In FCRA judgment, the Supreme Court misconstrued NGO’s legitimate activities as against national interest

In Noel Harper versus Union of India, the Supreme Court overlooks well-settled principles of freedom of association, equality and proportionality.

—–

FOREIGN contributions to individuals, associations and companies are regulated by the Foreign Contribution (Regulation) Act, 2010 ('FCRA'). The central aim of the Act is to prohibit foreign contributions, the utilisation of which may be for activities detrimental to the national interest. The FCRA was amended by the Parliament in 2020 to prohibit sub-transfer of foreign contributions to any other person, reduce the use of foreign contributions for administrative activities to 20 per cent from the existing 50 per cent, mandate that foreign contributions could be received at the State Bank of India's ('SBI') New Delhi branch, and registration or renewal of registration would require Aadhaar as proof — among other things. Clubbed together, these have primarily impacted Non-Governmental Organisations ('NGOs').

The amendments were challenged before the Supreme Court in the case of Noel Harper versus Union of India. The court, in a judgment running over 130 pages (mostly reiterating the claims of the Union Government) in April, upheld all amendments, except for reading down Section 12A, which required Aadhar as proof of identity; the court held that the provision needs to be construed as permitting the furnishing of a passport for identification (para 84 of the judgment). 

Also read: SC upholds recent amendments to Foreign Contribution Regulation Act: But is its reasoning persuasive?

Constitutional protection of freedom of association

First, the Constitution guarantees freedom of association to individuals upon which reasonable restrictions can be placed in terms of Article 19(4). Does the 2020 FCRA amendment place unreasonable restrictions on this right, through prohibition on transfer of funds and reducing the amount that can be used for administrative activities? The reasoning given for such a prohibition is that NGOs transfer funds received by them to other NGOs, establishing a principal-client relationship (para 5 (f)).

The court proceeds on the assumption that these activities are against the national interest without an iota of evidence. An NGO may exercise its routine functions through other smaller NGOs. The same cannot be equated with either activities detrimental to the national interest or utilisation of funds against the benefit of society.

The United States Supreme Court held in National Association for the Advancement of Colored People versus Alabama (1958) that freedom of association for the purpose of advocating ideas and airing grievances was protected under the free speech and due process clauses of the U.S. Constitution. This position was reiterated in Bates versus City of Little Rock (1960). NGOs, by their very nature of work, would be eligible for such protection.  

Furthermore, in our Supreme Court's order earlier this year in Parsi Zoroastrian Anjuman, MHOW versus The Sub Divisional Officer/The Registrar of Public Trusts & Anr. in the context of religious trust, Justice Ravindra Bhat observed:

"Any measure of public control enacted through express stipulations in law should not be expanded to such an extent that the right to freedom of association, under Article 19(1)(c), is reduced to an empty husk, bereft of meaningful exercise of choice."

Also read: The 2020 Amendment to Section 7 of the FCRA deprives genuine NGOs of their funding

Effect of the amendment

Second, to satisfy the threshold of reasonable restriction, it needs to be pitted against the object of the law. Here, the object is to restrict foreign funds which might be used for activities detrimental to the national interest. However, there exists no nexus between the transfer of funds from one NGO to another or utilisation of 50 per cent of funds for administrative activities or receiving funds at SBI, New Delhi, and national interest. The court merely takes the claims of the State at face value instead of engaging in appropriate analysis.

The court ignores the challenge to Article 14 by accepting the argument of the State without proper reasoning and jurisprudence. Justice A.M. Khanwilkar J. writes (para 57):

"We fail to understand as to how such a provision (amended Section 7) can be regarded as discriminatory or so to say vague or irrational much less manifestly arbitrary. The restriction therein applies to a class of persons who are permitted to accept foreign donation for being utilised by themselves for the definite purposes, without any discrimination and it is so done to uphold the objective of the Principal Act. Thus, there is clear intelligible differentia with a direct nexus sought to be achieved with the intent of the Principal Act. Such strict regime had become inevitable because of the experience gained by the concerned authorities over a period of time, including about the abuse of the earlier dispensation under the unamended provision."

As stated earlier, the amendments do not have a direct nexus with the object of the FCRA, thus failing the two-pronged test. The court neither engages in reasoning with respect to the nexus nor questions the repeated 'misuse' argument advanced by the State. Additionally, the court seems oblivious to jurisprudence on indirect discrimination.

The objective of any law is linked to a motive behind it which cannot be questioned before the court. Therefore, a shift from the purpose of the law to the effect of the law is required. This is called the effects-based approach to equality. The essential question while applying this approach is: whether the effect (not the purpose or objective) of the law is permissible under the Constitution?

The question that the Supreme Court had to answer in Noel Harper was whether the effect of the FCRA amendments was permissible. The effect of the amendment is impacting the workings of the associations disproportionately by prohibiting sub-transfers and by cutting the funds that can be spent on administrative activities. This disproportionate negative effect on associations is prohibited under the scheme of equality, however novel the purpose of the law may be.

Also read: Equality – Jurisprudential interest resurrected

Proportionality principle

Third, the judgment has disregarded the principle of proportionality. The reasonable restriction placed on freedom of association under Article 19(4) must be pitted against the test of proportionality. The legitimate interest of the State (or the purpose of the law) ought to be fulfilled in a manner that the right of the individual is not restricted to a greater extent than necessary. Proportionality is a question of both means and ends. However, Justice Khanwilkar observes otherwise in Noel Harper (para 66):

"…To overcome the mischief and to enhance transparency and accountability regarding acceptance and also utilisation of foreign contribution which is quite substantial every financial year having proliferating effect on the economy of the nation, it had become necessary to enact amended Section 7. In other words, there is a clear rationale behind the amendment which is consistent with the purpose of the Principal Act and the object sought to be achieved under the enactments. The fact that unamended provision was less restrictive, cannot be the basis to test the constitutional validity of the provision on the touchstone of Article 19(1)(c) or 19(1)(g) or Articles 14 and 21 of the Constitution."

As the Supreme Court stated in Justice K.S. Puttaswamy versus Union of India (2017), proportionality is an important aspect of the protection against arbitrary State action. It ensures that the nature and quality of the infringement on the right is not disproportionate to the object of the law. The Supreme Court had subsequently in 2020 held in Anuradha Bhasin versus Union of India that only an appropriate or least restrictive choice of measure is permissible under the Constitution. Therefore, the observation that the "unamended provision was less restrictive, cannot be the basis to test the constitutional validity of the provision" is turning the proportionality principle on its head, and it is no less than a constitutional nightmare that such observation comes from the Supreme Court.

Also read: CBI files FIR against Madurai-based human rights NGO People's Watch for alleged 10-year old FCRA violations

Tracking of funds

Lastly, it has been stated multiple times in the judgment that sub-transfers are prohibited, and FCRA funds could be received only at the SBI's New Delhi branch to ensure a trail of money and that utilisation is done for the permitted purpose. Under the unamended Act, the transfer of funds could be done from a registered FCRA account to another registered FCRA account. It is a logical riddle as to how the track of funds could not be kept when both the parties are FCRA-registered.

Cutting off the hands of non-State actors like NGOs will affect the social and economic state of our nation and our democracy.

The FCRA amendment has been crippling NGOs and, unfortunately, will continue to do so despite the presence of a so-called "guardian of the Constitution".