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Broadly speaking, whenever a question arises of transfer of any article by a foreigner where India is even remotely connected, the first thing that comes to our mind is the rigour of Foreign Contribution (Regulation) Act, 2010 (“FCRA”).

The FCRA came into force on May 01, 2011, by replacing earlier Act of 1976. The basic purpose of FCRA is “to consolidate the law to regulate the acceptance and utilization of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilization of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto.”

FCRA extends to the whole of India, and is applicable to the organizations outside India under certain circumstances.

In order to analyse – whether a foreigner can form a private trust in India for upkeeping of its property by transferring such property to the trust? – it becomes imperative to analyse certain provisions of FCRA.

As per Section 2(1)(j) of FCRA, a “foreign source” includes a citizen of a foreign country. Thus a “foreigner” will fall within the definition of a “Foreign Source”.

Having ascertained that, it becomes pertinent to analyse if an Indian property can be said to fall within the definition of a “Foreign Contribution” as provided in FCRA. The definition of Foreign Contribution as provided in Section 2(1)(h) of FCRA is as follows:

“foreign contribution” means the donation, delivery or transfer made by any foreign source ─

(i) of any article, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift is not more than such sum as may be specified from time to time by the Central Government by the rules made by it in this behalf;
(ii) of any currency, whether Indian or foreign;
(iii)of any security as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 and includes any foreign security as defined in clause (o) of Section 2 of the Foreign Exchange Management Act, 1999.

We know for a fact that an Indian property cannot fall within the term “any currency, whether Indian or foreign” or “of any security” as defined in clause (h) of section 2 of the Securities Contracts (regulation) Act, 1956 and includes any foreign security as defined in clause (o) of section 2 of the Foreign Exchange Management Act, 1999. Hence, what needs to be analysed is whether a property would come within the ambit of the term “article” as used in Section 2(1)(h) of FCRA. It is interesting enough that the term “article” is not defined anywhere in FCRA or any other applicable statute or Indian case laws.

The Indian legal dictionary (borrowing from English cases) defines an “article” to mean a material thing or a tangible object, a thing of value. Since a property can be said to be a tangible object (i.e., something which is easily identifiable) and a thing of value, therefore, a property can be said to fall within the ambit of the term “article”.

Hence, transfer of a property (an article) situated in India by a Foreigner (Foreign Source) to a trust shall constitute a “Foreign Contribution” within the meaning of FCRA.

Having established that, it becomes important to highlight that Section 11, Sub-section (1) of FCRA which provides that-

“No person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution unless such person obtains a certificate of registration from the Central Government.”

The said Section 11, Sub-section (2) further provides that –

“Every person referred to in this sub-section (1) may, if it is not registered with the Central Government under that sub-section, can accept any foreign contribution only after obtaining the prior permission of the Central Government and such prior permission shall be valid for the specific purpose for which it is obtained and from the specific source.”

Thus, from a reading of the above section, the following position emerges out:

No person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution unless:

1. It obtains a certificate of registration from Government of India (“GOI”); or
2. It obtains prior permission from GOI.

Moreover, other terms of FCRA, shows that the term “Person” used in this Section 11 is defined under Section 2(1)(m) of FCRA and it includes an association. The term “Association” is defined under Section 2(1)(a) of FCRA and in turn includes an “organization of any nature”. Hence, the term “Person” shall include a trust in question, since it includes organization of any nature.

The trust in question being a private trust, would be a Person as used in Section 11 of FCRA, however, without any definite cultural, economic, educational, religious or social programme.

Does this then mean that such Person (private trust in the instant case) does not need to obtain registration certificate or prior permission from GOI for receiving Foreign Contribution? Unfortunately, clarifications issued by Ministry of Home Affairs, GOI and judicial precedents of Indian courts are completely silent on this aspect.

In response to one of the Frequently Asked Questions, the Ministry of Home Affairs has clarified that in order for a Person to receive Foreign Contribution, the Person must fulfil the following conditions:

1. It must have a definite cultural, economic, educational, religious or social programme.
2. It must obtain the FCRA registration/ prior permission from the Central Government.
3. It must not be prohibited under Section 3 of FCRA, 2010.

Can we then say that a Person who is not eligible for obtaining a registration certificate or prior approval from GOI for not having a definite cultural, economic, educational, religious or social programme (like a private trust) is outside the ambit of FCRA? Hence, it can receive foreign contribution without any checks and balances? Or would it be too liberal an interpretation of a significant statute like the FCRA?

The Ministry of Home Affairs published an order in the Official Gazette vide number S.O. 459(E), dated 30th January, 2020, which in the interest of the general public exempts from the operations of FCRA any organisations (not being a political party), constituted or established by or under a Central Act or a State Act or by any administrative or executive order of the Central Government or any State Government and wholly owned by the respective Government and required to have their accounts compulsorily audited by the Comptroller and Auditor General of India (“CAG”) or any of the agencies of the CAG.

It is pertinent to note that even this clarification does not talk anything about an organisation which qualifies as a Person under FCRA, however, a Person who does not have a definite cultural, economic, educational, religious or social programme.

Since, there are no judicial precedents or clarifications issued in this regard, this appears to is a grey area. Unless a clarification is used by the relevant authority or this question is analysed by the Indian courts, this aspect remains open to a wide range of interpretations by the legal fraternity.

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We have always come across investors who are concerned about profits and dividends, but new age investors expect something more from the corporates i.e., they want to know the source of the profits as well. Hence, we are witnessing a sharp rise in ESG space, globally. ESG stands for Environmental, Social, and Governance. ESG investing is also known as “socially responsible investing,” “impact investing,” and “sustainable investing”. ESG refers to those parameters which are used to monitor responsible business conduct with an aim to ensure that businesses ultimately benefit all the stakeholders and not just the shareholders.

‘E’ stands for environment and broadly covers an organisation’s carbon footprint policy, waste management, energy conservation, water consumption policies etc.,

‘S’ stands for the social impact of an organisation on the community through its agendas for its customers, employees, suppliers etc. Gender diversity, safety at workplace etc., are some of the other important factors to judge social impact of an organisation; and

‘G’ stands for governance policies of the corporates which includes board composition, audit practices, disclosure compliances, bribery and corruption, executive compensation etc.

In India, sustainable reporting framework has evolved over time. However, it is still at a very nascent stage as India has still not consolidated laws relating to ESG reporting. Numerous legislations impose certain obligations and disclosure requirements related to ESG matters. These regulations are spread across various legislative frameworks such as the Factories Act, 1948, the Environment Protection Act, 1986, the Water (Prevention and Control of Pollution) Act, 1974, the Prevention of Money Laundering Act, 2002, the Prevention of Corruption Act, 1988, the Companies Act, 2013, MCA’s National Guidelines on Responsible Business Conduct and the SEBI regulations prescribing the compliance and disclosure requirements for the ESG matters.

After observing global standards and practices related to ESG such as sustainability standards published by Global Reporting Initiative (“GRI”) which requires detailed disclosures, SEBI took a step forward and came up with Business Responsibility Report (“BRR”) for top 100 listed companies in 2012. BRR was based on nine sustainability principles provided under MCA Voluntary ESG Guidelines, 2011. BRR format collected ESG data in the form of Yes/ No questionnaire. Hence, BRR was criticised for its weak design as it provided very little and meaningful ESG data. In order to become compliant with the global standards and improve disclosure quality, SEBI vide a circular dated May 10, 2021, introduced ‘Business Responsibility and Sustainability Report’ (“BRSR”) for top 1000 listed companies through amendment in SEBI (Listing and Disclosure Requirements), 2015.

From financial year 2022-23, top 1000 listed companies are mandatorily required to prepare

Business Responsibility and Sustainability Report which demands detailed ESG disclosures.

Some of the key disclosures required under the BRSR Framework are given under the tablebelow:

Since, BRSR is not an industry specific reporting framework, SEBI has allowed the reporting entity to identify non-applicable parameters and provide a reason for its non-relevance (for example, certain environment related disclosures may not apply to a service industry and so on).

Although India has taken a step towards sustainability and the proliferation of international disclosure standards, there are varying caveats and limitations to be taken into consideration.

1. Challenges in data collection:

Performance is demonstrated by establishing a robust data collection process. Hence, the companies face these major issues while collecting ESG data:

a. Not knowing what needs to be collected;
b. Not knowing who needs to be involved in the process;
c. Not knowing where the data is in the business.

2. Maintaining the quality of report:

Now the companies cannot afford to stick to a tick box approach. Investor satisfaction would require detailed disclosure along with follow-up actions from the respective entities. To maintain the investor trust, entities may also have to get external assessment or evaluation done. External assurance can help maintain investors’ expectations, especially of foreign investors.

3. Multiple disclosure frameworks:

As there are various frameworks available, companies often tend to choose framework which is apt to their particular business. This could lead to less meaningful and comparable ESG data. In such a scenario, gaining investor confidence becomes difficult.

To tackle these challenges posed by current ESG regime, efforts are being made to adopt a single global framework to regulate ESG data, in India. However, maintaining a global standard such as GRI or IFRS (International Financial Reporting Standards) would not be easy for companies operating in a developing economy like India.

1. Manipulated ESG ratings:

Investors who cannot afford proprietary ESG diligence, rely heavily on ESG ratings provided by the ESG rating agencies. However, the rating methodologies used by these agencies has been a topic of debate. More transparent methodologies to provide accurate ESG ratings is the need of the hour.

SEBI on January 24, 2022, released a consultation paper seeking views on proposal to provide for an accreditation framework for ESG rating providers in India. It is hoped that this step by SEBI will help bring in more transparency in the rating methodologies and protect the interest of the investors.

2. Comparability of ESG disclosures:

The availability of numerous frameworks leads to a lack of comparable ESG data in the capital markets. This reduces the usefulness of the ESG information for better capital allocation decisions by the investors. Hence, a common global standard is recommended to achieve reliable and comparable ESG data.

For now, ESG reporting remains a priority for large-listed companies only, but smaller companies, particularly those seeking private investments from VC or PE funds, should also deliberate upon their ESG risks and opportunities. Looking at the fast growth of ESG considerations, it is anticipated that it would soon find its way into credit assessments by banks and other private lenders. It is expected that the BRSR framework will be a milestone in achieving reliable and meaningful ESG data.

Companies should invest to build a mechanism to capture relevant data related to ESG matters, select suitable framework for reporting, and most importantly strengthen the level of assurance on such reporting. Also, it is advisable for the companies to create business specific ESG goals and plans while continuously analysing the risks, challenges and opportunities offered by the ESG regime in India.

As it is well-known, in countries like India where economic integration and social inclusion are imperative forces that drive the masses towards growth and development, Corporate Social Responsibility (“CSR”) has become an integral and impactful part of the corporate landscape.

The legal framework on CSR outside India began to develop during the 1900s.  However, India is the first country in the world to impose a statutory obligation of CSR on corporates by way of the introduction of Section 135 of the Companies Act, 2013 (“CA, 2013”).

As per Section 135(1) of CA, 2013 read with the Companies (CSR Policy) Rules, 2014, a company satisfying any of the following criteria during the immediately preceding financial year is required to spend, in every financial year, at least two per cent of the average net profits made during the three immediately preceding financial years:

(i) The net worth of rupees five hundred crores or more, or

(ii) Turnover of rupees one thousand crores or more, or

(iii) The Net profit of rupees five crores or more.

Since these criteria are joined by the word ‘or’ instead of the word ‘and’, hence the companies fulfilling any of the above criteria would be required to fulfill the CSR obligations imposed by CA, 2013.

The Government of India (“GOI”) has made it clear that CSR spending is not charity or mere donations without any strategic benefits. In fact, there has been a concerted effort to define broad areas (Schedule VII of CA, 2013) under which the funding can be channeled, thereby visibly and positively impacting society.

Covid 19 and CSR activities:

With the outbreak of Covid 19 pandemic, GOI declared it as a ‘notified disaster’ on March 14, 2020.  Following such notification, the Ministry of Corporate Affairs (“MCA”) on March 23, 2020 through a clarificatory circular, declared that spending of funds for Covid 19 relief would be treated as a permissible activity under CSR.  Further, the GOI has also set up the “Prime Minister’s Citizen Assistance and Relief in Emergency Situations Fund” (“PM CARES”) to respond to the Covid 19 crisis and provide relief to those affected.  Upon setting up of the PM CARES, Schedule VII of CA, 2013 was amended to include contributions to PM CARES, as a CSR activity.

Thus, standing today, a company which falls within the ambit of CSR regulations, can contribute to PM CARES and it shall constitute a valid contribution towards CSR activities.  Also, Companies’ CSR funds can now be used towards promoting preventive healthcare infrastructure and disaster management.

In light of several circulars issued by MCA, from time to time, since the outbreak of Covid 19 pandemic, the scope of CSR has been widened to encourage companies to contribute towards Covid 19 relief as well as research and development towards generating Covid vaccines.

The table below outlines the kind of expenditure towards Covid 19 related reliefs which would constitute CSR activities and which would not:

Conclusion

Thus, to tackle the need for additional monetary requirements caused by Covid 19 pandemic, the MCA was quick to undertake necessary modifications in the CSR regulations to serve the dual purpose i.e., to generate funds for Covid 19 reliefs as well as ensure that the companies contribute towards Covid 19 reliefs, which is the need of the hour.

However, despite the above measures introduced by MCA, the future of the CSR initiative looks a little uncertain in the wake of the Covid 19 pandemic.  As we are already aware, due to the outbreak of the Covid 19 pandemic, many companies (even the large ones) across sectors, have suffered a great loss. This is especially true in the case of the real estate sector, manufacturing sector, travel, and tourism industries, hospitality industry, airline industry, to name a few.  The imposition of prolonged lockdown and mass exodus of manual labor led to the shutdown of many factories and industries across the country.

Therefore, the question remains as to, whether due to the decrease in turnover ratio and profitability of companies during the pandemic, more and more companies would fall below the thresholds prescribed under the CSR regulations.

In such a scenario, maybe the need of the hour is for MCA to relook at the threshold limits and undertake necessary modifications therein to lower the limits, accordingly.  This may go a long way in ensuring that CSR regulations and corresponding CSR obligations on the companies, even though well-intentioned, do not remain a piece of toothless legislation.