Usually, the businesses are promoted and run by person(s) with a motive to earn profits, however, there are organizations which are registered for the promotion of social and charitable cause and not for the profit-making motives these organizations are commonly referred as “Non-Government Organizations” (NGOs).
In India, there are various modes available to form an NGO, one such mode to form an NGO is to incorporate a limited liability company under the Companies Act, 2013 widely known as a “Not for Profit Organization” (“NPO”) under section 8 of the Companies Act, 2013 (“Act”). NPOs under section 8 of the Act are incorporated with the objects of promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object.
This article presents an understanding with respect to the formation of NPOs and its related aspects subscription to the memorandum of association by persons resident outside India, receipt of foreign contribution by NPOs etc.
Under the provisions of the Act, an NPO can be incorporated as a private or public limited company either limited by shares or by guarantee. The same process which is prescribed for the incorporation of other companies is followed for the incorporation of an NPO.
The said section 8 of the Act allows a person or an association of persons to be registered as a limited company) if it proves to the satisfaction of the Central Government (powers delegated to Registrar of Companies) that it has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object; it intends to apply its profits, if any, or other income in promoting its objects; and it intends to prohibit the payment of any dividend to its members. An NPO incorporated under the Act with limited liability has the liberty to do away with the use of suffix “Limited” or “Private Limited” with their name.
An NPO enjoys the privileges and is subject to the obligations as applicable to limited companies. An NPO incorporated as a company limited by shares is bound to issue equity shares to the subscribers to the memorandum of association or to the persons against the capital contribution received from them.
Rule 13 of the Companies (Incorporation) Rules, 2014 provides for the subscription to the memorandum and articles of association by subscribers whether resident in or outside India. This is a general rule which is to be followed by the companies incorporated under the Act irrespective of the fact that the company is been incorporated under section 8 or not. Hence, it can be construed that the persons resident outside India are not restricted from being subscriber to the memorandum and articles of association of an NPO.
The Foreign Contribution (Regulation) Act, 2010 (“FCRA”) defines the term “foreign contribution” as “donation, delivery or transfer of, inter alia, currency (whether Indian or foreign) by a foreign source”. The term foreign source includes any foreign company, foreign Government, citizen of foreign country, a foreign trust or a foreign foundation.
Further, FCRA requires that “no person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution” unless such person obtains a certificate of registration from the Central Government. The term person” in FCRA includes companies registered under section 8 of the Act.
The words “donation, delivery and transfer” used in the definition of foreign contribution has a wider perspective and it covers almost any inflow of funds (barring a few exceptions) from a foreign source irrespective of the fact whether it is in Indian or foreign currency. Therefore, it implies that any receipt of funds whether as capital contribution or as grant by Section 8 companies from persons resident outside India would be considered as foreign contribution under FCRA thereby would attract the requirement of registration / permission.
This is further corroborated under one of the frequently asked questions (FAQ) and response thereof issued by the Ministry of Home Affairs (MHA) on FCRA, that infusion of foreign share capital in the section 8 companies must be treated as foreign contribution.
Foreign Exchange Management Act, 1999 (“FEMA”) read with Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (“NDI rules”) also provides the conditions and process to be followed for investments in non-debt securities of Indian Companies by the persons resident outside India.
Indian companies as defined under the NDI rules as a company incorporated in India which includes the companies incorporated under section 8 of the Act also. While referring to the list provided under FEMA and NDI rules wherein investment into equity shares by persons resident outside India is prohibited / restricted, it is apparent that the infusion of capital in the NPO does not fall into the prohibited / restrictive activities. Therefore, it can be construed that the investment into equity shares of NPO by persons resident outside India is permitted under the automatic route under FEMA and NDI rules subject to the conditions and process prescribed therein.
It can be concluded that the NPOs receiving the share capital from the person resident outside India would be required to obtain prior registration or permission under FCRA for receiving any capital infusion. The provisions of the Act along with the FEMA including the NDI rules made thereunder would also need to be adhered to by the NPO for issue of shares against such capital infusion.