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

A scrutiny of the constitutionality of the amended Section 7 of the FCRA had to necessarily involve an examination of whether the impugned provision had the effect of depriving organizations of their funding and if so, to what extent. No such examination was conducted by the Supreme Court in its recent judgment upholding the same.

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THE Supreme Court, in its recent judgment in the case of Noel Harper & Ors. versus Union of India & Anr. (2022), upheld amendments to the Foreign Contribution (Regulation) Act, 2010 ('FCRA') made by way of the Foreign Contribution (Regulation) Amendment Act, 2020 ('2020 Amendment'). I shall briefly analyse the judgment from the point of view of the impact of the amendment to Section 7 of the FCRA on the right to practice any profession and carry on any occupation, trade or business guaranteed under Article 19(1)(g) of the Constitution.

At the outset, it must be clarified that the term "occupation" used in Article 19(1)(g) is of wide import, and includes within its fold regular work, professions, jobs, principal activities, employment, businesses or a calling in which an individual is engaged (See Sodan Singh versus New Delhi Municipal Committee & Anr. (1989), para 28). Further, even activities that are charitable in nature that have no element of profit generation would fall within the ambit of the term "occupation" used in Article 19(1)(g) (See T.M.A. Pai Foundation & Ors. versus State of Karnataka & Ors. (2002), paras 20-25).

Section 7 of FCRA

Prior to the 2020 amendment, Section 7 of FCRA prohibited persons registered under the Act who had received a foreign contribution, from transferring such foreign contribution to any other person, unless such other person was also registered and granted a certificate under the Act or had obtained prior permission under the Act. The section also contained a proviso which allowed for the transfer of a part of such foreign contribution to a person who was not registered and had not obtained any prior permission, on obtaining prior approval of the Union Government.

As a result of the 2020 Amendment, section 7 of the FCRA presently prohibits in toto, persons registered under the Act who have received a foreign contribution, from transferring such foreign contribution to any other person. So while the section had earlier only required that the recipient of a re-transfer of a foreign contribution also be registered under the Act, the amendment completely prohibits any such re-transfer.

The contention of the petitioners before the Supreme Court in Noel Harper was that the amendment would adversely affect the funding of several grass-root level organizations who may not be able to meet the requisite eligibility criteria or submit detailed proposals for directly receiving foreign contributions, and are therefore dependent on intermediary organizations that are better-placed to receive foreign contributions and provide the necessary identification, monitoring and capability building of the smaller grass-root level organizations.

In its judgment, the court, before addressing the contentions against individual provisions that were under challenge, laid down the premise that it is open for a sovereign democratic nation to completely prohibit acceptance of foreign donations on the ground that it undermines the constitutional morality of the nation.

Referring to the amended section 7, the court noted that the amendment to the section was brought about to curb allegedly rampant misutilization of foreign contributions viz., the use of such contributions for purposes other than that for which the grant or contribution was made or for purposes other than that stated in the certificate granted under the Act.

The court also noted the amendment made to Section 8 of the FCRA whereby the Act now only permits 20 per cent of contributions to be defrayed for administrative expenses, as against the 50 per cent which was permitted prior to the amendment. The court inferred from a combined reading of the amendments to sections 7 and 8 that the legislative intent of mandating utilisation of foreign contribution by the recipient itself for the purposes for which it had been permitted gets reinforced.

Finally, noting that that restriction or complete prohibition on transfer to third parties by no standards deprive the acceptance of foreign contribution and utilisation thereof in the manner permitted for definite purposes, such as cultural, economic, educational or social programmes, the court held that there was no infraction inter alia of Article 19(1)(g) of the Constitution.

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

Impact of the amendment

In its judgment, the court does not appreciate or delve into the issue of grass-root level organizations being dependent on contributions from intermediary organizations for their funding, and the consequent degree of impact of the amendment on such grass-root level organizations (A few articles discussing the impact of the amendment on grass-root level organizations maybe found here, here, here, here and here).

It may be germane to refer to the judgment of the Supreme Court in Internet and Mobile Association of India versus Reserve Bank of India (2020). Under challenge in the said case were: (i) a Statement issued by the Reserve Bank of India directing entities regulated by the Reserve Bank to not deal with or provide services to any individual or business entities dealing with or settling virtual currencies, and to exit relationships, if they already have any, with such individuals/business entities dealing with or settling virtual currencies; and (ii) a Circular issued by the Reserve Bank directing entities regulated by it to not deal in virtual currencies or provide services for facilitating any person or entity in dealing with or settling virtual currencies, and to exit relationships, if they have any, with such persons or entities.

The petitions that were under consideration of the court were preferred primarily on the ground that the impugned statement and circular infringed the right of crypto-exchange platforms to carry on trade and business guaranteed under Article 19(1)(g).

While setting aside the impugned statement and circular of the Reserve Bank, the court noted that though virtual currencies or the activity of trading or dealing in them were themselves not prohibited, banking channels provide the lifeline of any business, trade or profession, and the moment a person is deprived of the facility of operating a bank account, the lifeline of their trade or business is severed, resulting in the trade or business getting automatically shut down.

Just like a bank account forms a lifeline to any business or trade, funding and funding channels constitute the lifeline of charitable organizations/NGOs. If such an organization is deprived of funding channels, it would automatically result in its shutting down. Hence, a scrutiny of the constitutionality of the amended section 7 of the FCRA had to necessarily involve an examination of whether the impugned provision had the effect of depriving organizations of their funding and if so, to what extent. No such examination was conducted.

Further, the court, while accepting the submission of the Union Government that there was rampant misutilization of funds and the amendment to section 7 was made in response to the same, did not consider whether the impact on the funding of grass-root level organizations that would result from the amendment to section 7, was proportional to the mischief sought to be corrected.

The Supreme Court, as far back as in 1950 in the case of Chintaman Rao versus State of Madhya Pradesh, which was one of the first judgments of the Supreme Court dealing with the right to carry on profession and business guaranteed under Article 19(1)(g), held that the Legislature had to strike a proper balance between the freedom guaranteed under Article 19(1)(g), and the social control permitted under clause (6) of Article 19.

In Mohd. Faruk versus State of Madhya Pradesh & Ors. (1969), the Supreme Court held that while determining whether a particular piece of legislation falls within the ambit of a "reasonable restriction" under Article 19(6), a court must attempt an evaluation of: (i) its direct and immediate impact upon the fundamental rights of the citizens affected thereby and the larger public interest sought to be ensured in the light of the object sought to be achieved, (ii) the necessity to restrict the citizen's freedom, (iii) the inherent pernicious nature of the act prohibited, or its capacity or tendency to be harmful to the general public, (iv) the possibility of achieving the object by imposing a less drastic restraint, and (v) in the absence of exceptional situations such as the prevalence of a state of emergency, national or local, or the necessity to maintain essential supplies, or the necessity to stop activities inherently dangerous, the existence of a machinery to satisfy the administrative authority that no case for imposing the restriction is made out or that a less drastic restriction may ensure the object intended to be achieved. This view has been upheld and applied in Internet and Mobile Association of India as well.

Also read: Behind the cancellation of FCRA licences: some legitimate concerns

Flaws in the judgment

In Noel Harper, the court, while extensively referring to the legislative history to show that the amendments were brought about to address misutilization of funds, (i) accepts the submission that there is rampant misuse and misutilization of foreign contributions without rigorously verifying the claim; (ii) does not examine the extent to which organizations, especially grass-root level organizations, stand to get affected by the amendment, keeping in view the fact that funding constitutes the lifeline of a charitable organization/NGO; (iii) consequently, does not examine whether the impact of the amendment on such organizations is proportional to the object sought to be achieved; and (iv) does not address the question of whether there could be a lesser restrictive measure.

Further, in rejecting the submission of the petitioners that the amendment would serve no purpose as even prior to the amendment, a recipient of foreign contribution was only permitted to transfer such contribution or a part thereof to a person registered under the Act and was therefore subject to the rigors of the Act, the court held that "legislative intent is to introduce strict dispensation qua the recipient of foreign contribution to utilise the same "itself" for the purposes for which it has been permitted as per the certificate of registration or permission granted under the Act by the Central Government."

This reasoning of the court does not answer the question of why the less restrictive measure under the earlier regime, under which grass-root level organizations which received funding from intermediaries were required to be registered under the Act and follow all compliances under the Act, cannot be regarded as adequate for the purposes of addressing the alleged menace of misuse/misutilization of funds.

NGOs and charitable organizations seek to contribute to initiatives in critical social sectors like food security, public health and education. In a country faring poorly in meeting the basic needs of a bulk of its residents, notwithstanding State/public schemes and efforts to meet such basic needs, voluntary efforts and contributions of NGOs and charitable organizations on these fronts ought not to be discouraged, disincentivized or rendered impossible. While misuse and misutilization of funds is a problem that certainly requires to be tackled, the means adopted to achieve the same ought not to be a death knell for genuine organizations.