Supreme Court Upholds Foreign Contribution(Regulation) Amendment Act 2020

The Supreme Court on Friday upheld the 2020 amendments made to the Foreign Contribution (Regulation) Act 2010, which introduced restrictions in the handling of foreign contributions by organizations in India.

A bench comprising Justices AM Khanwilkar, Dinesh Maheshwari and CT Ravikumar pronounced the judgment in PILs challenging the Foreign Contriubtion(Regulation) Amendment Act 2020(Noel Harper and others versus Union of India and connected cases).

However, the Bench read down the condition that Aadhaar numbers should be given for FCRA clearance and said that applicants should be allowed to produce Passports. 

"To sum up, we declare that the amended provisions vide the 2020 Act, namely, Sections 7, 12(1A), 12A and 17 of the 2010 Act are intra vires the Constitution and the Principal Act, for the reasons noted hitherto. As regards Section 12A, we have read down the said provision and construed it as permitting the key functionaries/office bearers of the applicant (associations/NGOs) who are Indian nationals, to produce Indian Passport for the purpose of their identification. That shall be regarded as substantial compliance of the mandate in Section 12A concerning identification", the concluding portion of the judgment stated.

While the petitioners challenged the amendments as arbitrary and stringent and making the functioning of NGOs extremely difficult, the Central Government said that the changes in the law were necessary to prevent malpractices and diversion of funds by NGOs.

The Bench had reserved judgment in the matter on November 10, 2021. Senior Advocate Gopal Shankaranarayanan led the arguments in the lead case filed by Noel Harper. Solicitor General Tushar Mehta appeared for the Central Government.

"Transfer" and "Utilization" interpreted

One of the argument raised by the petitioners was that the absolute prohibition of transfer will prevent NGOs from engaging third party agencies in relation to their charitable works.

In this regard, the Court interpreted that the payment to third party agencies in furtherance of the purposes of the recepient would be a case of "utilization" and not "transfer". "Transfer" within the meaning of Section 7 would be transfer to third parties for acts beyond the purposes for which the FCRA approval has been granted. Based on this interpretation, the Court said that Section 7 was intra-vires.

"If the foreign contribution is utilised for such definite purposes, including administrative expenses permissible under Section 8, even though it may theoretically entail in transfer of foreign contribution, it would not be a case attracting the rigors of Section 7. In other words, 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 of foreign contribution engages services of some third party or outsources its certain activities to third person, whilst undertaking definite activities itself and had to pay therefor, it would be a case of utilisation.The transfer within the meaning of Section 7, therefore, would be a case of per se (simplicitor) transfer by the recipient of foreign contribution to 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 Central Government. On this interpretation, it must follow that the argument regarding amended Section 7, being ultra vires, must fail".

The Court said that a complete prohibition of transfer is necessary to prevent diversion of funds for other purposes.

"...some of the recipient organisations were reportedly indulging in successive chain of transfers to other organisations, thereby creating a layered trail of money and also utilisation of funds towards administrative costs of successive transfers upto fifty per cent leaving very little funds for spending on the purposes for which it was permitted. Hence, providing complete restriction on transfer simplicitor, was the just option to fix accountability of the recipient organisation and maximise utilisation for the permitted purposes. Such being the avowed objective and purpose of the amendment, the challenge to the amended Section 7 must fail".

Prohibition of transfer to third party does not affect utilization of foreign contributions

"The restriction or complete prohibition on transfer to third party, by no standards deprive acceptance of foreign contribution and utilisation thereof in the manner permitted for definite purposes, such as cultural, economic, educational or social programme. Such a provision must be understood as being procedure established by law in the interests of the general public and in the interests of sovereignty and integrity of the country,including public order. Resultantly, there is no infraction even of Article 19(1)(c) or 19(1)(g) of the Constitution as urged by the writ petitioners before us, including Articles 14 and 21 of the Constitution. Consistent with this view, we must reject the challenge to the amended Section 7 on all counts"

Inconvenience not a ground to challenge constitutionality

The Court upheld the provisions mandating opening of FCRA account in the designated bank (in this case, SBI's New Delhi branch). The Court observed that inconvenience to a party is not a ground to challenge constitutionality.

Free and uncontrolled flow of foreign contribution affects sovereignity

The Court noted that the annual inflow of foreign contribution had almost doubled between the years 2010 and 2019 and many recipients of foreign contribution had not utilised the same for the purposes for which they were registered or granted prior permission under the Act. Further, many recipients had also 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.

The Court added that the 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.

"Philosophically, foreign contribution (donation) is akin to 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 potentials of impacting the sovereignty and integrity of the nation, its public order and also working against the interests of the general public", the judgment observed.

It is open to a nation to prohibit foreign contributions

"It is open to a sovereign democratic nation to completely prohibit acceptance of foreign donation 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. The third world countries may welcome foreign donation, but it is open to a nation, which is committed and enduring to be self-reliant and variously capable of shouldering its own needs, to opt for a policy of complete prohibition of inflow/acceptance of foreign contribution (donation) from foreign source".

The Court stated that there is no absolute right to receive foreign contributon.

Case Title : Noel Harper and others versus Union of India

Citation : 2022 LiveLaw (SC) 355

Click here to read/download the judgment