Recently Foreign Contribution (Regulation) Act, 2010 was implemented by the government to regulate borrowing from abroad by NGOs. You can read further about it here. To supplement the Act, Foreign Contribution (Regulation) Rules, 2011 has been brought in force.
The rules stipulates what kind of activities are speculative activity as an organisation taking fund under FCRA is not permitted to invest that money in speculative activities.
So, if your organization is registered under FCRA and you want to borrow money, make sure that the organization is not engaged in speculative activities.
What are speculative activities?
Under Rule 4 of the Foreign Contribution (Regulation) Rules, 2011, following activities are speculative activities:-
a) Any activity or investment that has an element of risk of appreciation or depreciation of the original investment, linked to market forces, including investment in mutual funds or in shares such as investment in various kind of mutual fund and investment in share market is speculative activity.
However, will this include various bonds and investment like KVP (Kisan Vikas Patra) and investment in various schemes in post office?
FRCRA regulations prohibit investment in schemes which are characterised by an element of risk, however, post office schemes and other schemes such as fixed deposit by bank are not subject to any risk of appreciation or depreciation. Hence if an organization is borrowing money under FCRA is investing in post office schemes or depositing the money under other such scheme where no risk is involved, such activity will not come in the category of speculative activity and the organization can carry it out without any impediment.
b) Participation in any scheme that promises high returns like investment in chits or land or similar assets not directly linked to the declared aims and objectives of the organisation or association is speculative activity.
Therefore, an organization borrowing money under FCRA cannot invest in chit fund or money circulation scheme or activities like lottery or real estate that is extraneous to the functioning of organization.
Chit scheme in this case denotes Chit scheme denotes a transaction by which a person generally know as foreman enters into an agreement with a specified number of persons that every one of them shall contribute a specified sum of money, generally by way of monthly installment over a definite period. The money that is pooled in is then auctioned every month amongst subscriber and the one who bids for highest discount is declared the winner and is given the prize amount. The amount that the chit winner forgoes as discount is distributed amongst the subscribers as dividend after subtracting the promoter’s commission.
While money circulation scheme which is also banned under Prize Chits and Money Circulation Schemes (Banning) Act, 1978 is defined as indicates any scheme viz. sponsoring business, multi level marketing, network marketing, pyramid scheme business etc. that promises easy or quick money or for the receipt of money or valuable thing as the consideration for a promise to pay money on the occurrence of any event or contingency relative or applicable to the enrolment of members into the scheme.
What kind of investment is not speculative?
A debt-based secure investment shall not be treated as speculative investment.
However, what kind of investment can be considered as debt secure investment is ambiguous. For instance, investment such as a Mutual Funds Monthly Income Plan, Income Fund, Short Term Fund, Ultra Short Term Fund & Liquid Fund can be considered as debt-based secure investment is not clear.
Compliance requirement for investment
Every association shall maintain a separate register of investments. Every register of investments maintained under the Act shall be submitted for audit to a chartered accountant.
An organization that wants to borrow money and is registered under FCRA needs to ensure that it is not engaged in speculative activities and is abiding by the compliance requirement under the Foreign Contribution (Regulation) Rules, 2011.
In case of any query or suggestion you can write to us at email@example.com or firstname.lastname@example.org