By K P C Rao., LLB., FCMA., FCS
Practicing Company Secretary
“The survival of our democracy and the unity and integrity of the nation depend up on the realization that constitutional morality is no less essential than constitutional legality. Dharma (righteousness; sense of public duty or virtue) lives in the hearts of public men; when it dies there, no constitution, no law, no amendment, can save it.”
-Soli J Sorabji
In the recent times, the setting up of a Koodankulam Nuclear Power Plant (KKNPP) (currently under construction in Koodankulam in the Tirunelveli district of Tamil Nadu) is in a great controversy and in the news and a topic of hot discussion in the print as well electronic media.
Unsurprisingly, within India there are about 3.2 million registered NGOs, of which an estimated 1.5 million are active. Some of India's religious trusts are among the richest in the world. In the recent past we have also seen NGOs like TTD, Satya Sai Central Trust, Ananda Padmanabhaswamy Temple embroiled into similar controversies as to funding and managing the affairs of the respective organizations.
This article focuses on the existing legal framework as to setting up of NGOs in India, drawbacks in the present system and emphasizes the need to bring umbrella legislation coupled with regulatory framework at the central in line with the uniform trust code of USA, so as to avoid these types of controversies and to create healthy atmosphere in the NGOs sector. Professionals like Company Secretaries can play an important role to bring in transparency and accountability in the NGOs sector through proper compliances good governing practices.
2. RECENT INCIDENTS IN NEWS
a) Koodankulam Nuclear Power Plant
In the latter part of 2011, protesters living around this Russian-built Koodankulam nuclear plant in the southern Tamil Nadu province blocked highways and staged hunger strikes, trying to prevent construction work. They demanded the plant's closure, as they feared it will cause a nuclear accident similar to Japan's Fukushima nuclear disaster. During February 2012, there were widespread protests in favour of commissioning the nuclear power plants from other parts of the affected province, due to the province's massive power deficit of 3-4000 MW resulting in power cuts of 4-8 hours in most areas.
Former President of India and a renowned aeronautical scientist Dr A. P. J. Abdul Kalam after a personal visit to the plant said that Koodankulam Nuclear Plant is safe and that it was essential for India. He added that anyone who was worried about the safety of the plant could meet him personally at any time.
Controversy as to NGOs funding and violation of FCRA, 2010
The Prime Minister Dr. Manmohan Singh, Home Minister P Chidambaram and the Minister of State V. Narayanasamy have all separately revealed that the protests at the Koodankulam nuclear plant was funded and instigated by foreign NGOs. On February 28 2012, a German national close to the protest leaders was arrested from a lodge near the nuclear plant and deported for the alleged funding activities. Four NGOs have been officially booked for violating the Foreign Contribution Regulation Act (FCRA) of India, because they diverted foreign funds into the protest movement. The feeling in the Indian establishment, on interacting with the protesters in order to answer their concerns, is that the movement has been created to scuttle India's indigenous three-stage closed fuel cycle program, which was put in place by independent India's desire to provide power for its future generations and which will make India independent of all fossil fuels.
b) Tirumala Tirupati Devasthanams (TTD)
During 2010-11, Tirumala temple, managed by Tirumala Tirupati Devasthanams (TTD), collected the "Hundi" collections touching Rs. 650 crores. The TTD budget estimates for the fiscal year 2011-12 will be about Rs.1,641.76 crores and the interest on investments of cash and gold deposits made at several Nationalised Banks is estimated to earn about Rs. 431.73 crore.
c) Sathya Sai Central Trust
Ever since news of Sathya Sai Baba being critical in hospital emerged, many have wondered who would manage the Sathya Sai Central Trust in the time to come. Even before the mortal remains of Baba can be laid to rest, a quest is on for control over the Trust. While the assets with Trust are officially assumed to be ` 40,000 crore, an unofficial estimation runs to over Rs. 1.4 lakh crore. Sathya Sai Central Trust is the Administrative Body running health and educational institutions, and the Baba was supreme as authorised signatory of bank accounts. With no heir apparent, many are vying to become the Trust's president.
d) Ananda Padmanabhaswamy Temple
Sree Padmanabhaswamy Temple (Also known as Sree Ananda Padmanabhaswamy Temple) became the richest Hindu Temple in India as well as the world. As on 7th July 2011, after completing the asset valuation of the 5 secret cellars of the temple the treasure sums to more than Rs. 100,000 crore, that’s around US$22.3 billion in total, without even calculating the antique value of the objects. Earlier Sree Tirumala Venkateswara Temple in Tirupati, Andhra Pradesh was regarded as the richest temple in India. Other richest temples in India are the Golden Temple in Amritsar, Punjab, and Shirdi Sai Baba Temple in Maharashtra.
3. NGOs SECTOR
The NGO sector plays a crucial role in the growth of a nation. The Indian voluntary sector (or the NGO sector) is emerging to be a credible force in catalyzing the nation’s social and economic growth, particularly for the masses at the ‘bottom of the economic pyramid’. The potential for this is well apparent from the experience of other developed and developing economies. If India is to achieve, as is predicted, the living standards of the developed world by 2050, then the NGO sector would need to play a critical role, and must grow at a pace much higher than that required of the overall Indian economy.
Governance standards of organisations are recognized as critical in maintaining the transparency and accountability on the whole. This is as true for the NGOs as for the corporate and the government. That the governance standards play a significant role in creating operational efficiencies and risk mitigation, particularly those of the long-term nature, is increasingly evident from recent global trends and research. The corporate world in general, and also the government sector, has in recent years increasingly recognized this correlation, as is reflected in the emphasis on the ‘corporate governance best practices’ and ‘the regulatory frameworks’ that have emerged. But while the corporate sector in India and elsewhere has somewhat succeeded in institutionalizing effective governance policies and regulations, the NGO sector is yet to reach anywhere near that level. This is dragging down the NGO sector from performing the role that it must for the overall growth of the nation and its economy.
4. EXISTING LEGAL FRAMEWORK
The right of all citizens to form associations or unions is guaranteed under Article 19(1) (c) of the Constitution of India. Charitable organizations usually take the legal status in the form of a Trust, Society, or non-profit company (also called not-for-profit organisations or NGOs), and are regulated by a variety of State and Central Government Agencies, Laws and Authorities.
The Federal and State laws (Many states also have their own Public Trusts Acts) which are applicable to charitable organizations and NGOs operating in India include:
a) Indian Trusts Act of 1882
This Act applies only to private trusts throughout India except the state of Jammu and Kashmir and the Andaman and Nicobar Islands.
b) Bombay Public Trusts Act 1950
This legislation deals with charitable trusts in the states of Maharashtra and Gujarat.
c) Charitable and Religious Trusts Act 1920
This law extends to the whole of India except the State of Jammu and Kashmir. The Central Government can extend its coverage to Jammu and Kashmir by notification in the Official Gazette,
d) Societies Registration Act 1860
This is a federal Act and is applicable generally to all states. However some regions had already enacted their own laws, others have made amendments or modifications to the Act, and other states have passed completely new laws to regulate societies leading to considerable variation across states.
e) Companies Act 1956
Section 25 of the Companies Act 1956 deals with Non-Profit Companies. This Act is a federal Act and applies to non-profit companies operating in any state.
f) The Wakf Act 1995
This Act is applicable to all Wakfs whether created before or after the commencement of the Wakf Act, 1995.
g) The Income Tax Act 1961
This is a federal Act which applies in all states, and governs tax exemption of not-for-profit organizations operating in India.
h) The Foreign Contribution (Regulation) Act, 2010 [FCRA]
The Foreign Contribution (Regulation) Act, 2010 [FCRA] has been enacted by the Parliament to replace Foreign Contribution (Regulation) Act, 1976 [FCRA 1976]. The Foreign Contribution (Regulation) Act, 2010 (FCRA 2010) came into force on 26-09-2010. The basic purpose of FCRA 2010 as mentioned in the preamble to the Act is “to consolidate the law to regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and to prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto.”
5. PRESENT REPORTING REQUIREMENTS
a) The Societies Registration Act 1860 provides that each society has to submit an annual report and list details of its managing body every year to its local Registrar of Societies. The requirement to file accounts differs between states.
b) All trusts registered under the Bombay Public Trusts Act have to file annual reports. In addition, trusts with an income above Rs.1500 per annum have to submit audited accounts, and those with an annual income below Rs.1500 have to submit income and expenditure statements within 6 months of closing of accounts to the Charity Commissioner’s office.
c) All section 25 companies have to file:
1) audited accounts;
2) an annual report;
3) an annual return with the Registrar of Companies; and
4) important resolutions.
Additional requirements for all directors and significant shareholders are laid out in the Companies Act 1956.
d) The Foreign Contribution (Regulation) Act, 2010
Considering the flow of funds into the country for purposes other than business, the Government has specified that acceptance of FC against national interest would not be permissible, requiring persons accepting FC to be subject to enhanced scrutiny. The measures include prior CG approval for accepting FC, registration and renewal, conditions for end use of FC and for transfer of FC to other persons etc.
The earlier Act of 1976 (FCRA 1976) had outlived its utility and needed to be scrapped as it had failed to keep pace with the changing face of India’s economic growth, more particularly after the introduction of the Prevention of Money Laundering Act, 2002. Both these Acts cover the Non-Profit Organisations (NPOs), the organisations having a definite cultural, economic, educational, religious or social programme, and also the persons in sensitive government positions, political parties and persons associated with the news media.
The provisions of FCRA 2010 applicable for regulating the acceptance of foreign contribution by persons having definite cultural, economic, educational, religious or social programmes are as follows:
NPOs are directly affected by the provisions of FCRA (both FCRA 1976 and 2010), and the Government closely monitors the inflow of foreign contribution into this sector.
Both under FCRA 1976 and FCRA 2010, any individual or organisation carrying out a definite cultural, economic, educational, religious or social programme is required to be registered with the Central Government or obtain prior permission of the Central Government before accepting any foreign contribution. Such an NPO cannot in turn transfer the foreign contribution received by it to any other person unless such other person is also registered or has obtained prior permission.
The process of registration is stringent and fraught with bureaucratic process. Unless the NPO has a track record of at least three years, as a matter of practice, registration has generally not been granted under FCRA 1976. Under FCRA 2010, the requirement of having a track record is now codified, as the Act specifically provides that before granting registration, the Central Government shall verify whether the NPO has undertaken reasonable activity in its chosen field for the benefit of society. If the NPO is not able to fulfill the requisite conditions for registration, then the only alternative would be to apply for prior permission, which would be valid only for the specific purpose and source for which it is obtained. Even for prior permission the NPO would have to show that it has a reasonable project for the benefit of society for which the foreign contribution is proposed to be utilised.
The Central Government, before granting registration or prior permission, is required to ensure that the person or organisation is in no way working to the detriment of national interest. For example, (and the below-mentioned items are only illustrative) it should not be engaged in:
a) Religious conversion through inducement or force;
b) Creating communal tension or disharmony;
c) Propagation of sedition or advocating violent methods to achieve its ends;
d) Undesirable purposes.
Besides, permission can be denied if the acceptance of foreign contribution is likely to affect prejudicially the sovereignty and integrity of India or is against the security, strategic, scientific or economic interest of the State; or is opposed to public interest.
This clearly brings out that the Central Government has almost absolute powers to deny registration or prior permission. The manner in which some of the above criteria can be interpreted is extremely subjective and fear is that too much power is placed in the hands of the bureaucracy and this may lead to undesirable consequences.
Under FCRA 1976, prior permission was relatively simpler to obtain as compared to registration and was generally granted within 90 days if the paper-work was proper. Under FCRA 2010, it is specified that application for registration or prior permission should, after inquiry, be ordinarily granted within 90 days of the application or the Government should communicate the reasons for not granting the same. No specific consequences are provided for not processing the application within the 90 days and hence the provisions are rightly viewed with a great deal of skepticism, as it is unlikely that the sanctity of the time frame of 90 days will be observed.
Under the Amended Act a ‘certificate of registration’ is now valid for a period of five years, after which the registration process will have to be repeated. This is in deviation of the present situation under FCRA 1976 where registration once granted is valid for the lifetime unless specifically revoked. The Central Government has wide powers under specified situations to cancel the certificate of registration, after making such inquiry as it deems fit. For example, the certificate can be cancelled if the NPO has obtained the same by making false statements or has violated any terms and conditions of registration or of FCRA or its rules or it is necessary to do so in public interest. The certificate can also be cancelled if the NPO has not been engaged in any reasonable activity for the benefit of society for two consecutive years. Foreign contribution can be received only in a single designated bank account and it is not permissible to open multiple bank accounts. Often funding agencies demand that separate bank account be opened specifically to manage and monitor the foreign contribution sent to India by them. Unfortunately that is not permitted under FCRA and needs to be clearly explained to the funding agencies.
Often trusts have projects in far-flung and remote places and it is always advisable to open a bank account at the project site. Recognising this need, it is provided that more than one bank account can be opened for actual utilisation of such foreign contribution. Such bank account is popularly referred to as project account and typically, the funds are transferred from the designated account, to the project account for direct spending on the project. No other deposits are allowed to be made in such project account as they are meant only for disbursement of expenses. Such project accounts were permitted under FCRA 1976 also by way of administrative directions, but under FCRA 2010, the same is legitimised by a specific provision in the Act itself.
The NGOs will have to maintain records and accounts in the prescribed manner and intimation will have to be sent to the Central Government reflecting the amount of each contribution received, its source and manner in which the same was utilised. The designated bank also has to report the details of the foreign contributions routed through them directly to the specified authority.
6. SHORTCOMINGS IN THE PRESENT SET-UP
By its nature the voluntary sector has an extremely philanthropic side to it, thus making it difficult for corporate-like professionalism or profit driven accountability-standards to take precedence over its core functions. However, like the other key sectors of India, the voluntary sector is also faced with imposing evolutionary and ‘market’ challenges. Hence, issues of internal control mechanisms, professionalism, accountability, transparency and financial management must be given impetus. The challenge is manifold, and compounded by the ‘unorganised’ nature of the sector, lack of regulatory frameworks and the fact that India boasts of more than a million NGOs comprising different roles, structures and sizes.
Evidently, there is both a need for a pertinent shift in the manner of how the voluntary sector in India views governance and the associated regulatory frameworks. Equally important is to create competencies for better risk management through operational means and management procedures for risk monitoring and risk mitigation. In case of the NGOs, more so than for the Corporates, the risks often take the shape of vulnerability to influences and risk dynamics ranging across:
a) Lack of or limited access to professional management expertise
b) Financial inefficiencies and malpractices
c) Vested organised crime and political interests
d) Extremism and terrorism
The changing social dynamics and security environment have added to the exposure of the voluntary sector to various risks, especially those operating in extremely remote or underdeveloped regions (where incidentally the need and the contribution of the NGOs is most critical). In particular, the NGO sector has become vulnerable to the vested interests of partial political interests, organised crime and extremist organizations in such regions.
The Indian government has been blacklisting several NGOs (sometimes, the numbers running into hundreds) for primarily fund misappropriation and relationships with extremist groups. As many as 833 NGOs and voluntary organisations have been blacklisted by an autonomous body under rural development ministry after they were found indulging in misappropriation of funds. Of the 833 NGOs and voluntary organisations which were blacklisted, 192 were from Andhra Pradesh, 125 from Bihar, 83 from Tamil Nadu, 75 from Karnataka, 72 from Uttar Pradesh, 42 from Rajasthan and 35 from Kerala.
In the incidents of the past several years, the sector has been often unlawfully exploited in that several NGOs (both national and global), especially those that receive foreign contributions, have been used as conduits for money laundering and sponsoring terrorist/extremist activities. This trend is not unique to India. The world over extremist and terrorist organisations are known to operate through ‘front’ NGOs as also extensively use NGOs as vehicles for generating funds and gaining influence and respectability amongst the local communities.
Such security considerations have further brought to fore the rising criticality of improving the governance practices in the Indian NGOs and exercising better regulatory mechanisms, disclosure norms, and management processes including financial management and budgeting systems as well. Moreover, in the larger interest going beyond the security considerations, the impetus has to be on inculcating a culture of including performance goals, conducting financial and performance audits, and reforms for increasing the operational accountability and transparency in the eyes of the public, volunteers, donors and other stakeholders.
As of now, there are no specific laws or regulations to regulate volunteerism in India. A task force, constituted to examine the issues related to the evolution of an independent, national level, self-regulatory agency for the voluntary organisations and develop accreditation methodologies by the Planning Commission, has suggested the creation of a statutory body, the National Accreditation Council of India (NACI), on the lines of the Bar Council and the Press Council of India. The NACI would develop, upgrade and promote norms and practices for the accreditation of voluntary organisations of various sizes and competencies, and assiduously remain on guard against all efforts and developments that might compromise the autonomy of a voluntary organisations.
7. NEED FOR GOOD GOVERNANCE PRACTICES- AN EMERGING FIELD FOR PROFESSIONALS
Therefore, the policy makers should give top priority to regulate this NGO sector by introducing the needed Regulatory Framework to bring in the transparency & accountability in this voluntary sector. The services of the qualified Professionals like Company Secretaries / Accountants may be utilized to achieve this objective.Some of the areas where the immediate governance based interventions needed are furnished below:
a) Financial Prudence
Like every other sector, one of the major drivers of efficiency is the manner of utilization of the capital and the funds that the NGO sector accumulates through various sources for carrying out its work. If statistics are to be taken into consideration, out of more than 1.5 million NGOs operating in India, only 3% are being able to carry out constructive grass-root level work (ICONGO, 2002 survey). Furthermore, NGO establishments typically tend to have high administrative costs of nearly 60% and above. Indicatively (based on limited statistics that are available for India), only 10-20% of the funds are utilized for effective developmental work. More stringent management norms and regulatory oversight will contribute to more effective spending by NGOs.
For instance, NGOs operating in under-developed nations receive more than $15 billion as funding from international financial institutions and government agencies – this is approximately the same amount of money that World Bank spends on development in these countries. The important question is whether the voluntary sector is being successful in delivering a comparable amount of development in the regions?
b) Internal Controls Mechanisms
A study conducted by the McKinsey Global Institute (MGI) during 2007 elucidates “that if India continues its recent growth, average household incomes will triple over the next two decades and it will become the world’s 5th-largest consumer economy by 2025, up from 12th (during 2007).” This also means more funds for the Indian NGO sector if it is able to create a greater degree of trust and professionalism in its operations. The NGO sector is beset by the problem of ‘lack of transparency’ in their functioning for gaining the trust of people and the donors for fund raising activities.
Transparency in operations is a major challenge. A large numbers of NGOs are prone to exploitation by vested political interests, extremist outfits and criminals for a variety of reasons owing to their clean, philanthropic image and their direct-connect with the masses (which both the corporates and the government tend to lack). This characteristic strength of an NGO often becomes its weakness since such vested interests misuse the public trust and the image enjoyed by the NGOs. This is further aggravated by the fact that NGOs have substantial access to international and national funds, again generally devoid of intensive scrutiny or audit trails.
c) Management Efficiencies
The NGO sector in India is largely in the form of what can be termed as an ‘unorganised sector’, with a preponderance of small outfits that have been floated by either individuals or small groups of people. The NGOs are generally founded by people passionate about a ‘cause’, which often results in an organisational infrastructure that is focused on operations rather than efficiencies and management processes. One result of this is the wastage of resources. Limited statistics that are available, indicate that on an average 70 percent of the funds are utilized for the administrative purposes of the NGOs.
The philanthropic and the humanitarian angle of the NGOs often override the need for management efficiencies and systematic planning to achieve the ‘cause’ based objectives. The fact that is amiss from the vision of the voluntary sector in India is that better management processes and professionalism can only accelerate the success of developmental and welfare programs in a seamless manner. There also exist numerous NGOs spending disproportionate amount in advertising and salaries often robs the sector of the trust and the faith among the general public.
In addition, the disproportionate focus on the operations versus management efficiencies and planning results in people with inadequate management competencies to hold senior positions. This exposes the sector to higher degree of risk from corruption and frauds, both intentional and consequential.
d) Prone to Money Laundering Transactions
The operational risk that emanates from unmonitored funding to NGOs is that it exposes the sector to money laundering and terrorism financing risks. This is further complicated by the fact that many NGOs have an international presence in strife-affected regions, and their operations are directed to vulnerable communities, which also tend to be the communities which extremist organisations target for support, propaganda, fund-raising and recruitment activities. This makes the NGOs to be more prone to money laundering activities.
e) Internal Control Checks in the Operations of NGOs
There are numerous NGOs working in remote and challenging regions of India. Many of the well-funded organisations have large geographically spread-out set-ups with regional branches in such areas. Consequently, such set-ups in the remote regions have inadequate means for internal control, further exposing to the risk of inadequate functional and financial monitoring.
Internal control mechanisms form an integral part of any organisation since it is essential that the ‘child’ outfits work in tandem with the parent organisations. It will be less beneficial if the parent organisation (often, set up in a large city) adheres to regulations and internal policies/controls but the branches do not.
Another impediment is that the regional branches often have limited autonomy and funds to manage the developmental activities at the grass-root level. This creates a huge disparity in the vision and the mission of the parent and the regional branches, leading to ineffectual realisation of the organisational goals.
Furthermore, the lack of internal controls over the smaller, regional branches (often established in vulnerable regions) exposes them to the various risks – from security to misuse of their infrastructure and programs by interested parties such as local politicians and crime syndicates, and even extremists. Much of the government welfare schemes in such regions too are exposed to similar risks.
Applying a pervasive ‘corporate style’ governance structure may not provide the full answer to the above challenges. However, without doubt the management of the NGOs needs to have a greater focus on ensuring how internal control mechanisms would work in a decentralised environment of geographically spread out regional branches and sub-branches. Earmarking funds and resources for such controls and monitoring is a necessity, some of which must be mandated by regulation to that effect. This will further enhance the quality of developmental work carried out by the sector on the whole, also imparting integrity and respect to the work at the same time.
f) Misuse of the Image of NGOs leads to Mistrust
Many NGOs have a respectable brand equity and are associated with high work ethics. They also often exercise significant level of influence amongst ‘vulnerable communities’. These very aspects are exploited by anti social elements to perpetrate crime and extremism using NGO fronts.
Weak governance policies and internal control systems leads to fraudulent and corrupt practices. The domino effect is mistrust in the voluntary sector further leading to reduction in donations and assistance, thus hampering the overall goal of the sector. For the NGO sector, reputation management and transparency are the primary ambassadors of building an appropriate relationship with its stakeholders – most importantly, the public and the volunteers.
g) Bridging the gap between the Top-most Management and the Grass-Root level Volunteers
NGOs as organisations tend to be founder-centric and are expected to run according to a preset cause. Since the decisions are mainly taken by the founders who also constitute the management, there is often a separation of the organisation’s vision and the working of the field staff. Founders hesitate to delegate decision-making and to empower lower level leadership. A major factor driving this a lack of focus on creating efficiencies and systematic processes.
Incidentally, our research shows that most often the stakeholders, particularly the public and the communities, support the cause and not necessarily the NGO brand. Hence, it is pivotal that there is no professional and visionary lacuna among the top management of the NGO and its volunteers at the grass-root level. This creates disparity in the vision, which translates into operational inefficiency at the end. Also, such disintegration in the vision and mission between the top management and the ground staff opens up avenues for corruption and indulgence in unlawful activities.
h) Strategic Leadership to provide Holistic Guidance
Strategic leadership is of utmost importance to NGOs since they are established with a clear humanitarian goal driven by a specific cause. Unlike businesses, where a major part of strategic leadership effort goes in assessing and deciding strategy for factors such as competitive forces and changing market dynamics, there is a consistency and less unpredictability with respect to strategy. On the other hand, the leadership of NGOs is required to play a much greater role in building reputation and brand-equity, which would attract donors and volunteers. In effect, it becomes pivotal for an NGO to put forth a robust and focused vision and mission centred on its strategic leadership. This, in turn, obviously must be supported by good planning and consistent monitoring by the organization’s management to ensure that the proposed philanthropic development and its objectives are being carried out.
Such measures can only enthuse a strong culture of professionalism in the voluntary segment of India with a ‘business like’ angle of achieving the set goals in optimum resources available. After all, how well the voluntary organization is equipped to deal with its deliverables will only translate into operationally achieving the developmental activities. The core requirement of strategic leadership is to provide a holistic guidance to the organisation with an impetus on strategisation, reputation building, performance, monitoring and improvisation.
The implementation of a strategic framework is essentially important in the management of an NGO. The endorsement of such a framework brings in professionalism and internal control mechanisms, which further makes the organization’s performance more effective. Developing strategies also include establishing a mechanism of consistent monitoring of whether they are being implemented and linking the results to the organisation’s goals.
In recent times concerns have been raised that trusts do not spend adequate amounts on their core objects. There isn’t enough transparency in the administration of the trusts, resulting in disproportionately high administrative expenses. Apparently to address these concerns, further controls over trusts are introduced, providing that not more than 50% of the foreign contribution received in a financial year by the trust shall be utilised to meet administrative expenses. Administrative expenses exceeding 50% can be defrayed only with the prior approval of the Central Government, which will prescribe the elements that will be included in the administrative expenses and the manner in which such administrative expenses shall be calculated.
Unregulated NPO activities in the past have known to be the conduits for money laundering for organised crime. Global pressure is also growing on India to act urgently. The Financial Action Task Force (FATF) has in its report identified fund transfers from foreign non-profit organizations (NPOs) as one of the major sources for terrorist financing in the country on par with counterfeiting of currency, drug trafficking and extortion.
In particular, the Indian voluntary sector urgently needs ‘Self-Regulatory Guidelines’ and transparency mechanisms to increase the trust and awareness as to how the philanthropic funds are being utilised. This is a critical challenge that creates a barrier to raising funds and capital for the sector. The general lack of transparency in the functioning of a large proportion of NGOs leads to aversion in donating funds for charitable causes since the general public is largely cynical about the ‘genuineness’ of the non-profit spirit of the sector.
Inevitably, stringent governance standards of an NGO will facilitate the effective management and increase the accountability to its stakeholders including donors, the government and the community. It is in the self-interest of the NGOs to realize the fact that it is equally important for them to implement a structure of ‘Corporate Governance Principles’ so that it is able to provide real value to the stakeholders. Also, this would enable to track the dubious sources of funding coming in for the voluntary sector – an aspect which has gained impetus in the wake of the increased number of terror attacks and extremist activities.
At present, India has different laws for administering the NPO sector, as some of the areas relating to religious trusts and non-profit organisations fall under the State and Concurrent List of the Constitution. Multiple Acts make monitoring of these entities difficult as there is no centralized body to keep a tab on the sector, raising concerns on the source and outflow of funds. Hence, there is a need for a ‘National Framework Legislation’ to support the NPO sector and to bring in the ‘Transparency & Accountability’ in this voluntary sector on the lines of Uniform Trust Code of USA. In USA, the Uniform Trust Code (2000) will provide States with precise, comprehensive, and easily accessible guidance on trust law questions and provide a uniform rule. The Code also contains a number of innovative provisions. The United States, Bangladesh and Nepal have centralised agencies for registering and monitoring NPOs.
 By Soli J Sorabji in his lecture titled “Palkhiwala and the Constitution of India” given on 22nd February, 2003.
 The Economic Times Dated 11/02/2011
 NDTV Dated 26/04/2011
 Council for Advancement of People's Action and Rural Technology (CAPART), an Autonomous Body functioning under Rural Development Ministry.
 Times of India dated 20/12/2009
 The HINDU, NEW DELHI, February 13, 2011
 FATF is a global watchdog to monitor illicit flows and terror financing.