Dear Sir/Madam
A charitable organisation running educational institution is not yet registered under 12A of income tax act and under FCRA. It is registered under Society act in 2020 and started constructing building and for this one of the member who is Non Resident Indian transferred funds from outside India more than 2 cr in the account of society for construction of building of the school. Society treated it as unsecured loan from the member which will be refunded when the school will be in operation in due course.
Is there any implication of this transaction under FEMA or any other law? Please guide.
CA Arvinder Pal Singh
Under FCRA 2010, any donation, delivery or transfer made by any foreign source of any currency will be treated as Foreign Contribution. S. 11 of the FCRA 2010 states that no person having a definite cultural, economic, educational, religious or social programme shall accept foreign contribution unless such person obtains a certificate of registration / prior permission from the central Govt.
Thus even a loan (secured or otherwise) received without registration / permission will be treated as violation of FCRA 2010 by the central Govt.
Under FEMA while individuals are permitted for receiving loans on restricted use & proper declaration basis, real estate is not included in the same. FEMA is silent on societies, as it falls under FCRA 2010.
A foreign loan is commercial transaction .It will be governed FEMA. Under FEMA RBI issue detailed Frame work for external Commercial Borrowing.A foreign Loan need to comply with RBI guideline On ECB. As per RBI master circular On ECB only eligible entity can raise foreign loan only from eligible lenders. NGO are not eligible borrower unless they are in micro finace neither a member of society is eligible lender.There is clear voilation of ECB guideline in the present case
Non-profits do not fall under Automatic route, and if required would need to take approval from RBI.
In any case, additionally, non-profits also must ensure compliance with FCRA 2010.