Usually, businesses are promoted and run by people with a motive to make profit, however, there are organizations that are registered for the promotion of social and charitable causes and not for profit motives, these organizations are commonly referred to as “Non-governmental organizations” (NGO).
In India, there are various modes available to form an NGO, one such mode to form an NGO is through the incorporation of a Limited Liability Company under the Companies Act 2013 widely known as “Non-profit organisation” (“NPO”) under section 8 of the Companies Act 2013 (“Law”). NPOs under article 8 of the law are incorporated with the objects of promoting commerce, art, science, sports, education, research, social protection, religion, charity, environmental protection or any other purpose.
This article presents an agreement regarding the formation of NPOs and its related aspects, subscription to the memorandum of association by persons residing outside India, receipt of foreign contribution by NPOs, etc.
Under the provisions of the law, an NPO can be incorporated as a private or public company limited by shares or by guarantee. The same process that is prescribed for the incorporation of other corporations is followed for the incorporation of an NPO.
The said Section 8 of the Act allows a person or association of persons to be registered as a limited liability company) if they prove to the satisfaction of the central government (powers delegated to Registrar of Companies) that they have purpose the promotion of commerce, art, science, sport, education, research, social welfare, religion, charity, environmental protection or any other similar purpose; it intends to apply its profits, if any, or other income to the promotion of its objects; and it intends to prohibit the payment of any dividend to its members. An NPO incorporated under the Limited Liability Act has the freedom to remove the use of the suffix “Limited” or “Private Limited” with its name.
An NPO enjoys the privileges and is subject to the obligations applicable to limited liability companies. The NPO constituted as a partnership limited by shares is required to issue shares to subscribers to the articles of association or to persons against the capital contribution received from them.
Rule 13 of the Companies (Incorporation) Rules 2014 provides for subscription to the Memorandum and Articles of Association by subscribers whether or not they reside in India. This is a general rule that must be followed by companies incorporated under the Act, whether the company was incorporated under section 8 or not. Therefore, it can be interpreted that people residing outside India are not restricted to subscribe to the memorandum and bylaws of an NPO.
The Foreign Contributions (Regulation) Act 2010 (“FCRA ») defines the term “foreign contribution” as “the gift, delivery or transfer of, inter alia, currency (whether Indian or foreign) by a foreign source”. The term foreign source includes any foreign corporation, foreign government, citizen of a foreign country, foreign trust or foreign foundation.
In addition, the FCRA requires that “no person with a defined cultural, economic, educational, religious, or social program shall accept any foreign contribution” unless that person obtains a registration certificate from the central government. The term “person” in the FCRA includes corporations registered under Section 8 of the Act.
The words “gift, delivery and transfer” used in the definition of foreign contribution have a broader perspective and cover almost all inflows of funds (with few exceptions) from a foreign source, whether in Indian currency or foreign. . Hence, this implies that any receipt of funds, whether capital contribution or grant by Section 8 companies from persons residing outside India, would be considered as a foreign contribution under the FCRA, which would trigger the registration/licensing requirement.
This is further substantiated in one of the Frequently Asked Questions (FAQ) and answer thereto issued by the Department of the Interior (MHA) on the FCRA, that the injection of foreign equity capital into corporations of Section 8 should be treated as a foreign contribution.
Foreign Exchange Management Act 1999 (“FEMA”) to be read with the Foreign Exchange Management (Non-Debt Securities) Rules 2019 (“NDI Rules ») also provides the conditions and procedure for investment in non-debt securities of Indian companies by persons residing outside India.
Indian companies as defined in the NDI Rules as a company incorporated in India, which also includes companies incorporated under Section 8 of the Act. While referring to the list provided under FEMA and NDI rules in which investment in shares by persons residing outside India is prohibited/restricted, it is evident that capital injection in the NPO does not fall within the prohibited/restrictive activities. Therefore, it can be interpreted that investment in shares of NPO by persons residing outside India is permitted under the automatic route under FEMA and NDI rules subject to the conditions and process therein. are prescribed.
It can be concluded that NPOs receiving share capital from the person residing outside India would be required to obtain prior registration or authorization under the FCRA to receive any capital injection. The provisions of the law as well as the FEMA, including the NDI rules derived therefrom, should also be observed by the NPO for the issuance of shares against such capital injection.