Rules regarding a Common Promoter in an NGO situated in India as well as USA

Question

There is an NGO in the USA and the same in India. The Indian NGO gets 90% of its funding from the USA. There is one common promoter for both the NGOs. Is there any rule/prohibition regarding this situation?

Answer 1

In the scenario where there is a common promoter for NGOs in both the USA and India, with the Indian NGO receiving 90% of its funding from the USA, the regulatory framework in both countries imposes certain considerations and rules that need to be followed. Here are the key points to be mindful of in both jurisdictions:

1. Indian Regulations:

1. Foreign Contribution (Regulation) Act (FCRA), 2010:
2. The Indian NGO receiving foreign funds (in this case, from the USA) is subject to the FCRA. The act regulates how foreign contributions are received and used by NGOs in India.
3. The Indian NGO must be registered under FCRA to legally accept foreign donations. It should also submit annual reports to the Ministry of Home Affairs regarding the receipt and use of the funds.
4. If the common promoter in the USA has significant control or influence over the Indian NGO, this may require additional scrutiny under FCRA, particularly if it seems that the foreign contribution is being used for activities that do not align with the regulations.
5. The Indian government closely monitors the sources of foreign funding, and a common promoter could raise concerns if there is a perception of undue influence or control from abroad. Proper disclosure and compliance are critical.
6. FEMA (Foreign Exchange Management Act):
7. Any transfer of funds between the USA and Indian NGOs needs to comply with FEMA regulations, which govern the flow of foreign exchange. NGOs in India must ensure that they are compliant with FEMA when receiving large foreign contributions.

2. USA Regulations:

1. IRS Rules for 501(c)(3) Organizations:
2. If the USA-based NGO is a 501(c)(3) tax-exempt organization, it must adhere to the IRS regulations regarding the use of funds, especially for foreign grants.
3. The USA NGO must ensure that its grants to the Indian NGO are used for charitable purposes and are in compliance with IRS guidelines on international grants. This includes conducting proper due diligence on the Indian NGO and ensuring funds are not diverted for non-charitable activities.
4. There is no explicit prohibition on having a common promoter between NGOs in different countries, but the IRS requires that the control and use of funds be transparent and not lead to private inurement (i.e., the promoter or any individual benefiting personally from the donations).
5. The USA NGO must avoid being used as a conduit for transferring funds in a way that bypasses Indian regulations, and all cross-border transactions must be properly documented.

3. Common Promoter Considerations:

1. Conflict of Interest:
2. Both NGOs need to be vigilant about potential conflicts of interest. A common promoter may have influence over decision-making in both organizations, which could create ethical or legal concerns regarding governance and independence.
3. Each NGO should have governance structures that ensure decisions are made independently and transparently, particularly concerning the use of funds.
4. Regulatory Scrutiny:
5. In India, regulators may scrutinize NGOs receiving a significant amount of foreign funding, particularly when a common promoter is involved. Indian authorities could view this as a potential means of circumventing local oversight, especially if the funds are not used strictly for charitable purposes within the country.
6. In the USA, the IRS may also require detailed reporting on how the USA-based NGO is distributing funds internationally and ensuring compliance with its tax-exempt status.

4. Other Legal and Practical Considerations:

1. Transparency and Reporting: Both NGOs should maintain high levels of transparency in their operations, particularly in how funds are allocated and utilized. Clear reporting mechanisms will help mitigate regulatory risks and maintain the trust of donors and authorities.
2. Dual Operations and Compliance: Having a common promoter operating in two countries increases the need for strict compliance with both Indian and USA laws, particularly in terms of governance, financial reporting, and use of funds.

Conclusion:

There is no outright prohibition on having a common promoter for an NGO in India and the USA. However, both NGOs must strictly follow the regulations regarding foreign funding (in India under FCRA) and international grants (in the USA under IRS rules). The Indian NGO, in particular, must comply with FCRA and FEMA, while the USA NGO must ensure that it fulfills its obligations under the IRS for international funding. Transparency, due diligence, and avoiding conflicts of interest are critical to avoiding legal complications in both countries.