hand, such of those voluntary organisations which have absolutely no connection with either party politics or active politics cannot be denied access to foreign contributions. Therefore, such of those organisations which are working for the social and economic welfare of the society cannot be brought within the purview of the Act or the Rules by enlarging the scope of the term ‘political interests'...

...Support to public causes by resorting to legitimate means of dissent like bandh, hartal etc. cannot deprive an organisation of its legitimate right of receiving foreign contribution. It is clear from the provision itself that bandh, hartal, rasta roko etc., are treated as common methods of political action. Any organisation which supports the cause of a group of citizens agitating for their rights without a political goal or objective cannot be penalized by being declared as an organisation of a political nature. To save this provision from being declared as unconstitutional, we hold that it is only those organisations which have connection with active politics or take part in party politics, that are covered by Rule 3(vi). To make it clear, such of those organisations which are not involved in active politics or party politics do not fall within the purview of Rule 3(vi).”

By this verdict, the Supreme Court has tried to strike a balance between organisations having political objectives and others only supporting public causes by resorting to legitimate means of dissent. It held that the former are not entitled to access to foreign contributions, but the latter cannot be denied the same.

Conclusion

While concluding, I would like to add that the issues of constitutional validity, over-reach, scope for misuse and abuse of power by the government or by individuals, associations or companies and whether activities of an organisation are of political nature or not may still not have achieved quietus. But till the next battle, the constitutional validity of change of regime of foreign contribution from ‘regulation’ to ‘prohibition’ has been upheld, protection of ‘national interest’ has become the paramount factor.

The only saving grace till date is that in spite of prohibition of receipt of foreign contribution, any violation thereof, though punishable under the Act, is not a scheduled offence under Prevention of Money Laundering Act, 2002. Whether it is an oversight or deliberate, no one knows.

The author is a Delhi-based Litigation Counsel expert in economic offences. He also advises various companies and individual clients. You can reach him at pavan.narang@gmail.com or 9810078924.