The union budget 2016 has delivered much needed relief to Indian companies having foreign shareholding over 50% by insertion of a new proviso to Section 2(j)(vi) of the Foreign Contribution (Regulation) Act, 2010 (“FCRA”), unshackling such companies from the restrictive provisions of the FCRA regulations.

The following proviso is sought to be inserted in Section 2(j)(vi) of the FCRA, namely:

“Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made thereunder, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source;”

Section 2(j) of the FCRA defines ‘foreign source’ to include an Indian company having more than 50% of its share capital being held by persons or entities that are foreign. The Delhi High Court in the case of Association for Democratic Reforms and Anr. Vs. Union of India and Ors. (2014) 3 Comp LJ 41 (Del), a case under FCRA, 1976, had held that even though the donors are companies registered in India under the Companies Act, 1956, if more than one-half of their share capital is held by a foreign company, in view of the mandate of the FCRA, the donations in favor of the political parties are to be construed as emanating from a 'Foreign Source' and fall within the prohibition imposed by the Act.

Subject to the provisions of the Foreign Exchange Management Act, 1999, the present amendment aims at rectifying the defect of a company incorporated under the Indian laws being restricted under the FCRA regulations in view of the nominal value of shares held by a foreign entity being more than 50%. The amendment is sought to be given retrospective effect from September 26, 2010 i.e. from the date of commencement of the FCRA Act, 2010.

VA View

The amendment has sought to legislatively overrule the decision of the Delhi High Court in the case of Association for Democratic Reforms and Anr. Vs. Union of India and Ors. (2014) 3 Comp LJ 41 (Del). The companies incorporated in India and having foreign shareholding in excess of 50% and within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999 are freed from the cumbersome process of contribution to an entity irrespective of whether it is registered or not under the FCRA. The amendment clears the hurdle for such companies to comply with the Corporate Social Responsibility obligation prescribed under Section 135 of the Indian Companies Act, 2013.