Why India's Non-Profit Sector Needs Comprehensive Legal Reform

With a number of NGOs losing their licenses on allegations of non-compliance and malpractice, or for differing with the government and its policies, new legislation is required to regulate the sector.

Civil rights activist Teesta Setalvad’s NGO has been one of the organisations that have been persistently targetted under the Foreign Contributions (Regulation) Act. Credit: PTI/Files

There was a time when no discourse on poverty, development, globalisation, democracy or governance was complete without the term ‘NGO’ (non-governmental organisations, also called non-profit organisations or charities) figuring in it. But lately, they have been in the news for all the wrong reasons – partly due to the misdeeds of a few organisations and partly because of a right-leaning government hardening its stance on foreign aid.

Recently an NGO as respectable as the Public Health Foundation of India was inexplicably denied its Foreign Contribution (Regulation) Act (FCRA) registration on grounds that it had lobbied for anti-tobacco policies. If this is the fate of an NGO that supposedly has governmental backing, both at the centre and in the states, one can only imagine the fate of NGOs not similarly fortunate. Foreign aid has become a punitive instrument for the government to use on NGOs critical its policies.

NGOs who have no foreign funding but have availed government grants have come under fire for an entirely different, but more justifiable reason – a lack of accountability. It is an unfortunate fact that there are several errant orgnisations in the sector and their misdeeds are well known. But because of these few, those doing good work – and there are many still – have been tainted.

In a recent hearing, the Supreme Court asked the Centre to explore the possibility of a new law to regulate fund utilisation by NGOs who receive government grants because, “after all it is the tax payers’ money”. Noting that less than 10% of 35 lakh NGOs file their audited accounts regularly, the government had framed guidelines requiring NGOs and other voluntary organisations to register with Niti Aayog for accreditation to receive public funds.

The guidelines have also proposed that NGOs must furnish a bond equivalent to the grant given to them, to be encashed by the government in case the funds are misused or misappropriated. But instead of just issuing such guidelines the Supreme Court is in favour of a new legal enactment to bring accountability.

No one will quarrel with the Supreme Court’ anxiety that tax payers money should not be wasted. Indeed tax payers’ money should not be wasted, either by the government or by NGOs. What is needed is not just a law to regulate NGOs, but a comprehensive reform of the entire NGO charity sector. This reform should include a new institutional mechanism to implement the law and reform already existent institutions.

The role of a charities regulator (I use ‘charities’ here onwards to include not only NGOs, but all charitable non-profit organisations such as trusts, Section 25 companies, associations etc), should be to effectively secure compliance with the charity laws of the land in a fair, transparent and non partisan manner, free from political influence to enhance public trust and confidence in both the regulator and the charities. Moreover, it should make the regulatory process as simple and cost effective as possible.

In order for it to be effective in fulfilling its role, there should be clarity in the scope and mandate of the regulator. The office should have adequate autonomy and integrity in its operation and the capacity to educate the public. It must also have the authority and the competence to review and interpret charity law to meet the needs of an evolving society.

Some years ago, the erstwhile Sampradaan Indian Centre for Philanthropy, whose director I had been at the time, had been commissioned by the Planning Commission to report on charities administration in India (comprising  the IT department, Registrar of Societies, Charities Commissioners in the states, and the Company Law Department) with recommendations for reform. A comprehensive report based on a nation wide survey was submitted in 2004. But, as is the fate of such reports, the recommendations did not see the light of day. However, in light of the Supreme Court’s interest, the recommendations made by the report are as relevant today.

While the enactment of a new law and new institutions to administer it remain pending, the report had recommended short term measures to facilitate charities to comply with the existing laws for the sake of good governance. The crux of the report lay in simplifying procedures, checking malpractice and effectively monitoring the application of sanctions. It also suggested self-regulation by the voluntary sector to complement legal regulation.

It had also recommended a public register of charities to serve as a central record, like they have in Hong Kong, UK and other countries. It is the only record of organisations which has been officially accepted as being for public benefit and which, therefore, receive privileged tax treatment. It allows charities to provide conclusive proof of their status to funders and others; gives members of the public up-to-date information about charities, and allows the regulator to monitor charities and their affairs on an annual basis. Apart from a physical public register, the government could also maintain the data in a digital portal.

However, noting that while the above measures may, if they are adopted, enhance the efficiency of individual agencies which regulate NGOs currently, they will not overcome some of the basic problems which are systemic. Anticipating the Supreme Court’s recent observations, the report had recommended the enactment of a comprehensive central law to legally incorporate non-profit organisations, perhaps along the lines of the Charities Act in the UK.

In England and Wales, the Charity Commission administers the Charities Act, which gives it jurisdiction over all matters concerning charities, including regulatory powers, that in Canada and the US fall under provincial jurisdiction.

The main difference between the UK, the US and Canada’s institutional arrangement is that while in UK registration is done by the Charity Commission, in the US-Canada model, it is the income tax department which has the main regulatory responsibility. The Charity Commission concerns itself not only with the financial aspects, but also with the administrative aspects of organisations, modernising them to keep abreast of new developments.

The Indian law could be called the law for non-profit public benefit organisations. Because charity is a concurrent subject, the parliament can make laws with respect to charities and charitable institutions under entry 28 of the concurrent list in the seventh schedule of the constitution. The states could, enact the same law using the central law as a model, for their jurisdictions.

It was proposed that the new uniform law should be flexible enough to offer registration for different types or organisations (trusts, societies and companies) under different sections, just as the Companies Act deals with a particular types of companies. It also suggested a section to distinguish development organisations from chambers, and other such professional membership bodies, as has been demanded often by the NGO sector.

The Income Tax Act, suitably amended, would continue to be responsible for tax exemptions.

The Supreme Court, disagreeing with the government about using either Niti Aayog or the Lokpal or Lokayukta as the agency to register and oversee NGOs, has rightly noted that it would prevent them from focusing on their core responsibilities. For this reason, the Sampradaan report had suggested that the administration of the new law should be the responsibility of an agency specially created for this purpose, which could be called the National Charities Commission, as in the UK. Alternatively, a non-profit organisations directorate can function alongside state directorates. Taking into account the present climate for NGOs, I feel it might be better to give the independent commission comprehensive powers currently exercised by the FCRA department in the home ministry and the income tax department, to ensure not only good  governance and management, but also financial compliance.

The report had also recommended a non-profit organisation advisory agency with representatives from the NPO sector and professionals such as lawyers, to provide the charities directorate policy guidance and feedback from the sector.

Hopefully with the Supreme Court’s backing and supervision, such a comprehensive reform of NGOs will ensure both accountability and impartiality in the NGO sector, free from political pressures.

Pushpa Sundar is the author of Foreign Aid for NGOs: Problem Or Solution? and other books.