Who is “Foreign” & Who Is Not? Mysteries Of FCRA 2010

Until recently if you received a
donation or a grant from a company like HDFC Ltd., which is an Indian
company and sanctioning that donation or grant in India, in Indian
rupees, it was to be treated as a foreign contribution. Not only
that, if you received a donation or grant from the H.T. Parekh
Fountain (the company’s foundation) which is registered in India
and making the contribution in India, in Indian Rupees, that too
would be a foreign contribution under FCRA 2010. 

What was the reason for this? The
problem had its roots in the definition of what is “foreign source”
under FCRA 2010. Section 2(1)(j)(vi) of FCRA 2010 treated any Company
even if registered under the Indian Companies Act a “foreign
source” if more than fifty per cent of the company’s share
capital was held by foreigners (e.g: FDIs or FIIs).

However, Section 2(1)(j)(vi) has
now been amended vide Finance Act, 2016 which was passed by the
Parliament, received the assent of the President of India on 14th
May, 2016 and has been duly published in the Gazette of India. (The
Amendment to FCRA 2010 can be found on page 91 under Part XIII.)

The relevant extract is as
follows:

PART XIII

AMENDMENT TO THE FOREIGN
CONTRIBUTION (REGULATION) ACT, 2010

236. 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 26th 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,
or the rules or regulations made there under, 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;”.

“Foreign source” is
defined in Section 2(1) (j) of FCRA, 2010. It has ten sub-clauses and
the recent amendment is only with regard to one sub-clause (i.e.:
sub-clause (vi)

Please read the amendment
carefully and note that the amendment is specific only sub-clause
(vi) of Section 2(1)(j).

There is no amendment to
sub-clause (iii) or sub-clause (v) of Section 2(1)(j).

“Foreign source”, as
defined in Section 2(1) (j) of FCRA, 2010 includes:-

 

The recent amendment under
Finance Act 2016 is only concerning: sub-clause
(vi) or 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;

Thus Indian companies such as HDFC
Ltd., which have more than 50% FDIs or FIIs will not be treated
as ‘foreign source’ with retrospective effect from 26th
September 2010, thanks to this amendment.

However a ‘Foreign company’
or ‘Multi National Company’ will continue to be treated as
‘foreign source’.

Section 2(42) of the Indian
Companies Act 2013 defines “foreign company” to mean any company
or body corporate incorporated outside India
which:

(a) has a place of business in
India whether by itself or through an agent, physically or through
electronic mode; and

(b) conducts any business activity
in India in any other manner.

Under Section 2(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;

(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.

In Explanation to sub-clause (iv)
[regarding multi-national corporation] FCRA 2010 states:

“For the purpose 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.

Noshir H. Dadrawala