Authors: Mr. Chirag Jain (Partner) and Ms. Snigdha Prakash (Principal Associate)
One label. Two regulatory identities. That is the quiet complexity of foreign owned or controlled companies (FOCC) in India.
Under India’s foreign exchange framework, a foreign owned or controlled company (FOCC) is treated as both a resident and a non-resident – depending on the lens through which the transaction is viewed. For several operational and reporting purposes, an FOCC is regarded as an Indian resident entity because it is incorporated in India. Yet, for investment classification and certain pricing considerations, the same company carries a foreign character because of its ownership and control. One label. Two regulatory identities. This fluid treatment reflects a conscious regulatory design rather than a contradiction. However, this carefully balanced framework begins to create certain practical complications when an FOCC attempts to discharge its corporate social responsibility (CSR) obligations by moving CSR funds to an Indian non-profit organisation, since the Foreign Contribution Regulation Act (FCRA) enters the picture, and the seemingly straightforward question of whether that payment constitutes ‘foreign contribution’ suddenly becomes far less clear.
FOCC Around and Fund Out
Under the Companies Act, the obligation to undertake CSR is triggered by financial thresholds, not by the ownership profile of a company. The statute places the obligation on every qualifying company, irrespective of whether it is domestically owned or foreign owned. Consequently, an FOCC does not undertake CSR because of its foreign ownership or control, rather, it does so because, in the eyes of law, it is simply another Indian company that has crossed the prescribed thresholds. In other words, the obligation is entirely domestic in character.
The complexity begins when the CSR expenditure is routed to an Indian non-profit organisation (NGO). At that point, the relevant question is no longer the nature of the obligation, but the character of the funds being received by such NGOs. While the FOCC may be unquestionably Indian under company law, FCRA draws its own lines around what counts as ‘foreign contribution’ and who may lawfully receive it.
CSRiously Foreign?
FCRA has a simple default rule: no person resident in India may accept ‘foreign contribution’ unless the law specifically permits it. For organisations engaged in cultural, economic, educational, religious, or social programmes, that permission typically comes in the form of an FCRA registration or prior approval. In other words, the law begins from a position of restriction, not permission, and acceptance of foreign contribution is barred unless the statute itself opens the door. Against this backdrop, the application of FCRA to CSR spending by FOCCs raises a more fundamental question of characterisation. When an FOCC discharges its CSR obligation by contributing funds to an Indian NGO, should such contribution be viewed through the lens of foreign exchange regulation or foreign contribution regulation?
Answering that question requires stepping into the heart of the FCRA framework itself. Broadly speaking, FCRA treats any donation, delivery, or transfer made by a ‘foreign source’, whether in the form of currency, an article, or security, as foreign contribution. The definition is intentionally expansive and leaves little outside its net. The enquiry, therefore, inevitably circles back to the FOCC itself – specifically, whether it would qualify as a ‘foreign source’ under FCRA.
Source Code
FCRA adopts a sweeping approach to the concept of a ‘foreign source’. The definition extends beyond foreign governments and foreign corporations to also cover, among others, subsidiaries of foreign corporations and multinational corporations. At first glance, this creates an immediate challenge for FOCCs. While an FOCC is undeniably incorporated in India and therefore, not a foreign corporation in the traditional sense, its foreign ownership and control can make it difficult to ignore the possibility that it may nevertheless fall within the wider contours of a ‘foreign source’.
The answer, however, may lie in its fine print. While the definition of ‘foreign source’ is broad, it is not without qualification. FCRA carves out an important exception for Indian companies that have received foreign investment in accordance with India’s foreign exchange laws and within the prescribed sectoral limits. Read literally, this suggests that an Indian company does not become a ‘foreign source’ merely because it is foreign owned or controlled. In the case of FOCCs that have received foreign investment through the permitted FDI route, this exception appears capable of materially altering the analysis.
Yet, the position is not entirely free from doubt. Earlier FAQs issued by the Ministry of Home Affairs (MHA) had indicated that infusion of ‘foreign share capital’ (which would typically include investments by FOCCs) into Section 8 companies (not-for-profit companies) would be treated as ‘foreign contribution’. Having said that, that clarification no longer forms part of the current FAQs. The omission, however, has not been accompanied by any express clarification on the issue, leaving room for differing interpretations on the interplay between FCRA and foreign investment.
Full Circle
Taken together, the statutory exception and the subsequent silence in the MHA FAQs make the FOCC story more interesting. At first glance, the FCRA analysis appears to pull an FOCC towards the category of a ‘foreign source’. Yet, a closer reading reveals that the answer is not quite so binary, particularly when viewed alongside the exemption for FDI-compliant Indian companies and the absence of any definitive clarification following the omission of the earlier MHA FAQ.
That brings us back to where we began: one label, two regulatory identities. The same company can be viewed as Indian for one purpose and foreign-linked for another, not because the law is inconsistent, but because each framework is asking a different question. Whether those different questions always produce a consistent answer is, perhaps, a question that remains open.
Disclaimer: This article represents our understanding and interpretation of the judgment as on the date hereof and is provided without expressing any opinion, advice, or recommendation. This article is furnished solely for academic and informational purposes and should not be construed as legal advice or relied upon for any purpose whatsoever.
