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PFI Ban and After: Govt Must Plug FCRA Loopholes to Block Foreign Funding to Anti-India Outfits

By: Sumeet Mehta

Last Updated: October 04, 2022, 14:55 IST

Mumbai, India

Police personnel deployed outside PFI headquarters in Chennai, Tamil Nadu. (Photo: ANI)

Police personnel deployed outside PFI headquarters in Chennai, Tamil Nadu. (Photo: ANI)

The Popular Front of India and other anti-India groups have violated and circumvented FCRA to get foreign funding for their dubious activities. Here’s how these loopholes can be plugged

The Government of India raiding the Popular Front of India (PFI) has sent shockwaves among Islamist and other anti-India outfits. The PFI exploited two major loopholes in the Foreign Contribution (Regulation) Act, 2010 to get funding from foreign sources for subverting India’s unity, integrity, sovereignty, and social and economic stability of the country. The Enforcement Directorate (ED) discovered that the PFI was using the “Pocket Funding” route to get foreign funds in India.

FCRA was legislated to ensure foreign funding is prohibited and thereby foreign influence is stalled in areas of governance and national interest. In the process, the Government of India legislated that foreign funding must not be allowed in areas like advocacy, political interference, proselytism, etc. This was to ensure that the social fabric of the country is not hurt under foreign influence by foreign-funded NGOs.

Here, the first loophole is in the definition of the term “foreign contribution”. Section 2(1)(h) defines “foreign contribution” as “the donation, delivery or transfer made by any foreign source”. This definition is followed by two explanations that expanded the definition and scope of foreign contributions. Explanation 1 states that any donation in local or foreign currency or securities or in kind from a foreign source is considered a foreign contribution. Explanation 2 goes on to expand the scope of foreign contribution by including interest on and/or any other income derived from foreign contribution within the definition of foreign contribution.

However, Explanation 3 has created the loophole that enabled the PFI to get money from outside India using its office bearers. This explanation to Section 2(1)(h) says, “Any amount received, by any person from any foreign source in India, by way of fee (including fees charged by an educational institution in India from foreign student) or towards cost in lieu of goods or services rendered by such person in the ordinary course of his business, trade or commerce whether within India or outside India or any contribution received from an agent of a foreign source towards such fee or cost shall be excluded from the definition of foreign contribution within the meaning of this clause.”


In other words, if any foreign source enters into a commercial contract with any Indian individual, then the money received by that Indian individual does not fall within the definition of foreign contribution. However, this loophole is exploited by office bearers and their relatives and associates, who become conduits to route foreign funds into NGOs. This explanation has become the loophole for many NGOs to get foreign contribution from foreign sources for all prohibited and proscribed activities, by paying the office bearers and key management personnel of the NGO, who in turn pay the NGO.

Hence, it is advisable that the Government of India removes this explanation and instead categorically and specifically states that any funding received through the office bearers, managing committee members, key officials, and their relatives and associates for any research, consultancy, training, etc, from a “foreign source” should be brought within the purview of FCRA compliance. Foreign funds received by office bearers and officials, managers, their relatives and related parties from foreign sources on account of any commercial activity must be included in the definition of “foreign contribution”, irrespective of whether that money is further donated or given to the Indian NGO or not. Here “related party” means every person who is defined as a related party under the Companies Act, 2013 and the Income Tax Act, 1961. Along with this definition of relatives should include all categories of relatives as defined in the Hindu Succession Act, 1956.

The other loophole in FCRA is that multitudes of individuals from abroad send small sums of money to their friends and relatives in India. These friends and relatives of the person staying abroad, then transfer that money to the Indian NGO. Here there is a provision in FCRA that states that any person who receives foreign contribution in excess of Rs 1 lakh in a financial year from any of his relatives shall inform the Central government in Form FC-1 within thirty days from the date of receipt of such contribution. This is Rule 6 of the FCRA Rules. This loophole is extensively exploited by many people and in more than one instance of anti-India activities, one of them being PFI.

The Government of India must do two things in order to plug this loophole. First is to reduce the threshold amount from Rs 1 lakh to a relatively much lower amount of something like Rs 50,000. Second measure that the government must take is to make compliance of Rule 6, which is filing of the form on receipt of money from friends and relatives residing outside India, compulsory for all Indian residents. This will ensure the government has a better idea of inflow of funds and can get an early warning about any possible ways of funding any NGOs in any specific region.

In wake of the raids on and banning of PFI, the country is discussing and debating how the Islamist outfit and other NGOs have violated and circumvented FCRA and how these loopholes can be plugged. Here it is pertinent to note that FCRA was legislated in 2010, during the Congress-led UPA government headed by former Prime Minister Manmohan Singh to safeguard the sovereignty and integrity of India, and maintain public interest, freedom or fairness of election to any legislature, friendly relations with any foreign State, and harmony between religious, racial, social, linguistic or regional groups, castes or communities.

The Foreign Contribution (Regulations) Act, 2010 started with an objective which is, “national interest and any other matter connected or incidental to it”. “National Interest” is meant to protect economic, social, and communal, cultural, educational, and religious values. To ensure that the Foreign Contribution (Regulations) Act, 2010 is implemented in its word and spirit, and the underlying intent for which the law was legislated, the government must amend the law to plug the loopholes.

Sumeet Mehta is a Chartered Accountant by qualification and a Corporate Finance professional. He is the author of the book, ‘Diagnosing GST for Doctors’, published by CNBC Books18. He tweets from @sumeetnmehta. Views expressed are personal.

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first published:October 04, 2022, 14:50 IST
last updated:October 04, 2022, 14:55 IST