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How The Supreme Court Upheld The Foreign Contribution (Regulation) Amendment Act, 2020

The Supreme Court bench comprising Justices AM Khanwilkar, Dinesh Maheshwari and CT Ravikumar delivered the verdict in Noel Harper and Ors. v. Union of India (W.P. (C) No. 566/2021) with other connected matters that had challenged the Foreign Contribution (Regulation) Amendment Act, 2020 ("2020 Act").

The 2020 Act made certain crucial amendments to the Foreign Contribution (Regulation) Act, 2010 (2010 Act), which are:

  • Prohibiting the transfer of foreign contributions received to "any other person," including individuals and companies [Section 7];
  • Reducing the amount of foreign contribution that can be used for administrative expenses from 50% to 20% [Section 8(1)(b)];
  • Empowering the Central Government to direct persons receiving foreign contribution to utilize it or not or even receive any further funding after conducting a summary inquiry [Section 11(2)];
  • Opening a bank account in the main branch of State Bank of India in New Delhi, which would be used to receive foreign contribution by the registrants under FCRA [Sections 12 & 17];
  • All office bearers and functionaries of the registered organization to provide their Aadhaar numbers for identification purposes [Section 12A].

What the Petitioners Contended
Noel Harper, Chairman of the Care & Share Charitable Trust, that works primarily for child welfare, challenged the amended Sections 7, 12(1A), 12A and 17 for being manifestly arbitrary, unreasonable, and impinging upon the fundamental rights guaranteed under Articles 14, 19 and 21 of the Constitution. While Jeevan Jyothi Charitable Trust, which works on issues of migrant workers - challenged Section 17 for being violative of Article 14, 19(1)(c), 19(1)(g) and 21 of the Constitution.

Section 7 read with Section 17(1) was assailed to be overbroad, vague and arbitrary as it hinders social upliftment schemes and affects the collaborations with smaller grassroot organizations that may not get access to grants from foreign countries and are dependent on organizations such as that of the petitioner(s). The ordinary meaning of expression "utilization," as per the petitioner, would include transfer of foreign contribution to another entity; and, thus, there is apparent conflict between Section 7 and Section 8.

Thus, the total prohibition is manifestly arbitrary and has no causal connection with the object sought to be achieved - thus violative of the rights guaranteed under Articles 14, 19(1)(c) and 19(1)(a) of the Constitution. Moreover, it was argued that the provision being manifestly arbitrary and lacking any determining principle, is wholly unreasonable and, therefore, violative of Article 21 of the Constitution. The petitioner notably contended that the State had failed to establish a "national security" claim to justify the amendments, and thus no omnibus prohibition can be said to be valid.

Section 12A was assailed to be violative of the test of proportionality, insofar as it mandated to produce Aadhaar details of the office bearers of the organizations as identification document for grant of FCRA certificate under Section 12, or renewal under Section 16 or to open a bank account under Section 17. Since the office bearers without an Aadhaar card can provide an alternate identity document.

Section 17(1) read with 12(1A) was challenged on the ground that they suffer from the vice of manifest unreasonableness, ambiguity, overbreadth and impose unreasonable restrictions. Section 17 was also challenged on the grounds that it fails the test of proportionality and fails to provide a fair procedure.

The challenge was limited to the requirement of opening a bank account at one specific SBI branch in New Delhi. Under the 2010 Act or any other law, such a mandate is absurd, illogical, and serves no valid purpose, since all scheduled banks with FCRA accounts are controlled by the Reserve Bank of India, so there is no logic to demonstrate how the unamended regime will harm national interest.

Furthermore, the State was accused of not substantiating the principle of necessity, despite the fact that it is already required to register an FCRA account in a designated bank, with account data connected to the organization's FCRA registration number.

All of the organizations have been given a unique ID with registration on an electronic portal "DARPAN." Furthermore, as indicated in Section 18 read with Rule 17 of the 2011 Rules, registered organizations must file periodical returns. Thus, the phony national security justification cannot be accepted, and there can be no presumption in support of the amendment.

What the Government Claimed
The object behind the 2010 Act, the government argued, is "to secure the sovereignty and integrity of India including public order and public interests. This wisdom of the Parliament cannot be lightly brushed aside being a legislative policy." The 2020 Act is intended to ensure effective regulatory measures regarding inflow and utilization of foreign funds as it is "evident that the foreign contribution owing to its nature and vast expanse was being abused by some registered organizations."

Thus, in no manner, the amendments impact the fundamental rights, much less under Articles 14, 19(1)(c), 19(1)(g) and 21 of the Constitution, as contended by the petitioners. The government further argued, the "legislative intent behind enactment of the 2010 Act is that foreign contribution cannot be allowed unless it is tightly regulated and controlled."

Thus, the government contended, "the amended provisions are intended to remedy the mischief of endless chain of transfers of foreign contribution from the recipient NGOs to other registered NGOs creating layered trail of money making it difficult to trace the flow and legitimate utilization thereof."

In response to the challenge to Section 7, the government stated that Parliament decided to enact a severe regime to address the problems that had arisen as a result of the previous system's ineffectiveness. Without a doubt, the new regime does not fully restrict foreign contributions, but just implies the use of funds from foreign sources solely for the purposes for which it was received and granted permission for.

As per the government, Section 12(1A), which makes it essential to furnish details of FCRA account, is necessary 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."

Further, the core intent behind Section 12A is "to facilitate proper identification of person and associations with which the persons are connected and also purposeful real-time monitoring of activities for ensuring that the same are not detrimental to the national interest."

The stipulation by Section 17(1) has been constructed to maintain "the inflow of foreign contribution through designated channel which is to ensure effective implementation of proper regulatory and controlled measures." Before the amendment, the NGOs used to receive foreign contribution in an exclusive bank account in any bank in India, which "inevitably caused enormous difficulty in monitoring of inflow or outflow of amount from the respective accounts and also during audit process."

On the point of violation of Article 14, the government argued that "the amendments fulfil the 'twin test of classification' founded on the factum of classification between Indian citizens and foreigners, so much so, Indian contribution and foreign contribution."

While countering the challenge on the ground of Article 19(1)(c) and 19(1)(g), there exists no right to seek a foreign contribution without regulation, and the amendments are "squarely covered by the exceptions provided for within the meaning of Article 19(4) and 19(6) of the Constitution." Moreover, Article 21 of the Constitution "cannot and does not include the right to receive unregulated funds and contributions; misuse of which inevitably threatens the polity and sovereignty and integrity of the country."

The Judgment
After tracing the legislative history and object of the statute in detail, the Court noted, "there is no fundamental right vested in anyone to receive foreign contribution (donation) or foreign exchange." Further, the Court observed, "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 (utilized) 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 Court reasoned that instead of gaining foreign contribution, the organizations should focus on generating donations within India, as "there is no dearth of donors within our country." The Court said that "foreign aid can create presence of a foreign contributor and influence the policies of the country. It may tend to influence or impose political ideology." Moreover, as per the Court, foreign aid has the tendency of "destabilizing the social order within the country"

Section 7
The Court rejected the challenge on all counts and noted that the amendment does not prevent the recipient from utilizing the foreign contribution "itself." The rationale of Section 7 as amended, inter alia, is that the foreign donor is made aware of the declared purpose which is permitted by the authority, and a corresponding obligation upon the recipient regarding utilization of the funds "itself" for stated purposes and "none else."

The Court rejected the argument of the amendment being ultra vires and read down the meaning of "transfer" under Section 7 to be a case of per se (simplicitor) transfer by the recipient of foreign contribution to third party without requiring engaging in the definite activities of the recipient for which the recipient had obtained a certificate of registration.

The amendment was not discriminatory or manifestly arbitrary, the Court held, as there is clear intelligible differentia with a direct nexus sought to be achieved with the intent of the 2010 Act. As per the Court, providing complete restriction on transfer simplicitor was the just option to fix accountability of the recipient organization and maximize utilization for the permitted purposes of the donation.

The Court thus held:
"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. The amended Section 7, being plain and clear and having nexus with the object sought to be achieved and is necessitated because of sovereignty and integrity of India or security of the State, public order and in the interests of the general public." Such a provision must be understood, the Court held, as being procedure established by law.

Section 12(1A) and Section 17(1)
The Court fully agreed with the government that it was necessary to have the bank account at a specified bank, providing for strict regulatory measures and for ensuring transparency and accountability, and being a matter of national security, its validity cannot be questioned. The Court said, the mere fact that the previous regime allowed opening bank accounts at any bank in India - would not be a ground to challenge the amendments, as the Parliament can change the law in its wisdom.

In fact, the "Parliament must be credited with for having taken recourse to corrective dispensation for eradicating the mischief, which any sovereign country can ill-afford," the Court noted. Thus, it can neither be said to be manifestly arbitrary nor irrational, much less without a legitimate objective. Accordingly, the Court had no hesitation in negating the challenge as being violative of Articles 14, 19 and 21 of the Constitution.

Section 12A
The Court noted that the provision envisages a Passport to be used as an identification document, for OCIs and Foreigners holding office. As per the Court, it cannot be argued that those seeking an FCRA certificate of registration do not need to provide official identification documents of its officials. The Court held, the amendment needs to be construed as "permitting furnishing of the Indian Passport of the key functionaries of the applicant who are Indian nationals," negating the mandatory requirement of producing Aadhaar.

The impact:

Since the Supreme Court upheld the FCRA 2020, it would impact all "non-profit" entities registered in India that receive foreign contribution as it would require them to function on the government's whim. Those who do not receive foreign funding but rely on grants from others who receive it, will not be able to do so now hampering the collaborative work, as was contended by the Petitioners. As per the Supreme Court, "charitable activity is a business."

So be it. But charity is not business, for if it was, it could have financed itself never requiring donors but needing investors. Yet again, the Court found itself sinking in the ever-deepening basin known as the "national security."

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