How to establish Charitable Company/NGO in India through Foreign Funding

1. CONCEPT OF CHARITABLE COMPANY/NGO’S:

Charitable Company or Non Governmental Organization (NGO) is a group, organization, Non Profit establishment or non Profit association of individuals, activists, voluntary and social persons. Non Government Organization (NGO) is citizen based non–profit group works for social welfare and sustainable development. The main aim and objective of any NGO is same as the aim of Government for development of society.

The Government of India allows for registration of an NGO under three laws:

a. Section 8 Company under The Companies Act, 2013;

b. Society under Societies Registration Act 1860;

c. Trust under Public Trusts Act of each state.

All types of NGOs are treated equally under the Income Tax Act of 1961.

In order to be eligible for tax exemption status, an NGO must be founded for a charitable purpose. As defined in India law, ‘charitable purposes’ include relief for the poor, education, medical relief, and the advancement of any other object of general public utility.

Once this status is established, charitable organizations can apply for an 80G certificate to enable donors to claim tax rebates against their donations.

2. ESTABLISHMENT OF SECTION 8 COMPANY UNDER THE COMPANIES ACT, 2013 THROUGH FOREIGN FUNDING

In recent era Section 8 Company is more suitable form for the non-profit organization in India to promote the fields of arts, commerce, science, research, education, sports, charity, social welfare, religion, environment protection, or other similar objectives. These companies also apply their profits towards the furtherance of their cause and do not pay any dividend to their members.

These companies were previously defined under Section 25 of Companies Act, 1956 with more or less the same provisions. The new Act has, however, prescribed more objectives that Section 8 companies can have.

3. FEATURES OF A SECTION 8 COMPANY:

A Section 8 company comprises of the following distinct features that most other kinds of companies do not have:

i. Charitable objectives: Section 8 companies do not aim to make profits. Their objectives are purely charitable in nature. They aim to further causes like sports, science, culture, research, religion, etc.

ii. No minimum share capital: Section 8 companies, unlike all other companies, do not require a prescribed minimum paid-up share capital.

iii. Limited liability: Members of these companies can only have limited liability. Their liabilities cannot be unlimited in any case.

iv. Government license: Such companies can function only if they have the Central Government’s license. The Government can revoke this license as well.

v. Privileges: Since these companies possess charitable objectives, the Companies Act has accorded several benefits and exemptions to them.

vi. Firms as members: Apart from individuals and associations of persons, Section 8 also allows firms to be members of these companies.

4. INVOVEMENT OF MAJOR REGULATORS FOR THE REGISTRATION OF SECTION 8 COMPANY UNDER THE LAW:

1) Department of Ministry of Corporate Affairs (MCA) under the Companies Act 2013

2) Department of Income Tax, under the Income Tax Act, 1961

3) Department of Ministry of Home Affairs under the (FCRA) Foreign Contribution Regulations Act, 2010.

5. REGISTRATION & COMPLIANCE UNDER COMPANIES ACT 2013:

A person or an association of persons can make an application to the Registrar of Companies using requisite forms to form a company with charitable objectives under Section 8 of Companies Act. 2013 The Central Government, if satisfied, can accept such an application upon any terms and conditions imposed under the license granted by it. Once accepted, the Registrar of Companies will register the company after the applicants pay all requisite fees.

It is important to note that such companies can only be limited companies. All privileges and obligations of limited companies apply in this case. Further, these companies also do not need to include the words “Limited” or “Private Limited” in their names.

FREQUENTLY ASKED QUESTIONS (FAQs) ON THE COMPLIANCES OF SEECTION 8 COMPANIES UNDER THE COMPANY LAW:

a) Is it necessary that Section 8 Companies are to be incorporated as a limited company with share capital?

Section 8 Company may be incorporated as a company limited by shares or by Guarantee (with or without share capital).

b) Is it mandatory that the name of section 8 Company shall include the words like – Foundation, forum, association, federation, chamber, confederation, Council, electoral trust etc.?

Yes. As per rule 8(7) of the Companies (Incorporation) Rules, 2014, for the Companies under Section 8 of the Act, the name shall include the words foundation, Forum, Association, Federation, Chambers, Confederation, council, Electoral trust and the like etc.

 c) Whether Section 8 Companies are required to appoint a Resident director?

Yes, section 8 company is required to have atleast one director who has stayed in India for a total period of not less than one hundred and eighty two days within the previous calendar year i.e. Resident Director under section 149(3).

d) Can shareholder of section 8 company be a director of the same?

Yes, there is no specific prohibition on such appointment as director.

e) Whether Section 8 Company can alter its objects? If yes, if any permission required?

Yes, the objects of Section 8 Company can be altered by taking shareholders’ approval and approval of Registrar of Companies in terms of Section 8.

f) Is there is any restriction on a Section 8 Company from making borrowings from bank, financial institutions etc.?

There is no restriction on borrowing by Section 8 Company. However, provisions of section 180, if applicable, required to be complied with.

g) Whether Section 8 Company can be formed for providing advisory, consulting services to Section 8 Companies?

Yes, in line with the objects stated in section 8(1)(a) of the Companies Act, 2013.

h) Can section 8 companies be a holding company of another company?

Yes, section 8 company can promote another company and be a holding company of another company.

i) Can Section 8 Companies receive contributions from overseas or non-residents parson/association/ company/body Corporate?

There are special requirements to be complied with under the Foreign Contribution and Regulation Act, 2010 before a Section 8 Company can receive any contributions or donations from overseas/outside India from non-residents. The provisions of the said Act are in addition to the provisions under the Companies Act.

j) Section 8 Companies are exempted to suffix Limited/ Private Limited with the name of the company. What is the significance of this exemption? Does it affect their limited liability?

No, the Section 8 Companies enjoy limited liability even without adding the words “Limited” or “Private Limited”. No, it does not affect their limited liability.

k) Is there any relaxation in stamp duty payment in incorporation of a Section 8 Company?

Stamp duty on memorandum & articles of association of a Company or on any increase in share capital is governed by Indian Stamp Act, 1899 as adopted by respective state or stamp act of respective state, as the case may be. Some of the states provide privileged rates for stamp duty on MOA/ AOA of Section 8 Companies or on increase in authorized share capital.

l)Is there is any relaxation in Stamp duty payment on issuance of share certificate by a Section 8 Company?

Stamp duty on issue of share certificates is governed by Indian Stamp Act, 1899 as adapted by respective state or stamp act of respective state, as the case may be. No relaxation of special rate of stamp duty has been provided by any of the state in respect of stamp duty payable on issue of share certificates by Section 8 Company.

m) If a Section 8 Company is required to prepare its annual accounts in Schedule III of the Companies Act, 2013?

Yes. Rule 4A of the Companies (Accounts) Rules, 2014 provides that the financial statements shall be in the form specified in Schedule III to the Act and comply with Accounting Standards or Indian Accounting Standards as applicable. No exemption has been provided in respect of section 8 companies.

n). Whether Accounting Standards are applicable on a Section 8 Company?

 Yes. Rule 4A of the Companies (Accounts) Rules, 2014 provides that the financial statements shall be in the form specified in Schedule III to the Act and comply with Accounting Standards or Indian Accounting Standards as applicable. No exemption has been provided in respect of section 8 companies.

6. THE REGULATION OF FOREIGN FUNDING OF NGO’s

The FCRA, 2010, the FCRA Rules, 2011, and FCRA Amendment Rules, 2015 were respectively enacted to regulate the inflow of foreign funds received by NGOs. The FCRA, 2010 replaces the erstwhile Foreign Contribution (Regulation) Act of 1976.

FCRA legislation state that an organization cannot receive funding from a foreign source, unless it is registered under the 2010 Act or has obtained special government approval for a specific project. In addition, registered NGOs have to comply with various post-registration requirements, as detailed in the provisions of the Act and its rules of enforcement.

SCOPE: The FCRA and its enforcement rules regulate “foreign contributions” received from “foreign sources”, whereby such ‘sources’ are entities established in a foreign territory.

The Act categorically defines ‘foreign contributions’ as a donation, delivery, or transfer made by a foreign source of:

• Any article (unless offered for individual personal use), the value of which must not exceed Rs 25,000;
• Currency – foreign or Indian; or,
• Foreign securities, including all foreign debentures, bonds, shares, stocks, and other instruments of credit (income or interest generated from these sources are also treated as foreign contribution under the FCRA).

7. MANDATORY REGISTRATION & COMPLIANCE UNDER FCRA FOR THE FOREIGN FUNDING:

According to the FCRA, any Charitable Company and another form of NGO’s that accepts foreign contribution has to register with the central government. Such contributions can only be accepted through designated banks.

To obtain this eligibility, NGOs can either opt for special permission or go for a long-term registration that is valid for a period of five years.

In the case of the former, Ministry of Home Affair’s approval must always be sought prior to receiving contributions. In the case of the latter, NGOs only have to apply for renewal six months prior to the ending of the registration period.

COMPLIANCES:

NGOs have to open and maintain bank accounts, which will exclusively deal with the receipt and utilization of foreign contributions, as required under FCRA rules. A separate set of accounts and records must be maintained, exclusively for these transactions.

The FCRA also mandates that foreign contributions must be utilized only for the purpose for which they were received. Under Section 7 of the FCRA, the transfer of contributions is not allowed.

A person or entity is prohibited from transferring contributions to any other person, unless such transferee is authorized by the government to receive foreign contributions

In case of non-compliance with provisions of the FCRA, the government can penalise an NGO and, subsequently, suspend or cancel its license. If these NGOs don’t file annual returns, the government can issue a show-cause notice and, subsequently, suspend or cancel their foreign funding licenses, as it deems fit.

FREQUENTLY ASKED QUESTIONS (FAQs) ON THE COMPLIANCES OF SEECTION 8 COMPANIES UNDER FCRA:

a) Whether infusion of foreign share capital in a company registered under section 8 of the Companies Act, 2013 attracts the provisions of FCRA, 2010?

Yes, infusion of foreign share capital in a company registered under section 8 of the Companies Act, 2013 is treated as foreign contribution.

b) Whether an individual or a Hindu Undivided Family (HUF) can be given registration or prior permission to accept foreign contribution in terms of section 11 of FCRA, 2010?

 The definition of the ‘person’ in the Foreign Contribution (Regulation) Act, 2010 includes any individual and ‘Hindu Undivided Family’ among others. As such an Individual or an HUF is also eligible to apply for prior permission to accept foreign contribution.

c) Can a private limited company or a partnership firm get registration or prior permission under FCRA, 2010?

 As per the definition of the “person” in the FC(R)Act, 2010 which includes an “association” which in turn is defined as an association of individuals, whether incorporated or not, having an office in India and includes a society, whether registered under the Societies Registration Act, 1860, or not, and any other organisation, by whatever name called, a private limited company too may seek prior permission/registration for receiving foreign funds in case they wish to do some charitable work at some point of time.

d) What are the eligibility criteria for grant of registration?

 For grant of registration under FCRA, 2010, the association should: (i) be registered under the Societies Registration Act, 1860 or the Indian Trusts Act, 1882 or section 8 of the Companies Act, 2013 etc; (ii) normally be in existence for at least three years and has undertaken reasonable activity in its chosen field for the benefit of the society for which the foreign contribution is proposed to be utilised.

For this purpose, the association should have spent at least Rs.10,00,000/- over the last three years on its activities, excluding administrative expenditure.

Audited Statements of Income & Expenditure for last three years are to be submitted to substantiate that it meets the financial parameter.

e) Can foreign contribution be mixed with local receipts?

 No. Foreign contribution cannot be deposited or utilised from the bank account being used for domestic funds.

f) Whether expenses like ‘interest paid to bank’, ‘bank charges’, ‘hospitality’ etc. can be included in ‘administrative expenses’?

 No. The definition of as ‘administrative expenses’, as given in Rule 5 of FCRR, 2011 is explicit in this regard.

g) Is there any restriction on transfer of funds to other organisations?

Yes. Section 7 of FCRA, 2010 states:- “No person who –

(a) is registered and granted a certificate or has obtained prior permission under this Act; and

(b) receives any foreign contribution, shall transfer such foreign contribution to any other person unless such other person is also registered and had been granted the certificate or obtained the prior permission under this Act;

Provided that such person may transfer, with the prior approval of the Central Government, a part of such foreign contribution to any other person who has not been granted a certificate or obtained permission under this Act in accordance with the rules made by the Central Government.”

h) Whether donation given by Non-Resident Indians (NRIs) is treated as ‘foreign contribution’?

Contributions made by a citizen of India living in another country (i.e., Non-Resident Indian), from his personal savings, through the normal banking channels, is not treated as foreign contribution. However, while accepting any donations from such NRI, it is advisable to obtain his passport details to ascertain that he/she is an Indian passport holder.

CONCLUSION:

It is concluded that, Section 8 Company has become more suitable form of charitable organization to promote the commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment. The Ministry of Corporate Affairs has made the simplified procedure for the registration of Section 8 Company and it enjoy the several Privileges and limited liability status even without adding the words “Limited” or “Private Limited” under the provisions of the Companies Act, 2013. In order to be eligible for tax exemption status under the Income tax provisions, Section 8 Company can apply for registration under Section 12A of Income Tax Act, 1961 to get the tax exemption on their taxable income and also can apply for an 80G certificate to enable donors to claim tax rebates against their donations. Further Section 8 Company can also accept the donation; contribution and fund from the person resident outside India or foreign entity through the foreign source subject to compliance of provision of (FEMA) Foreign Exchange Management Act, 1999 and (FCRA) Foreign Contribution (Regulation) Act 2010.

Author:  CS AMIT KATHURIA, (CS, LLB, IPR)- PRACTISING COMPANY SECRETARY- For further query write on csamitkathuria.akc@gmail.com

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