Madras High Court: NGOs Receiving Foreign Funds Should Not Be Viewed With Suspicion

The Madras High Court recently ruled in the case of M/s. Sharma Centre for Heritage Education vs. The Director, FRCA Wing, Ministry of Home Affair, that every NGO receiving foreign funding should not be viewed with suspicion.

Background of the Case

The case involved the renewal of Foreign Contribution (Regulation) Act, 2010 (FCRA) registration for two Chennai-based NGOs: Ellen Sharma Memorial Trust and Sharma Centre for Heritage Education. The Ellen Sharma Memorial Trust, a public charitable trust established in 1982, focuses on promoting education and child welfare. It runs institutions like the Ellen Sharma Primary School and the Ellen Sharma Memorial Matriculation School, which cater to orphaned and Tibetan refugee children, and also operates health clinics. The trust is heavily reliant on foreign contributions, which constitute approximately 70–75% of its operational funding. It has been duly registered under the FCRA, with its last renewal granted on April 23, 2016, effective from November 1, 2016, for five years.

Ahead of the expiry of the registration, the trust applied for renewal under Section 16 of the FCRA on 15.02.2021. During the processing of the application, the Ministry of Home Affairs (MHA) raised a series of queries, particularly concerning the trust's association with two sister organisations: Children’s Garden School Society and Sharma Centre for Heritage Education (the latter being the appellant in the associated Civil Miscellaneous Appeal). All three organisations operated from the same premises to reduce administrative costs, had some overlapping office bearers, and received contributions from a common foreign donor family. The trust clarified these matters and submitted supporting documents including certified bank statements and annual returns.

Despite these clarifications, the MHA issued a communication on 09.12.2021 rejecting the renewal application, citing Section 16(1) read with Section 12(4)(a)(vii) of the FCRA. A similar rejection was issued to the Sharma Centre for Heritage Education on 29.12.2021, triggering the present appeal. The basis of this rejection, was an alleged violation of Section 7 of the FCRA, which pertains to the prohibition on the transfer of foreign contributions.

It is crucial to understand the context of Section 7 of FCRA. The FCRA, was originally enacted to regulate foreign donations in India, later replaced by the FCRA 2010 to enhance transparency and prevent misuse of foreign grants. In 2020, significant amendments were introduced through the Foreign Contribution (Regulation) Amendment Act, 2020. Prior to these amendments, registered organizations were permitted to transfer foreign contributions to other registered organizations without prior government approval. However, the 2020 amendment introduced a complete prohibition on such transfers, even between FCRA-registered entities, unless explicit prior approval was obtained from the Central Government. The authorities alleged that the petitioner trust and its sister NGOs continued to transfer foreign funds among themselves without prior approval during the "post-amendment period of October 2020 to February 2021".

Key findings of the Madras High Court

The Madras High Court ruled in favour of the petitioner, allowing the NPO’s FCRA registration and reinforcing that the government must follow proper legal procedures when scrutinizing foreign contributions.

1. Lack of Reasoned Rejection:

The Court held that the impugned rejection communications issued by the MHA did not provide any reasons other than a bare reference to Section 16(1) read with Section 12(4)(a)(vii) of the FCRA. It noted that neither the writ petitioner nor the appellant was informed of the specific violation alleged against them. The absence of reasoning, especially in matters affecting rights and continuity of longstanding institutions, was found to be contrary to principles of natural justice.

2. Alleged Violation of Section 7 – Limited and Procedural:

The only substantive allegation — that foreign contributions were transferred among sister NGOs without prior approval — arose from the amended Section 7 of the FCRA, which came into effect on 29.09.2020. The Court observed that before this amendment, such transfers between FCRA-registered entities were lawful. The alleged violation, therefore, could have occurred, if at all, only between October 2020 and February 2021. The Court emphasized that this was a short period immediately following a legal change, and any non-compliance appeared procedural rather than intentional.

3. No Misuse or Diversion of Funds:

Upon reviewing the sealed Intelligence Bureau report and government records, the Court categorically found no evidence of misuse, diversion of foreign funds, or personal gain. The foreign contributions were used for their intended charitable purposes, including the running of schools and welfare programs. The Court also noted that the institutions had never previously come under adverse notice and had responded promptly and transparently to all government queries.

4. Bona Fide Conduct and Longstanding Compliance:

The Court highlighted the petitioner trust’s longstanding history of lawful operation since 1983 and its consistent compliance with FCRA requirements until the denial of renewal. The trust’s response to queries, submission of clarifications and documentation, and their continued charitable work indicated bona fide conduct. The Court held that such organisations, especially those supported by individuals of Indian origin living abroad and engaged in welfare efforts, should not be denied renewal on hyper-technical grounds.

5. Disproportionate Response by the Authorities:

The Court applied the principle of proportionality and held that denying renewal based solely on a procedural lapse in a newly amended provision was excessive. It stressed that in the absence of any mala fide intent or misuse of funds, the authorities should have issued a notice and sought explanation before resorting to rejection. Consequently, the Court set aside the impugned communications and directed the authorities to process the renewal applications within four weeks.

6. Layperson’s Difficulty in Keeping Up with Technical Amendments:

The Court acknowledged that amendments to procedural laws — such as the sudden prohibition on inter-NGO fund transfers introduced in late 2020 — can be difficult for laypersons or non-legal entities to immediately absorb and act upon. It emphasized that charitable organisations, particularly those with a clean record, cannot be expected to instantly comprehend and implement technical legislative changes without clear communication or guidance from authorities. The Court held that procedural lapses under such circumstances should not be treated as wilful violations.

Conclusion

The judgement is a significant step in safeguarding the autonomy ensuring that NPOs can function without undue interference, as long as they comply with norms. It also emphasizes that without evidence, there should be no reason to deny NPOs the ability to work and receive foreign funds. The Court gave weight to the petitioner’s long-standing clean record since 1983, suggesting that consistent compliance and transparent conduct can strengthen an NPO’s case even when procedural mistakes occur.