Legal framework regulating foreign contribution to start-ups in India
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This article is written by Lalit Chhatria, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho.com. 

Introduction

Multiple laws regulate start-ups in India. Regulation and procedure enforcement is necessary and severe fines will be incurred for non-compliance. The future and the backbone of the Indian economy are start-ups. It can be integrated into different types, such as a company, a partnership firm, a one-person company, a limited liability partnership, etc.

Through various policies and regulations such as Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations 2000, Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations 2000, Foreign Exchange Management (Transfer or Issue of Security by an individual resident outside the country), the Government of India has established a comprehensive policy to encourage start-ups in India.

Foreign Contribution (Regulation) Act, 2010

The FCRA 2010 is an Act of the Parliament of India and has been in force since 1 May 2011. The object of the Act is to control, in some cases, the acceptance and use of foreign contributions and foreign hospitality. The Act consists of nine chapters with 54 sections and extends to all of India and also to non-Indian people of India.

It is true that the financial support of many political parties in India comes from foreign countries. Often, through some social or seemingly non-political group, funding is received. It is also true that certain countries offer senior level contributions or hospitality to individuals, so that these individuals in India can look after the interests of these countries. This is clearly not in the interests of the nation and therefore the object of the act is to stop such contribution and hospitality in high places.

A Gazette Notification dated 29 April 2011 notifying the Foreign Contribution (Regulation) Rules 2011 under section 48 of FCRA 2010 was also issued by the Ministry of Home Affairs.

Foreign Contribution [Section 2(1)(h)]

Foreign Contribution means the donation, delivery, or transfer made by any foreign source:

  • Any article, except any article given as a gift for personal use and the value of the gift, does not exceed what the central government can specify from time to time;
  • A currency of some kind; and
  • Any international security.

The following are the variations that will not be protected by the foreign contribution definition:

  • Receipt of fees for colleges or institutions to be paid;
  • Cost of goods and services payments; (in the ordinary course of business)
  • Money earned in India as an agent for foreign sources.

Salient Features of the Act

  • The permission given under the old Aact will be valid for a period of five years after the new International Contribution Legislation Act 2010 has been enacted.
  • In the newly passed act, certain aspects of the repealed FCRA, 1976 are integrated to the FCRA, 2010 . 2010, FCRA.
  • An information broadcasting business and political organisations were put in the group barred from receiving foreign donations.
  • The person entitled to receive a foreign contribution may not pass it to another person not approved or entitled to receive the contribution in compliance with the 2010 FCRA.
  • The international donation must be used only for the purpose for which it was received and, with the approval of the central government, 50 percent of the donation could be used for administrative expenses and, above that, for the purpose for which it was received.
  • The newly enacted Act allows for the suspension and cancellation of the registration of an agency, association or corporation in breach of the provisions of the Act and of the Rules of Procedure. Provision for the above reference point was not provided for in the repealed act.
  • Under the newly enacted Act, the registration certificate will be valid for a period of 5 years for the recognition of a foreign donation and must be renewed within 6 months of the expiry of the registration certificate and no guidelines have been laid down for the registration certificate deadline under the repealed act.
  • The company shall maintain a separate account and no fund other than a foreign donation shall be deposited in that account and it shall be the responsibility of the bank to report the account annually to the competent authority.
  • According to the statute, provisions for maintaining the account are given and non-compliance or failure to supply the inspection account will attract retaliation.
  • Any person who knowingly and purposely falsely imitates or declares and seeks registration by means of fraud or misrepresentation shall be liable to imprisonment for a period of up to six months or a fine, or both.

Salient Features of the Rules

  • The activities to be regarded as speculative activities have been described in the Foreign Contribution (Regulation) Rules, 2011.
  • Expenditure, which amounts to “administrative expenditures,” has also been stated in the rules.
  • Information of the process for submitting an application for registration or prior authorisation to accept a foreign contribution have been given.
  • The application fee will be Rs. 2000/- and Rs. 1000/- respectively for obtaining registration or prior permission to accept international contribution.
  • Any pending application under the repealed act shall, subject to payment of the prescribed charge, be considered to be an application made under the new laws.
  • A separate collection of accounts and records shall be maintained by the person to whom registration or prior authorisation to obtain and make use of the foreign contribution has been given.
  • The registration certificate is valid for a period of 5 years for the approval of a foreign donation and must be renewed within 6 months of the expiry of the registration certificate.
  • If the registration certificate is revoked, the amount of foreign investment unused in the account of the individual will be vested with the bank authority before further instructions are given by the central government.

Foreign investment: Compliance under the Reserve Bank of India/ Foreign Exchange Management Act

India has seen an unprecedented rise in the flow of foreign direct investment since liberalising and globalising the economy to the outside world in 1991. Through the ‘Make in India’ campaign launched on September 25, 2014, the Government of India took on the challenge of turning India into a manufacturing power. A national programme aimed at encouraging investment, fostering creativity, enhancing the development of skills, protecting intellectual property, and developing the best-in – class production infrastructure.

There are two routes to Foreign Direct Investment ( FDI), namely, Government Route where the Foreign Investment Facilitation Portal (FIFB) operated by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India is managed by the prior approval of the Reserve Bank of India, concerned ministries/ authorities / department and central government through a single window. However, only through the Government Route can individuals or organisations from Bangladesh and Pakistan invest.

In addition to the listed 17 sectors, viz. Defence, Food Product Retail Trade, Satellites-Establishment and Operation, Telecom Services, Pharmaceutical-Brownfield, Banking-Private and Public Sector, Private Security Agencies, for which approval by the Government is mandatory, DIPP would have the duty to identify the competent authority appropriate to the specific application, in the event of doubt by the relevant Ministry. DIPP also deals with proposals from export-oriented units and NRI applications concerning equity issues for the importation of capital goods / equipment, pre-operational / pre-incorporation costs, etc.

Various categories of foreign investors, such as Foreign Portfolio Investors, Foreign Institutional Investors, Foreign Venture Capital Investors, and Non-Resident Indians, may hold stakes in Indian business entities, subject to conditions and sectoral ownership limits.

FDI is a transaction of a capital account and any infringement of its regulations attracts punitive provisions under FEMA. RBI administers FEMA and the Directorate of Compliance, Ministry of Finance. In the event of any breach of its laws, the Government of India has the right to investigate.

Concerned Administrative Ministries/Department/Authorities

The sector covered by the Government Route requires the approval of foreign investment from the ministries, departments and authorities concerned under the current FEMA Regulations and the FDI Policy.

  • Ministry of Mines;
  • Department of Defence Production, Ministry of Defence;
  • Ministry of Home Affairs; 
  • Ministry of Information and Broadcasting; 
  • Ministry of Civil Aviation; 
  • Department of Space;
  • Department of Telecommunications; 
  • Department for Promotion of Industry and Internal Trade; 
  • Department of Economic Affairs; 
  • Department of Financial Services; 
  • Department of Pharmaceuticals. 

Conclusion

The International Contribution Legislation was introduced in 1976 in the aftermath of the emergency in the 1970’s. Since its introduction in 1976, the legislative structure relating to international contributions has undergone numerous changes. In addition to restricting the acceptance of international donations, the FCRA, 2010, also lays down rules for its use. It describes the foreign contribution referred to in section 2(h) of the Act by means of a gift, distribution or transfer of papers, currency or securities by any foreign source. The key purpose of the donation or the funds collected under the FCRA is that it should be used for charitable activities and that fundraisers can not use it for their personal use.

In addition, the Regulation Act, 2010, requires that the turnover of the NGO eEtc. should be 10 lakhs that the organisation should have spent on its targets, priorities and administration in the last three years. In addition, the legal structure relating to records is strict and demands that a bank account be connected to the system of public financial management.

Any candidate for election, correspondent, author, cartoonist, editor, honorary printer, publisher of a registered newspaper / agency, or any organisation or political party and its barriers to office, or members of any legislative association, or any company engaged in the production or broadcasting of audio news or audio-visual news, or any government organisation or political party or its barriers to office, or any company engaged in the production or broadcasting of audio news or audio-visual news, or any company engaged in the production or broadcasting of audio news or audio-visual news or government The receipt of foreign contributions by way of wages, salaries or remuneration, or payment by way of ordinary course of business, or gifts, is not protected by the provisions of Section 3 and is subject to the exception of Section 3.

Section 8 lays down the rules regulating the use of a foreign contribution from a foreign source and, furthermore, the Act specifies that the central government shall further control and forbid the use of the foreign contribution thus obtained.

Section 14 authorises the central government to cancel or revoke the certificate on its satisfaction that the use of the certificate is contrary to public policy or due to misrepresentation or fraud during the application or violation of land laws or for the use of the certificate for any reason other than that for which it was granted and that person / organisation will not be entitled to reapply for the certificate.


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