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

The Supreme Court's general observations against foreign funding will unwittingly prove useful to the petitioner in another case who has challenged amendments to the FCRA in the Finance Acts, retrospectively legalising foreign donations to political parties.

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ON Friday, a three-judge bench of the Supreme Court, comprising Justices A.M. Khanwilkar, Dinesh Maheshwari and C.T.Ravikumar upheld the constitutional validity of the 2020 Amendment to the Foreign Contribution (Regulation) Act, 2010 [FCRA, 2010].

The Leaflet breaks down the judgment, to understand its implications.

Why was the 2020 amendment to the FCRA, 2010 challenged?

The FCRA, 2010, replaced the FCRA, 1976. The FCRA, 2010 imposes restrictions on the receipt of foreign contribution or foreign hospitality by certain individuals or associations or companies, in order to prohibit its utilisation for activities detrimental to national interest. Thus, foreign contribution is not meant to be used to influence electoral politics, public servants, judges and others, such as journalists or those in the media.

The inadequacies of FCRA, 1976, as perceived by the government agencies to realise its objectives, led to its replacement by the Act of 2010. The amendments carried out in 2020 aim to make it more stringent than earlier.

The amendment of Section 7 of the 2010 Act prohibits the registered person from transferring any foreign contribution, irrespective of whether such person is duly registered or not, which was otherwise permitted under the unamended provision

Section 7 may be attracted if the utilisation is not for the definite or permitted purposes for which the certificate of registration or permission under the Act has been granted by the competent authority. Indeed, if the recipient engages services of some third party or outsources its certain activities to third person, whilst undertaking definite activities itself and had to pay therefore, it would be a case of utilisation. The transfer within the meaning of section 7 would be a case of per se (simplicitor) transfer by the recipient of foreign contribution to the third party without requiring to engage in the definite activities of cultural, economic, educational or social programme of the recipient of foreign contribution, for which the recipient had obtained a certificate of registration from the Union Government.

This change was challenged on the ground that it is arbitrary, and it directly affects the implementation of the social upliftment schemes of the Trusts through foreign contribution. It is a blanket ban on transfer of foreign contributions, thus affecting the collaborations in developing eco-systems, especially for smaller and less visible grassroots organisations that may not meet the criteria or be able to submit detailed proposals to get access to grants from foreign countries.

The grassroots organisations, in some cases, may not have the track record or meet the eligibility criteria to obtain registration under the Act and are entirely dependent on the funding/transfer by foundations, such as the Trusts that moved the instant petitioner at the Supreme Court. The intermediary organisations, which provide the necessary identification, monitoring, and capability building of the smaller non-profit organisations, were aggrieved that they would be completely jeopardised because of the changed dispensation.

The newly inserted Section 12A was assailed because it made mandatory to produce Aadhaar card details of the office-bearers/functionaries/directors of the societies/trusts as identification document for the purpose of seeking registration, even though they are expected to file application for grant of certificate under Section 12 or get their certificate renewed under Section 16 of the FCRA, 2010.

The Bench read down Section 12A and construed it as permitting production of Indian passport for the purpose of identification.

The amended Section 17(1) mandates opening of FCRA account and receiving of foreign contribution only at one bank at New Delhi, that is, the New Delhi Main Branch of the State Bank of India [SBI] on the specious ground of logistical issues for verification of accounts at different locations.

The amount of foreign funding used for administrative expenses of an NGO was reduced to 20 per cent of the funds received, while it was 50 per cent before the 2020 amendment. However, this amendment was not challenged by the petitioners.

Also read: Why the inordinate delay in SC's hearing of FCRA and electoral bonds cases is of concern

Who are the petitioners who challenged these amendments?

Noel Harper, the Chairperson of the Vijayawada-based 'Care and Share Charitable Trust', is the lead petitioner who challenged the constitutionality of three provisions of the 2020 FCRA amendment.

The second petitioner is Nigel Mills, a social worker and one of the trustees of the Care and Share Charitable Trust. The Trust is engaged in social upliftment activities such as helping children below the poverty line, street children, children of sex workers, physically challenged kids, shelter orphans, abandoned babies and assisting juveniles detained in observation homes (local reformatory) in Vijayawada, Andhra Pradesh. The trust has built and is running nine schools in different slums. It has rescued over a thousand street children and 165 infants, apart from HIV positive and AIDS orphans of Vijayawada. The Trust has also been engaged in a daily milk program for 500 kindergarten children since 2000. The Trust has been awarded the National Award for Child Welfare by the Union Ministry of Women and Child Development in 2007, for its exceptional work and contribution in the field of child welfare.

The third and fourth petitioners are trustees of the National Worker Welfare Trust, registered under the Indian Trusts Act, 1882 in Secunderabad, Telangana in 2016. This Trust is registered with the Union Ministry of Home Affairs under the 2010 Act for receipt of foreign funds. It is engaged in rehabilitation of migrant workers with the International Labour Organisation ILO, and addresses the concerns of women workers from marginalised communities, prospective migrant workers (interstate and oversees), families of migrants, communities, leaders of communities, returnees, women organisations, trade unions, local panchayats, departments at Mandal, district and state-levels connected with labour, and administration and governance related to these workers.

How justified was the petitioners' challenge?

Non-profit organisations and voluntary organisations contribute enormously to India's Gross Domestic Product, and provide livelihood to millions of people through direct employment and social welfare activities undertaken by them.

Foreign contributions have increased from Rs 10,282 crores in 2009-2010 to Rs 16,343 crores in 2018-2019, which is a significant contribution through foreign funds.

Small NGOs are concerned that they can no longer receive fund transfers from larger organisations. Blanket requirement to open an account at the SBI Main Branch, New Delhi, is considered manifestly arbitrary serving no rational purpose, violating the right to equality.

What were the union government's answers to these concerns?

The Union of India argued that the legislative intent behind the enactment of the 2010 Act was that foreign contribution cannot be allowed unless it is tightly regulated and controlled. The implementation of the 2010 Act increasingly revealed that certain NGOs were involved primarily in routing of foreign contributions only. They received and utilised foreign contribution by transferring it to other NGOs, thereby establishing a principal-client relationship. The regulatory agencies were finding it difficult to monitor the ultimate utilisation of foreign contribution by the transferee. It was, therefore, considered necessary to stop the transfer of foreign contribution and thus ensure that the recipient of the foreign contribution itself utilises the same. The wisdom of the Parliament was also in favour of reducing the permissibility of administrative expenditure by limiting it to 20 per cent, so that maximum benefit is reaped by the society at large due to its utilisation for permissible activities of the NGO.

The subject amendment became necessary also to obliterate the mischief of foreign powers, and foreign State and non-State actors indulging in activities resulting in interference in the internal polity of the country with ulterior designs. Section 12A had been inserted requiring furnishing of Aadhaar card details in lieu of identification document. The Supreme Court's judgment in K.S. Puttaswamy (2018) does not completely rule out the possibility of intrusion into the privacy of a person, which is backed by a just law, the Centre told the Supreme Court.

Section 17(1) requires the inflow of foreign contribution through designated channel, which is to ensure effective implementation of proper regulatory and controlled measures, the government claimed.

The government urged that the Constitution does not predicate that all laws must be general in character and universal in application. It is open to the legislature to distinguish and classify persons or things for the purposes of legislation. Such discrimination and classification should not be arbitrary and ought to be in conformity with the intelligible differentia having a reasonable relation to the object sought to be achieved by the law in question.

The law in question is squarely covered by the exceptions provided for within the meaning of Article 19(4) and 19(6) of the Constitution, the Government told the Supreme Court.

The challenge to the amendments made on the touchstone of Article 19(1)(c) needs to be considered in light of the object of the Principal Act. It is an Act to protect the 'sovereignty and integrity of India' and 'public order'. Relying on the Supreme Court's judgment in O.K. Ghosh vs. E.X. Joseph (1962), the Centre noted that Article 19(4) refers to the restriction imposed in the interests of public order. The restriction, proximate and direct, must have causal connection with public order, it told the court.

The object behind the FCRA, 2010 is to secure the interests of sovereignty and integrity of the country, public order and interests of general public. That objective, being a consistent part of the legislative policy of the country for the past five decades, is beyond judicial review. As the impugned amendments have a direct and proximate relationship with the stated object of the Principal Act, they are fully protected within the meaning of Article 19(4) and 19(6), it was contended by the government.

With regard to the claim of violation of Article 21, the regulatory mechanism being a procedural matter, would come within the purview of procedure established by law. Being a reasonable restriction for accompanying the objectives of the Principal Act and founded on intelligible differentia, it must be regarded as rational and proportionate, and as furthering the State interests, it was claimed.

What are the gems which can be gleaned from the judgment? Did the bench go beyond the government's claims in justifying the amendment, so as to vindicate the criticism that it proved to be more loyal to the amendment than the government itself?

The bench made the following observations:

"The legislative intent behind the enactment of the 1976 Act has remained unchanged even to this day – nay it has become more relevant now. In that, the experience gained after implementation of the 1976 Act revealed that a more stringent dispensation was needed to minimise the negative impact owing to the surge in the inflow of foreign donation and for upholding the values of a sovereign democratic republic, for which the 2010 Act came to be enacted.

"In due course of time, it was realised that the dispensation enunciated in the 2010 Act was also not yielding the desired result. This impelled the Parliament to amend the 2010 Act to make it more stringent and effective to subserve the cause and intent of the Principal Act – not only in regard to the modality of acceptance of foreign contribution in the prescribed manner but also making it imperative for the recipient of foreign contribution to utilise the same "itself" for the designated or specified purposes for which it was so permitted.

"Philosophically, foreign contribution (donation) is akin to a gratifying intoxicant replete with medicinal properties and may work like a nectar. However, it serves as a medicine so long as it is consumed (utilised) moderately and discreetly, for serving the larger cause of humanity. Otherwise, this artifice has the capability of inflicting pain, suffering and turmoil as being caused by the toxic substance (potent tool) – across the nation. In that, free and uncontrolled flow of foreign contribution has the potential of impacting the sovereignty and integrity of the nation, its public order and also working against the interests of the general public. 

"Undeniably, the sovereignty and integrity of India ought to prevail and the rights enshrined in Part III of the Constitution must give way to the interests of the general public, much less public order, and the sovereignty and integrity of the nation. It must be borne in mind that the legislation under consideration must be understood in the context of the underlying intent of insulating the democratic polity from the adverse influence of foreign contribution remitted by foreign sources.

"Many recipients had failed to adhere to and fulfil the statutory compliances – which resulted in cancellation of as many as 19,000 certificates of concerned persons/organisations during the stated period, including initiation of criminal investigation concerning outright misappropriation or misutilisation of foreign contribution. There had been cases of successive transfers and creation of a layered trail of money making it difficult to trace the flow and final utilisation.

"It is open to a sovereign democratic nation to completely prohibit acceptance of foreign donations on the ground that it undermines the constitutional morality of the nation, as it is indicative of the nation being incapable of looking after its own affairs and needs of its citizens. 

"Such a change cannot be labelled as irrational much less manifestly arbitrary, especially when it applies uniformly to a class of persons without any discrimination". 

Relying on Rustom Cavasjee Cooper (1970) and R.K. Garg (1981), the court said: "it is not for the Court to consider relative merits of the different political theories or economic policies; mere possibility of abuse cannot be the basis for striking down an economic legislation".

The following are some more gems from the judgment:

"The 2010 Act deals with a class of persons accepting foreign contribution from foreign source. All such persons are treated equally and without any discrimination. 

Receiving foreign donations cannot be an absolute or even a vested right. By its very expression, it is a reflection on the constitutional morality of the nation as a whole being incapable of looking after its own needs and problems.

Charitable activity is a business. Receiving contribution within India to do charitable activity can be and is being regulated differently. No one can be heard to claim a vested right to accept foreign donations, much less an absolute right. There is no dearth of donors within our country. 

The foreign aid can create the presence of a foreign contributor and influence the policies of the country. Foreign contribution can have material impact in the matter of socio-economic structure and polity of the country. The presence/inflow of foreign contribution in the country ought to be at the minimum level, if not completely eschewed. The influence may manifest in different ways, including in destabilising the social order within the country.

There is a presumption that the Parliament understands and reacts to the needs of its own people as per the exigencies and experience gained in the implementation of the law. Mere plea of inconvenience is not enough to attract constitutional inhibition.

The courts ought not to adopt a doctrinaire approach in construing the amended provisions and undermine the legislative intent of strengthening the regulatory mechanism concerning foreign contribution. The legislature enjoys considerable latitude while exercising its wisdom on the basis of inputs collated from different quarters. There is intrinsic evidence to indicate that the change effected by the amendments is to serve the legitimate Government purpose and has a rational nexus to the object of the Principal Act and the amendments, and that the pre-amendment dispensation (unamended section 7) was not sufficient to effectively regulate the acceptance and utilisation of foreign contribution as predicated by the Principal Act."

While it is true that the Supreme Court proved to be more loyal than the Government itself to the rationale of the 2020 amendments to the FCRA Act, unwittingly, these observations will prove to be a boon to the petitioners in a pending case in the Supreme Court.

As both the Centre and the EC took no action within six months, the Finance Act, 2016 brought in a retrospective amendment to the FCRA, 2010, to change the definition of what constitutes a foreign company in such a way that key beneficiaries of the UK-based Vedanta group – the BJP and the Congress – could evade legal action for violating the law. Another amendment in 2018 made the 2016 amendment to the FCRA 2010 retrospectively operative from 1976. Both the amendments have been challenged by the Association for Democratic Reforms [ADR] in the Supreme Court.

Also read: Vedanta's serial crimes against Indian people, land and water expose State-Corporate nexus at its worst

These amendments, the ADR had alleged, were an attempt to overturn the Delhi High Court's judgment, and opened the doors to unlimited political donations from foreign companies. These amendments changed the definition of what constitutes a foreign company in such a way that key beneficiaries would not face legal scrutiny for donations.