Jumping through hoops

Foreign-owned Indian companies face hardships in making mandatory CSR contributions to NGOs, write Shreekanth Katti and Kartheek Kangiti, both counsel at leading science and technology company Merck India

As per the Companies Act, 2013, and the Companies (Social Responsibility Policy) Rules, 2014 (CSR Rules, 2014), an Indian company with a net worth of INR5 billion (USD80 million), a turnover of INR10 billion, or a net profit of INR50 million is mandated to contribute 2% of the average net profits made during the previous three years towards corporate social responsibility (CSR). It is said that India is the first country in the world to make CSR mandatory by way of statutory obligations.

Companies can contribute towards this requirement by running CSR projects themselves, or they can engage an implementing partner or an NGO (non-governmental organisation) to carry out the projects on their behalf. Another option is to collaborate with other companies to undertake these CSR projects.

When the company engages an implementing partner or an NGO for its CSR projects, it must be either a section 8 company (non-profit company), a public trust or a registered society registered under section 12A and 80G of the Income Tax Act, 1961, with a track record of at least three years. It is normal for companies to engage such NGOs when the CSR amount to be spent is on the high side, the scope of a CSR project is large, or the company doesn’t have adequate resources to handle the CSR projects required.

Deemed foreign contributions

The Indian Foreign Contribution (Regulation) Act, 2010 (FCRA), seeks to regulate the acceptance and utilisation of foreign contributions. Further, it prohibits accepting foreign contributions or hospitality for activities detrimental to national interest. The FCRA, under section 3, specifies the nature of organisations prohibited from accepting any foreign contributions.

Interestingly, under various definitions the FCRA has included direct foreign contributions, i.e. contributions coming from outside India and also “deemed foreign contributions”, i.e. those made by an entity within India but still considered foreign contributions under the FCRA.

This is because a “foreign contribution” is defined under section 2(h) of the FCRA as any donation made by a “foreign source”. The FCRA further defines “foreign source” under section 2(j) to include, among others, a company incorporated in India where more than half of its shares are held by foreign companies. This means a contribution made by an Indian company that is a subsidiary of a foreign company (foreign-owned Indian company), would qualify as a donation coming from a foreign source.