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The Foreign Contribution Regulation Act 1976 is repealed with the enactment of Foreign Contribution Regulation Act 2010 (FCRA 2010). The new FCRA 2010 imposes restrictions on investment in Mutual Funds. The restriction is imposed by virtue of section 8. Section 8 of the act basically deals with the manner of utilization of foreign contribution received. (Please refer act for definition of foreign contribution). Section 8 is reproduced below as:

“(1) Every person, who is registered and granted a certificate or given prior permission under this Act and receives any foreign contribution,—

(a) shall utilize such contribution for the purposes for which the contribution has been received:

Provided that any foreign contribution or any income arising out of it shall not be used for speculative business:

Provided further that the Central Government shall, by rules, specify the activities or business which shall be construed as speculative business for the purpose of this section;

(b) shall not defray as far as possible such sum, not exceeding fifty per cent of such contribution, received in a financial year, to meet administrative expenses:

Provided that administrative expenses exceeding fifty per cent of such contribution may be defrayed with prior approval of the Central Government.

(2) The Central Government may prescribe the elements which shall be included in administrative expenses and the manner in which administrative expenses referred to in sub-section (1) shall be calculated.”

From the first proviso to clause (a) of sub-section (1) of section 8 it is clear that the foreign contribution shall not be utilized for speculative business. Interestingly the definition of the term Speculative Business is different from what is defined in Income Tax Act 1961 and also from the proposed Direct Tax Code.

For the purpose of this section Speculative Business is defined under rule 4 of the Foreign Contribution Regulation Rules 2011. The rule 4 is reproduced below:

“Speculative activities. - (1) The following activities shall be treated as speculative activities:-

(a) any activity or investment that has an element of risk of appreciation or depreciation of the original investment, linked to market forces, including investment in mutual funds or in shares;

(b) participation in any scheme that promises high returns like investment in chits or land or similar assets not directly linked to the declared aims and objectives of the organization or association.

(2) A debt-based secure investment shall not be treated as speculative investment.

(3) ……………


Now also there is a difference in the definition of Speculative Business as defined in I T Act and FCRA 2010 and DTC 2010.

Section 43(5) of the I T Act covers the definition of the Speculative Business as reproduced below:

“speculative transaction” means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip:

Provided that for the purposes of this clause—

(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or

(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or

(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member;

[(d) an eligible transaction in respect of trading in derivatives referred to in clause 19 [(ac)] of section 2 20 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;]

shall not be deemed to be a speculative transaction.

[Explanation.—For the purposes of this clause, the expressions—

(i) “eligible transaction” means any transaction,—

(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and

(B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;

(ii) “recognised stock exchange” means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified 23 by the Central Government for this purpose;]

Nowhere restriction is imposed on investment in Mutual Funds and shares. That means Clear distinction from the definition given in FCRA 2010.

Section 314 the Direct Tax Code 2010 is in line with the definition of section 43(5) of I T Act. I am not reproducing the content of the section.

If we talk specifically about a charitable society or trust this provision is in contradiction with section 11(5) of Income Tax Act 1961. This very section of Income Tax Act allows Society or Trust to invest in Mutual Fund but now this will jeopardize the activity of the society with the enactment of FCRA 2010 as it does not allow to do so. The investment in mutual fund is very much famous amongst the societies as the same is treated safe (up to great extent), beneficial under taxation law, good return.

There are some other provisions also enacted which may be considered for rethinking by the legislature. Such as

a) Rule 3(iii) provides that “an organization can be declared of political nature if it has objectives of political nature or comments upon or participates in political activity.”

My observation is restriction on speech interferes with the fundamental right of Indians given under the constitution.

b) Rule 6 provides that foreign contribution, received from relatives, in excess of 1,00,000/- in one financial year should be intimated to the Central Government in Form FC-1 within 30days of such receipt.

My observation is it would hamper the speediness of the work of the organizations as it is not feasible every time to intimate. Also it is in contravention of the section 4(e) of FCRA 2010 wherein FC received from relative is exempt in totality.

And many more observations are there which require amendment.

I think ministry of Home Affairs should think once again to bring the amendment in this inclusion. Last but not least it is also doubtful that if the investment is made in debt based mutual fund then it will be in contravention with the provisions of section 8 of FCRA 2010 ? Because as per rule 4(2) exclusion is given based on “Investment in debt based secured fund”.

Hope you will appreciate and suggest some more clarity on the issue.


CA Yogesh Agarwal


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Yogesh Agarwal
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