India - The Opportunity Of A Lifetime For HNIs—saving The Indian NGO Sector.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
21 July 2020
The year 2020 will be etched in our memories for a long time. COVID-19 has blindsided most of us. The non-discriminating virus has not spared any country, religion, or occupation, and has impacted the lives of every individual in the world.
Yet some have suffered more than others. In India, the impact has been greater on the marginalised groups in cities, such as the migrant workers and the low-income households. Nearly four crore individuals are reported to be without work or home, and their plight is unlikely to end any time soon. Although, the pandemic is status neutral, and can affect anybody belonging to any strata of the society, containment zones have shifted from the more affluent parts of cities to the slums and other congested areas. A third group comprising the aging citizens in cities, bereft of any support system, also remain vulnerable.
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Shift in hotspots from affluent South Mumbai in April (left) to other parts of Mumbai in June (right)
Source: BMC Daily Dashboard
NGOs during the COVID-19 outbreak
Faced with the herculean task of protecting public health and the economy, the government is struggling to provide adequate support to these groups. In these challenging times, it is the NGOs that have stepped up their acts—they are distributing rations, organising trains for migrants, and providing medicines to the elderly.
Acknowledging the immense, critical contribution of NGOs to India’s response to the COVID-19 pandemic, Amitabh Kant, CEO of NITI Aayog, wrote: “Civil society and voluntary and non-governmental organisations constitute the backbone of collective articulation of citizen interest in a democracy. As facilitators, mediators, and advocators of this interest, they have put people before everything else during this pandemic crisis.”
The data supports Kant’s assertions. An India Today study highlighted that NGOs provided meals to nearly 30 lakh people during the difficult initial weeks of the lockdown. In 13 states and Union Territories, NGOs provided meals to more people than the respective state governments in this time. And it is their work in the months ahead that will prevent hunger, starvation, loss of livelihoods, violence, abuse, exploitation, and worse.
Government initiatives & CSR
While NGOs have been at the forefront doing humanitarian work, companies too have been forthcoming in funding various initiatives, despite financial constraints and an excessively punitive Corporate Social Responsibility (CSR) regime.
To its credit, the Central Government has been receptive to the feedback it has received from the industry on the extant CSR provisions. Basis the findings of the Company Law Committee’s Report dated November 14, 2019 (“CLC Report”), the Central Government on March 17, 2020 (just prior to the declaration of the national lockdown) introduced the Companies (Amendment) Bill, 2020 (“CAB”) in Lok Sabha / Parliament to amend the Companies Act, 2013. The key provisions under CAB relating to CSR were:
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The imposition of criminal liability on account of procedural, technical, and minor non-compliances was perceived to be inherently contradictory to the very spirit of CSR, which globally is a voluntary act undertaken by companies. Should Parliament give a green light to the CAB in its current form, Corporate India’s CSR activities may witness an intent / purpose driven approach rather than such activities being pursued as a mere formality.
Further relief is expected for Corporate India as the Securities and Exchange Board of India’s (“SEBI”) high-powered committee on Social Stock Exchange (“SSE”) recently recommended that companies which are spending heavily for CSR activities will soon be able to trade their excess component.
Currently, the excess CSR spend cannot be carried forward. As per SEBI committee’s suggestions, companies with surplus CSR spends would be able to list their certificates on the exchange platform for trading. Permitting companies to trade their excess component is expected to encourage them to spend on CSR activities without being straightjacketed by the prescribed minimum 2% net profit threshold. This step will go beyond what the regulations prevailing in Canada, UK, Singapore and USA provide for.
However, as discussed below, these changes to the CSR regime may not be enough to really get funds to where they are needed the most. The changes above were conceptualised before the Pandemic, and further application of mind is needed by all stakeholders in relation to what legal framework can really help in these unprecedented times.
Funding for NGOs in 2020 and beyond
Despite the various Government initiatives and the promise of CSR, Indian NGOs are facing a crisis of survival amidst the pandemic.
Recent FSG research shows that COVID-19 will lead to a drastic reduction in funding for NGOs in 2020 and 2021. NGOs in India typically have three major sources of funding: Indian CSR, individual donors, and international donors. Funding from each source is likely to dry up, which will leave the NGO sector reeling.
CSR funding will see a large reduction, which FSG estimates to be about 30–60%. This is driven by the following factors:
Current priority given to PM-CARES and COVID-19: Every CSR funder interviewed by FSG was actively investing in activities related to COVID-19. About 50% of CSR funding for the year has already gone towards the PM-CARES Fund or other COVID-19 relief efforts. While this is understandable, an unintended consequence has been a squeeze in funding available for NGOs.
Reduction in existing commitments to NGOs: About two-thirds of CSR funders said that they may have to reduce funding under some of their formal commitments, and all of them said that they would not be able to keep their informal or verbal commitments.
Continued focus on COVID-19: All CSR funders said that they are unlikely to fund new partners except for COVID-19-related activities. They also mentioned that they would modify their funding plans to prioritise needs emerging from COVID-19. More than three-fourths of the respondents stated that they would continue to fund COVID-19-related efforts and would like to allocate it through existing partners. This is expected to damage traditional CSR initiatives like education, sanitation, skill development, etc. which will get pushed back.
Foreign contributions expected to hit additional roadblocks and dry up: The Central government’s wariness towards foreign contributions continues. Not satisfied with simply cancelling registrations of over 20,000 NGOs in the recent past, the Government has further tightened the screws on foreign contributions. E.g. The Ministry of Home Affairs has made it mandatory for all office bearers of NGOs to file an affidavit with a government identity card like the Aadhaar number or passport asserting that they are not involved in conversion, communal tension or sedition while seeking to register or renew their licence for taking foreign funds. Till now, only the chief of an NGO seeking permission to receive foreign funds needed to file an affidavit. The raging COVID-19 situation is expected to push back international donors, who are likely to invest in their own backyard in these extraordinary times. At a time when India needs to be a net recipient of foreign funds for aid, this critical NGO lifeblood will dry up. Whatever does come will be subject to additional scrutiny and compliances.
All of this is likely to lead to an existential crisis for the Indian NGO sector. Funding cuts will lead to salary cuts and layoffs, which can be devastating for a sector that already finds it hard to attract talent.
In the short-term, this means the loss of knowledge, skills, expertise, and relationships. This will compromise the ability of NGOs to serve their target communities—population most impacted by this crisis.
In the longer-term, when we have moved past the pandemic, the situation is unlikely to get better. Philanthropy typically recovers more slowly than other sectors after a recession, which is likely to impact the core capabilities of the NGOs they have built over several years. These capabilities help address issues such as malnutrition, water sanitation and hygiene and domestic violence, which will still pervade after the pandemic is over. Without a functioning NGO sector, India will stall on most of its development goals.
The impact will not only be limited to the communities that NGOs work with, but also a significant loss of livelihoods. The NGO sector is estimated to provide paid employment to 7.2 million people (substantially more than sectors like automobiles or IT, which clock in at 5 million each). Even a 30% fall in funding can result in rendering over 2 million people jobless, adding to the ranks of the unemployed rather than helping to alleviate their circumstances.
All of this presents a grim picture of the Indian NGO sector, and raises a natural question: How can we save it?
HNIs & NGOs – An important partnership
The challenge of all funders is understandable, and many of them have constraints that they cannot overcome in this crisis. But like with most crises, there are also hidden opportunities. We believe one such opportunity is for the philanthropic investments of high net-worth individuals (HNIs), who can step in (directly or via their family offices or foundations) and potentially prevent the funding crisis in the sector.
HNIs are typically classified as individual donors but have greater financial resources than the typical individual donor. While companies will have to navigate their own internal policies vis-à-vis the CSR regime, HNIs and their family offices have a greater degree of flexibility. They are not restricted by regulatory policies or strict investment mandates, and they have greater discretion in disbursement of funds. They are often driven by the personal passions of their founders / principals. Unfortunately, Indian family offices have traditionally focused their attention largely on the investment portfolio of the family and matters of philanthropic initiatives become ancillary. Not surprisingly, global family offices reflect a contrary and an evolved outlook. As per the Campden’s ‘Global Family Office Report 2019’, eight in 10 family offices believe that the world’s wealthiest families will play an increasingly active role in helping to address global challenges historically reserved for governments. Similarly, two-thirds (65%) believe they have a role to play in alleviating economic inequality.
The present environment now makes it imperative for Indian promoters to reconsider their family office framework. Non-financial activities of the family office, such as philanthropic initiatives should be treated on par. This will help the family sustain its unity, talent, and momentum alongside its wealth. This evolutionary process will provide promoters with useful information about the family’s needs now and in the future. This will help build trust and inclusiveness amongst family members who will feel heard and represented.
Planned personal philanthropic activities are also more likely to be successful as founders will invest personal time and effort on certain causes that they are passionate about. As family capital is generally on a longer-term basis and is not constrained by aggressive shareholder concerns or quarterly pressures, it acts as patient capital which can help in longer term gestation of social projects. HNIs do not necessarily need to change the absolute amounts they are planning to donate. Instead, they can consider front-loading their support, giving in the next 12 to 18 months what they would have given over three years. Timely support during this critical period will enable NGOs to survive, as opposed to giving over a period of three years, when many NGOs may not even exist. HNIs funding can not only enable NGOs to maintain their core capabilities, but also build new skills that have become more relevant during COVID-times (e.g., using digital communication to reach their target communities). Since the onset of the pandemic, The Premiji Foundation, founded by the iconic Azim Premji, backed by Wipro’s technical expertise and distribution reach, has been able to extend immediate support to 78 lakh people in 467 districts across 26 states and three union territories, in the form of food, dry rations and personal hygiene items. The Reliance Foundation is also providing free meals to people in partnership with NGOs.
It is worth acknowledging that HNIs have also suffered due to the crisis. Their asset holdings are likely to have been eroded —this group typically has a substantial amount of investment in newer and less tested opportunities, which may have been greatly impacted by the crisis. But given the diversification and magnitude of their financial resources, HNIs are likely to recover their net worth in the longer-term. The crisis presents an opportunity to contribute when it is needed the most.
Liquidity may also be a genuine concern for HNIs, especially with a drop in asset prices or drying up of dividends / cash flows. However, there is an opportunity to use debt products that leverage current low wholesale borrowing rates to generate this liquidity, which can then be paid off as asset prices recover. HNIs may also use this period to strategically reassess their business portfolio to see what is really adding value and staying relevant and disposing of those assets which no longer hold good. This portfolio shuffling can free up capital for where it is really needed.
The value of the NGO sector has never been more obvious, yet its existence never more fragile. The sector needs help, and HNIs are uniquely positioned to provide the much needed support. In the middle of a pandemic, it may seem foolish to think of anything other than the pandemic. But as this article highlights, the crisis may cause irreversible damage to the NGO sector, and the impact will not be limited to the spread of the pandemic. Individual philanthropy can present an attractive combination of present and future. A meaningful experience with loved ones can be shared in the here-and-now while a legacy of giving is built for future generations. If HNIs can step in, they may leave a legacy that will be remembered long after the crisis is over.
For further information, please contact:
Rishabh Shroff, Partner, Cyril Amarchand Mangaldas
 Though as per news reports, Corporate Affairs Secretary Mr. Injeti Srinivas has stated that CSR contributions towards the PM Cares Fund in excess can be carried forward. Per new reports, Mr. Srinivas has stated “Even if you have contributed the prescribed amount towards CSR, I would like to urge you to contribute over and above the minimum prescribed amount, which can later be offset against the CSR obligation arising in subsequent years, if you so desire.” An official MCA notification in this regard is awaited.
 On March 23rd, 2020, the Ministry of Corporate Affairs clarified that contributions towards COVID-19 related activities, would qualify as CSR expenditure.
 The Ministry of Home Affairs has notified the Foreign Contribution (Regulation) (Second Amendment) Rules on 16 September 2019 amending the Foreign Contribution (Regulation) Rules, 2011 under the Foreign Contributions (Regulation) Act, 2010.