Tag Archives: FCRA

Corporate Social Responsibility (CSR) Contributions in Incubators

Every company having a net worth of INR 500 crore or more, or turnover of INR 1000 crore or more or a net profit of INR  5 crore or more during the immediately preceding financial year is subject to the provisions related to Corporate Social Responsibility (“CSR”) under the Companies Act, 2013 (the “Act“). The CSR related provisions of the Act are applicable to not just companies incorporated in India, but also to a foreign company that has its branch or project office in India. For a deep dive on the general conditions attached to CSR, and how to structure your CSR activities please refer to our previous post here. In this post, we will focus on the various ways CSR can be taken by incubators.

CSR in Technology Business Incubators located within Academic Institutions:

The most straight forward way is through grants given to government recognised Technology Incubators. Under entry (ix) of Schedule VII of the Companies Act, 2013, a company is allowed to undertake activity under their CSR Policy for “contributions or funds provided to technology incubators located within academic institutions which are approved by the central govt”.

The process for obtaining approval of the Central Government as Technology Business Incubators (TBI) is captured in brief below:

  • A Host Institute (HI) which is generally an Academic/Technical/R&D Institution or other institutions with proven track record in promotion of technology-based entrepreneurship, is required to submit a proposal to National Science and Technology Entrepreneurship Development Board of the Department of Science and Technology (DST).
  • If the HI is not an academic institution, then it should be a legal entity registered in India with clear purpose of promoting research, innovation and entrepreneurial ecosystem. It is desirable to have partnership with at least one academic institute of repute.
  • Financial support for establishing a TBI is also extended to a not-for-profit legal entity registered as a trust/society/section 8 company. For-profit incubators are not given financial support by the DST.

A snapshot of the formal requirements and stages involved in constituting a TBI is provided here for ready reference[i]:

Stage Detailed requirements
Stage I – Proposal Two hard copies + soft version in MS word document in prescribed format; necessary enclosures, and consent for Terms and Conditions; must be forwarded by the Head of HI (with necessary endorsements).

Necessary enclosures that must be included:

Registration Certificate of the HI; Memorandum of Association/Bye Laws of HI; Audited Statement of Accounts for the last three years; and, Annual Reports for the last three years.

Stage II – Evaluation by NEAC and in-principal approval Evaluation of proposal is done by National Expert Advisory Committee (NEAC) on the standards innovation, incubation, and technology entrepreneurship which meets at least twice in a year. Proposal must be submitted up to one month before the meeting of NEAC.

If TBI is not-for-profit entity then, after in-principle approval they are eligible to funding from Govt. subject to these conditions:

·  Registration of TBI as not for profit society/trust or a section 8 company

·  separate bank account in TBI’s name

·  minimum 1000 sq. ft. of furnished space for hosting the TBI

·  minimum lease for land must be 15 years provided by HI

Stage III – Post Approval Conditions After the approval the following conditions must be met by the TBIs:

·  The TBI must be administered by the apex body called Governing Body.

· The Governing Body needs to be chaired by the Head of the Host Institution.

· The Governing Body of the TBI should meet every six months to review progress of TBI and provide policy guidelines for the operations of TBI.

· Each TBI would have a dedicated CEO & a compact team who works full time for TBI.

· Host institution would constitute a selection committee with a DST nominee as a member for the selection of the CEO.

· A suitable incentive mechanism (share of surplus, earning of TBI, equity stake, etc) should be evolved by the host institution for the CEO and his team. HI is free to decide on the remuneration of CEO.

·  TBI should execute appropriate agreement with incubatees. The residency period and the exit policy may also be defined clearly in the agreement.

Stage IV – Monitoring The TBI is expected to attain self-sustenance within five years of its being. However, after the approval, the Department of Science and Technology may constitute teams to monitor the progress of TBIs.

CSR in non-TBI Incubators

As per the Companies (Corporate Social Responsibility) Amendment Rules, 2018 dated 19 September, 2018[ii], provisions of the CSR Rules have been amended to widen the definition of CSR. It clarifies that the CSR Policy of the Company must include activities that are related to the ‘area or subjects specified’ in Schedule VII of the Act. Earlier, the provision only mandated activities mentioned in the CSR Policy to be related to the specific activities listed under Schedule VII of the Act. Through this amendment, the MCA has provided more freedom to companies in choosing their preferred CSR engagements under the CSR Policy.

Pursuant to the amendment, funding of activities by incubators not being TBIs approved by Central Govt. is now possible. However, the same should be within the scope of the CSR Rules.

Other important considerations for CSR by foreign companies:

Compliance with Foreign Contribution Regulation Act, 2010 (FCRA):

Under the FCRA, approval and license from the Ministry of Home Affairs (MHA) is required for accepting and utilizing grants under CSR from foreign companies (which qualifies as foreign contribution) to non-profit entities. Thus, foreign companies undertaking CSR will have to ensure that any third-party entities that it seeks to engage for its CSR activities have an FCRA license (For our post explaining the issue, read here).

Earlier Indian companies with majority foreign stake holding were also considered as a ‘foreign source’. However, after amendments made by the Finance Act, 2016, contributions made by companies whose foreign shareholding are within the limits specified under the FDI regulations are not be considered as ‘foreign source’. Thus, Indian subsidiaries of foreign companies do not fall within the ambit of FCRA compliances for their CSR activities.

[i] Detailed procedure may be referred to, available at:   http://www.nstedb.com/institutional/Approved%20Revised_guidelines_of_TBI.pdf

[ii] Available at:

 http://www.mca.gov.in/Ministry/pdf/CompaniesCSRPolicyAmendRules2018_19092018.pdf

Author: Avaneesh Satyang

CARRYING OUT CSR ACTIVITIES THROUGH A THIRD PARTY

The Companies Act, 2013 makes it compulsory for a company with an annual income of INR 1000 crores, or a net worth of INR 500 crores, or net profit of INR 5 crores to spend at least 2% of the average net profits during the three immediately preceding financial years towards Corporate Social Responsibility. The Act was lauded for the flexibility it provided to the companies with respect to how they could carry out their CSR activities. More about CSR here https://novojuris.com/2014/03/26/a-note-on-csr-corporate-social-responsibility/

CSR image

CSR activities can be undertaken through a third party non profit organizations which may be a registered society or trust or a Section 8 company under the Companies Act (Section 25 company under the 1956 Act).The implication of this rule is that requirements for CSR have been liberalised so as to utilise the participation of a third party to undertake CSR activities on behalf of the Company. Also, such outsourcing is desirable as it allows for non profits organizations who are specialised in carrying out a particular kind of activity, to undertake it for other companies as well. Such an entity would have to follow the specifications and modalities regarding utilization of funds, monitoring and reporting requirements as provided by the spending company. The Annexure to the Rules on CSR notified by the MCA has a prescribed format for reporting on CSR Activities by the Board. It must be ensured that the third party entity is able to keep track of provide all details to be detailed in the report format.

Further, the rules mandate that the third party entity being utilized for such services must have an established track record of a minimum of 3 years in conducting similar programs or projects.

FCRA restrictions

However, the intent to provide flexibility is scuttled by the some of the archaic provisions of the Foreign Contribution Regulation Act (FCRA). Under the FCRA, non-profit organizations (“NPO”) can only accept contributions from a foreign source once they register with or obtain prior permission from the Central Government. Without FCRA approval, grantee organizations in India may not legally receive foreign contributions from any donor.  The FCRA deems an Indian subsidiary of a foreign company to be a foreign company, and consequently, a foreign source. Further, Indian companies with foreign ownership of more than 50% are also treated as foreign sources.

 Hence, in case of an Indian subsidiary of a foreign company, or an Indian company which have foreign ownership of more than 50% need to ensure that in case they utilise the services of a non-profit entity to carry out their CSR activities, such entity must have obtained prior permission from the Central Government. It is noteworthy that the process of obtaining prior permission of the Central Government under the FCRA is a long and difficult process, and available to only organizations which are at least 3 years old. The permission, when granted, would apply to only a specific project and specific amount, which means that the NPO cannot use contribution for a different project or for any additional funding for the same project.

 The new Companies Act is an extensive and ambitious legislation. However, for it to be able to achieve its ends, it is important other laws are aligned with the intent of the Companies Act, as well. The FCRA restrictions, which are no longer relevant in an environment with liberalised flow of FDI in the country, pose a significant issue in companies being able to outsource their CSR spends.

Image credit: IndiaCSR