NON-GOVERNMENTAL ORGANISATIONS (NGOs)

Any organisation working for a social, cultural, economic, educational or religious cause is termed as an NGO. NGOs have made favourable indents to needy sections of Indian society at par with a constantly changing socio-economic climate. NGOs have reached out to all sections of society including women, children, pavement dwellers, unorganised workers, youth, slum-dwellers and landless labourers. NGOs are viewed as vehicles of legitimization of civil society.

An NGO can be formed under various legal identities:

(i) Society registered under Societies Registration Act, 1860.

(ii) Trust (Formed under the Trust deed and registered with Income Tax Authority.)

(iii) Limited company incorporated under section 25 of the Companies Act, 1956

SOCIETY

The most common form of non-profit organisations in India is a Society. A Society is formed when people come together to do something with some common purpose, which is legal and useful for others. A society should generally not get into profit making activities.

FORMATION OF A SOCIETY

1. Seven persons enjoin for a common purpose

The first step in forming a society requires the coming together of seven (or more) person who have agreed to pursue a common objective. Please note that the seven members or more may be comprised of one or all foreigners, a limited company, a partnership firm or another registered society.

2. Society's Objective to be literary, scientific or charitable

Section 20 enumerates the purposes for which a society may be registered under the Act.

3. Naming the society

The members can arrive a suitable name which gives a clue as to the character of the society, which does not amount to an improper use of any name, emblem, official seal specified in the Emblems and Names (Prevention of Misuse) Act, 1950, does not offend or mislead people, which is not the name of a society already existing. The registrar will object to names containing words like government, ministry, bank, suggesting involvement with the government, which is not allowed. The name of a society can also end with the word "Trust".

4. Drafting the Memorandum of Association and enrolment of members

The Memorandum of Association ("MOA") is perhaps the most important document of a registered Society since it contains the conditions of association of the members and its Objects Clause dictates what can and cannot be done by the members of the Society. As a Charter of the Society it should ideally include name, objects, details of Governing Body and signatures of subscribers.

5. Registration of Society

The registration of a society is important to give the society a legitimate identity and a legal status and particularly more so when viewed from the consequences and benefits which flow from such fulfilling the legal formality of registration of society.

TRUST

The three parties (settlor, trustee and beneficiary of trust) are linked by a trust deed which documents the relationship inter se and vis-a-vis the trust property. Trusts are commonly classified as private/family and public trusts. The main difference between a private and public trust is that while the beneficiary of a private trust is one or a few individual (mostly family members of the donor), the beneficiary of a public trust is the general public. For the purposes of forming an NGO enuring public benefit a public trust can be formed.

There are two statutes relevant to functioning of Trusts in India: The Indian Trusts Act, 1882; and Charitable and Religious Trusts Act, 1920. Public trusts are however governed by general law, though the principles forming the basis of the Indian Trusts Act can be applied in the case

Features of a Trust

A Trust is created when a donor attaches a legal obligation to the ownership of certain property based on his confidence placed in and accepted by the donee or trustee, for the benefit of another.

The persons who intends to create the trust with regard to certain property for a specified beneficiary and who places his confidence in another for this arrangement is called the Author of the Trust; the person who accepts the confidence is called the Trustee; the person whose benefit the confidence is accepted is called the Beneficiary; the subject matter of the trust is called Trust Property.

Charity is a matter for State control, so different States of India have their own legislation in the form of Trusts or Endowment Acts to govern and regulate public charitable NGOs. Endowment is the dedication of property by gift or devise to religious or charitable uses and in a generalized context trusts include endowments also. A religious endowment or trust is one that has for its object the establishment, maintenance or worship, of an idol or deity, or any object or purpose subservient to religion.

The Trustees control the trust's assets and decide how the income (and capital) of the trust is to be distributed, and ensure that it is in line with the charitable purposes of the trust.

A trust must be created for a lawful purpose. The author of the trust must indicate with reasonable certainty the following:

• Intention to create trust
• Purpose of the trust
• Beneficiaries of the trust, and
• The trust property

A public trust is of permanent and indefinite character. A public trust benefits the public at large or at least a section of the community. The property forming subject matter of the trust must be capable of being transferable to the beneficiary - thus property that is inalienable by virtue of public policy or statute does not form valid subject matter for a trust. In terms of section 8 of the Indian Trusts Act, there cannot be as a trust of a beneficial interest under a trust i.e. there cannot be a trust upon a trust.

Flexibility in naming Trust

Trust can be named as family name, or name of an honorable person. The organisation can also be called a "foundation" or "charity" or any similar terms as these words are practically interchangeable in a legal sense.

NON - PROFIT COMPANY

A Non-Profit Company can be formed for any non-profit activity. It is identical to an ordinary company in all respects except that it is not established for profit and commercial gain. It is also called a Section 25 Company and is a voluntary association of people, registered under the Indian Companies Act, 1956. The accountability aspect of a non-profit company because of statutory disclosure requirements is a relevant advantage of a company's operational transparency and ability to invoke and maintain public faith.

Objectives of a Non-profit company: -

Objectives of a non-profit company can be including promotion of commerce, art, science, religion, charity or any other useful object. Profits are applied for promoting only the objects of the company and no dividend is paid to its members. (Section 25 (1) (a) and (b) of the Companies Act, 1956). A non-profit company may be Public or Private. If the non-profit company is a private company a minimum of only two members are required to form it. However, if the non-profit from is for a public purpose, then a minimum of seven are needed. A 'Section 25 company' and is eligible for certain exemption from provisions of law and concessional rate of fees etc.

Steps for establishing a section 25 Company

1. Application for a name

Applying for availability of name to the Registrar of Companies is the first step towards registration of the non-profit company. Four names are to be suggested to the Registrar in prescribed Form.

2. Memorandum and Articles

Memorandum and Articles of the non-profit company are required to be approved by the Regional Director and the ROC. The documents required for submission of application are:

i) Three printed copies of the memorandum and articles of association of the applicant company, signed by all the promoters with full name, address and occupation (No stamp duty is payable on the Memorandum and Articles of Association)

ii) A declaration by an advocate or a chartered accountant that the memorandum and articles of association have been drawn up in conformity with the provisions of the Act and that all the requirements of the Act and the rules made there under have been duly complied with, in respect of registration;

iii) List of the names, addresses and occupation of the promoters, members of board of directors, name of companies, associations and other institutions in which promoters of the applicant company are directors or hold positions, description of the positions held by them (three copies)

iv) A statement of assets and liabilities

v) Source of income of the Applicant Company and estimate of annual expenditure;

vi) A statement giving a brief description of the work, if any, already done by the association and of the work proposed to be done by it after registration in pursuance of section 25;

vii) A statement on grounds on which the application is made under section 25 of the Companies Act, 1956;

viii) A declaration by each of the persons making the application that he/she is of sound mind, not an undischarged solvent, not convicted by a court for any offence and does not stand disqualified under section 203 of the Companies Act, 1956 for appointment as director. 

3. License under section 25

An application for the license under 25 for the company is to be submitted to the Regional Director (Department of Company Affairs). The license essentially permits the word 'Limited' or 'Private Limited' to be deleted from name of the company. It could take upto 12 weeks after application to receive the license under section 25 of the Companies Act 1956. Pursuant to application to the Regional Director (within seven days thereafter), the applicant company has to publish a notice in a newspaper where the registered office is situate and certified copy of the notice to filed with the Regional director.

4. Registration with ROC

Registration certificate is normally granted within one month after filing section 25 license;

 Converting existing company to section 25 company

The Companies Act, 1956 also facilitates the conversion of an existing company to a non-profit company.

Foreign Director

There is no bar under Indian law for a foreigner to be a Director in a section 25 company, (relevant permissions prescribed under the Foreign Exchange Management Act.)

FOREIGN CONTRIBUTION

Prior Permission always :

The Foreign Contribution (Regulation) Act, 1976 (FCRA) requires all Indian NGOs that receive foreign contributions to receive clearance from the Ministry of Home Affairs, in the form of either permanent FCRA registration or prior permission on a case-to-case basis.

If a foreign donor agency opens a branch office in India, the Indian office needs FCRA registration or prior permission. Further, the second, third, fourth, fifth and all the subsequent receivers of foreign funds need FCRA registration or prior-permission. It is said that the colour of money never changes and in this regard it is interesting to note that the foreign funds remain 'foreign' in the hands of NGO at all time, its foreign origin does not change with transfer - only when it is spent or given to individual beneficiaries, the funds become Indian. An NGO would need prior permission in the following four situations:

• The NGO does not have permanent FCRA registration;
• The FCRA number has been cancelled by the Government;
• The NGO has been asked to get prior-permission under section 10(b).
• The FCRA number is 'frozen' due to change in Governing Body.

FCRA conditions for accepting foreign funds:

An NGO seeking to receive foreign funds is statutorily required to do the following:

(a) Register with the Central Government;

(b) Intimate the Central Government of (i) the amount of each foreign contribution received by it; (ii) source; (iii) manner in which foreign contribution is to be received; and (iv) purposes for which and the manner in which such foreign contribution is to be utilised by it.

Those NGOs, which are not registered, with the Central Government can accept foreign contribution only after obtaining the prior permission from the Central Government and should also give intimation to the Central Government as the registered association does.

The procedure for obtaining prior permission from the FCRA is as follows :

Apply in Form FC - 1A

Applicant (s) to file Form FC - 1A alongwith required documents.

Field Inquiry

Official from the Intelligence Bureau visits your main office, may inspect accounts and ask questions, can also visit the field area, inquire at local police station and thereafter he prepares confidential report to FCRA Department.

FCRA permission

Within 90 days thereafter, you will receive a registered letter from the Department either granting the permission or stating rejection of your request.

When FCRA permission is not needed:

Prior permission from the FCRA is not required for receiving amounts in the following forms :-

(a) Salary, wages or other remuneration either to individual or payment for business purposes.

(b) Payment for international trade or for business transacted by him outside India.

(c) By way of a gift or presentation received as member of any Indian delegation.

(d) Gift not exceeding Rs. 8,000/- per annum.

Profit-oriented organisations are not covered by FCRA.

Bank Account for foreign funds

An NGO is required to open and use bank account exclusively for foreign funds under FCRA.

Income Tax Benefits on foreign funds

1. Benefits for the NGO:

Income receive by any religious or charitable trust or institution registered with the income tax authorities, is not taxable as long as this income is applied for the objects of the organisation

2. Benefits to Donors:

The donors are also entitled to get an exemption on their donation which exemption can be 50% or 100% depending on category of organisations.

 Illustrative example of NGOs handling foreign money/materials :

Sponsorships by foreign parties :-

An occasion can arise where a moneyed foreign person agrees to kindly sponsor an NGOs annual charity festival and the foreign funds are forwarded directly to the printers for printing of catalogues for this festival by them, the NGO accepting the catalogues has accepted foreign contribution and is under an obligation to intimate the Central Government. If the NGO does not have requisite FCRA registration or prior permission it cannot accept the sponsorship in the first place.

Remember :

• If the foreign funds are already laying on your account, do not spend the money till you receive permission.
• Form FC-3 is to be filed at the end of each financial year (by 31^st July). Filing required to be done annually till such time the FCRA funds are exhausted.
• Always make two complete sets of documents - one for filings with the FCRA, the other for the NGO records. Wherever documents have been delivered by hand, to obtain written acknowledgment with date, stamp and signatures (when documents are sent by registered post - to retain proof of posting and acknowledgment card (when received back) carefully.
• Documents to attach with Form FC-8 - Attach one copy of each of the following documents

1. Certificate from concern District Collector/Department of State Government/Ministry or Department of Central Government;

2. Activity report for past three years;

3. Audited Statements of Account for past three years;

4. List of state or districts of focus of work;

5. Note on socio-economic background of the beneficiaries and of the region to be covered;

6. Where NGO is a society, then also attach certified copy of Registration Certificate issued by the Registrar of Societies;

7. Certified copy of registered Trust Deed (if NGO is a Trust);

8. Certified copies of (a) Memorandum and Articles of Association, (b) registration certificate issued by the Registrar of Companies, (c) section 25 license issued by the Regional Director, Department of Company Affairs (if NGO is a non-profit company);

9. FCRA does not allow mixing up of Indian funds and FCRA funds. This means both funds are to be maintained separately.