Transfer of funds between FCRA registered entities

Dear Experts,

FCRA Act Under the recent amendment it is prohibited to transfer funds from one FCRA registered entity to another FCRA registered entity

for example, We have two FC registered Trust. A & B. We raise debit notes from A to B and the same is settled by B within the month. and viceversa. for example A incurrs employee salary expenses on behalf of B. whihc is re-imbursed by B during the next month. our auditors are of the view that since transfer of funds is prohibited between two FCRA registered entities, it is necessary that no transactions like debit note/credite should be made. Does this amounts to transfer of funds between the entities as per the recent amenement.

Please clarify as per FCRA act.

Thanks

Dear Gkannan,

Your query pertains to the Foreign Contribution (Regulation) Act (FCRA), 2010 — particularly post the FCRA Amendment Act, 2020, which prohibited sub-granting or transfer of foreign contributions from one FCRA-registered entity to another.

Let’s break this down:

🔒 FCRA Amendment, 2020 – Key Provision

Section 7 of the FCRA was amended as follows:

“No person who is registered and granted a certificate or has obtained prior permission under this Act and receives any foreign contribution shall transfer such foreign contribution to any other person.”

"Person" here includes any individual, association, or NGO.
This amendment categorically prohibits transfer of foreign contribution between two FCRA-registered entities.

🔍 What constitutes a ‘transfer’?

Per MHA clarification, even reimbursements, settlements, or cost-sharing between two FCRA-registered entities can be construed as indirect transfer of foreign contribution.

So in your example:

Trust A pays employee salary or other expenses on behalf of Trust B, and
Trust B reimburses the cost to Trust A.

➡️ This can be construed as a "transfer of foreign contribution", even if:

The transaction is reimbursement-based,
There is a debit/credit note trail, and
It's not a direct grant or donation.

Hence, your auditor’s view is correct — this may violate Section 7 post-amendment.

✅ Permissible Alternatives (Compliance-Oriented)

If both Trust A and Trust B are involved in a project jointly, consider these options:

Expenses borne directly by each entity from their own FCRA bank account.
Cost-sharing mechanisms without fund transfer — with clear demarcation of responsibilities.
Avoid routing reimbursements or settling inter-entity costs using FC funds.
Maintain separate project agreements or MoUs (clearly defining the scope of work and fund usage), but avoid monetary settlements between them.

⚠️ What You Should Avoid

Issuing debit/credit notes between two FCRA entities.
Reimbursing one another, even for legitimate shared expenses.
Pooling funds or doing back-to-back recoveries.

🧾 Penalty for Violation

Violations of Section 7 may attract:

Cancellation of FCRA registration
Penalty up to Rs. 1 lakh or more
Seizure of accounts or funds

So it's advisable to avoid even seemingly harmless settlements.

📌 Conclusion

Question	Response
Is reimbursement via debit/credit notes between FCRA entities allowed?	❌ Not permitted post-2020 amendment.
Does this count as transfer under Section 7?	✅ Yes, it can be considered indirect transfer.
Should you avoid such reimbursements?	✅ Yes – shift to separate accounting and avoid fund flows.