Introduction:
In the world of globalization, not only the business but charitable activities are also not confined to national boundaries only. There has been tremendous inflow of cross border funds for augmenting the social, educational, and humanitarian projects. However, receiving foreign donations in India is a regulated activity, primarily governed by the Foreign Contribution (Regulation) Act (FCRA). FCRA governs the inflow and utilization of foreign contributions for social, cultural, economic & educational purposes. Even if the NGO has CSR-1 Registration, FCRA registration is mandatory for accepting foreign contributions. Further In addition to FCRA compliance, the Reserve Bank of India (RBI) also play a key role in ensuring the legal processing of foreign contributions.
This blog will provide a comprehensive guide on FCRA compliance for NGOs, including the latest guidelines and other legal aspects to help NGOs receive foreign funding legally in India.
What is FCRA and its Regulatory Framework?
The Foreign Contribution Regulation Act (FCRA) is a law passed by the Government of India to regulate the acceptance of foreign contributions to safeguard national security and sovereignty. NGOs must be FCRA registered to legally received foreign donations.
The Reserve Bank of India (RBI), as the central banking institution, oversees the banking procedures involved in processing foreign funds. NGOs must comply with both FCRA and RBI guidelines to ensure transparency and legal use of foreign funds.
What are the key objectives of FCRA Registration for NGOs?
The key objectives of FCRA Registration for NGOs are as below:
- Preventing Money Laundering: FCRA plays an important role in money laundering and the misuse of foreign contributions for illicit or illegal activities.
- Ensuring National Security & integrity: The primary objective of the FCRA is to ensure that foreign contributions are not received from any country or institution which jeopardize the national security & integrity.
- Avoiding foreign influence of internal affairs: The Foreign Contribution (Regulation) Act aims to prevent foreign contributions posing undue influence on the internal affairs affecting social and political environment of the country.
- Ensuring transparency and accountability: NGOs which receive foreign grants or contributions are required to maintain proper accounts and also submit annual report to the Ministry of Home Affairs. This ensures transparency and accountability in the receipt and utilization of foreign contributions.
- Monitoring NGO Activities: Compliance provisions of Foreign Contribution (Regulation) Act ensures proper monitoring of the activities of NGOs who receive contributions from foreign institutions or entities. It ensures that the foreign funds are utilized for the purposes for which these are received by NGO.
Key FCRA Compliance Requirements for NGOs:
1. How to apply FCRA Registration
Before receiving foreign funds, NGOs must apply for FCRA registration with the Ministry of Home Affairs (MHA). The registration process is essential for NGOs seeking to legally accept foreign donations.
- The NGO must be registered under the Indian Trust Act, Societies Registration Act, or Section 8 of the Companies Act.
- The organization must have been in existence for at least three years and demonstrate effective social work.
- The NGO seeking FCRA registration should have spent at least Rs. 10 lakhs towards its aims and objects, excluding administrative expenditure.
- The NGO should maintain audited financial statements and have a transparent track record.
- The applicant should not be fictitious or benami and should not have been prosecuted.
Note:
Newly Registered NGO may also apply for FCRA registration only for specific foreign contributions through prior permission. In such case, prior approval of Ministry of Home Affairs is to be obtained for specific activity, purpose and source.
FCRA Registration Process:
- NGOs must apply via the FCRA Online Portal.
- The NGO will be required to submit documents, including PAN, Income Tax Returns (ITR), and audited financial statements.
- FCRA registration once granted is valid for 5 years. Renewal of FCRA registration can be made 6 months prior to the date of expiry, to keep the registration valid.
Documents required for FCRA Registration:
NGO may apply for FCRA registration using Form FC-3. Application can be made through online portal. NGO Darpan Registration is also mandatory for registering on FCRA online portal. Following documents are needed to be submitted along with application for registration:
- Self-certified copy of registration certificate/ Trust Deed etc. of the NGO (Hindi/ English) or translated into Hindi/ English
- Self-certified copy of Memorandum of Association (MOA)/ Article of Association (AOA) showing aim and objects of the NGO- in Hindi/ English or translated into Hindi/ English
- Activity Report showing details of activities and programmes undertaken by the NGO during the last three years.
- Details including KYC of key functionaries of the NGO.
- Audited Financial Statements for past three years including Balance Sheet, Income & Expenditure Account and Receipts & Payments Account.
- JPG file of signature of the Chief Functionary (Size: 50KB)
- A Fee of Rs. 10,000 is to be paid online through a payment gateway
- Affidavit from each office bearer in Proforma AA on non-judicial stamp paper of Rs. 10/- and attested by notary public or 1st class magistrate
2. Opening an FCRA Account
Once registered, the NGO must open a designated FCRA account with an RBI-authorized bank. Please note that the RBI has authorized State Bank of India New Delhi for this purpose. This account is crucial for receiving foreign funds legally.
Key Aspects of the FCRA Account:
- Exclusive use: The FCRA account should only be used for foreign contributions.
- Bank Authorization: The NGO must inform the bank that the account is for foreign funds under FCRA guidelines.
- Transaction Monitoring: Banks must monitor foreign transactions to ensure compliance with FCRA and FEMA (Foreign Exchange Management Act) regulations.
3. Receiving Foreign Contributions (INR or Foreign Currency)
Foreign funds can be received either in Indian Rupees (INR) or foreign currency. The RBI governs how foreign currency is converted into INR.
Conversion Process:
- Foreign Currency: If the donation is in foreign currency, the authorized bank must convert it into INR as per the prevailing exchange rates.
- INR Contributions: Donations received in INR must also be processed through an authorized bank, ensuring compliance with FEMA guidelines.
4. Utilizing Foreign Contributions
Under FCRA, NGOs must utilize foreign contributions exclusively for the purposes mentioned during FCRA registration. Misuse of funds is prohibited under the law.
FCRA Guidelines for Fund Utilization:
- Funds should only be spent for activities that align with the NGO’s mission and objectives as mentioned during registration.
- Annual Returns must be filed with the Ministry of Home Affairs, detailing how the funds have been used.
5. Filing Annual Returns
NGOs must submit FCRA Annual Returns by 31st December of every year. These returns are a detailed report of foreign contributions received, their sources, and how they were used.
What Should Be Included in the Annual Returns?
- A report on the total amount of foreign contributions received.
- Detailed audit reports from a Chartered Accountant.
- Breakdown of how the funds were utilized.
6. FCRA Renewal and Non-Compliance Consequences
FCRA registration is valid for five years. If the NGO fails to apply for renewal, it will no longer be eligible to receive foreign funds.
Consequences of Non-Compliance:
- Cancellation of FCRA Registration: If an NGO violates FCRA provisions, the MHA can cancel its registration.
- Penalties: NGOs may be subject to financial penalties or legal action for non-compliance.
- Reputational Damage: Non-compliance can damage the NGO’s credibility, making it difficult to attract funding in the future.
Recent FCRA Amendments to be taken care of:
FCRA Amendment Act 2020:
The Foreign Contribution (Regulation) Amendment Act, 2020 which was passed by Parliament in September, 2020 brought following major amendments to be taken care of by NGOs:
- Prohibition upon public servants from receiving foreign contributions
- Prohibition upon transfer of foreign contributions to other NGOs
- To lower the cap on administrative expenses that can be funded by FCRA funds from 50% to 20%
- To make Aadhaar number mandatory for all key functionaries of NGO eligible to receive foreign donations
- Foreign grants can be received in designated FCRA account at State Bank of India, New Delhi
FCRA Amendment Rules, 2022:
Some of the key changes with the aim to reduce the compliance burden in NGOs are:
- The limit for receiving foreign contributions from relatives without informing the authorities increased from Rs. 1 lakh to Rs. 10 Lakh in a financial year.
- The time limit increased from 30 days to 90 days for intimation using Form FC-1 to Government regarding foreign contributions from relatives.
- The time limit for making application for registration or prior permission to receive foreign funds increased from 30 days to 45 days
- The number of compoundable offences under the FCRA increased from 7 to 12.
How to Ensure FCRA Compliance and Avoid Legal Issues
- Stay Updated with FCRA Guidelines: It is essential for NGOs to stay informed about the latest updates from both the Ministry of Home Affairs (MHA) and RBI regarding FCRA compliance.
- Regular Audits: Ensure that your financial records are audited by a Chartered Accountant to maintain transparency.
- Proper Fund Utilization: Strictly adhere to the stated purposes for which foreign funds are received. Any misuse can lead to serious legal consequences.
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