Draconian New Rules To Fix Rule-breaking Tata Trusts Will Hit Small NGOs
When powerful companies break the rules, the typical reaction in India is not to identify the problem and punish the culprit, but introduce mindless restrictions with punitive consequences for the entire sector. This only adds hurdles to doing business, creates stress, increases costs and generates a sense of disillusionment, instead of the ‘animal spirits’ that the government wants to unleash. 
 
Sledgehammer regulations never work. If they did, trillions of rupees would not have been looted from public sector banks. But they certainly cut off access to many deserving genuine enterprises. Such arduous regulation is now being applied to not-for-profit organisations as well. 
 
Over the past few years, all non-governmental organisations (NGOs) have been systematically demonised with allegations about misuse of funds, violation of rules and hidden agendas. Indeed, some poorly funded NGOs focused on work that benefits society may be a little tardy about the increasingly onerous web of regulatory compliances. But, how is it fair for the government to create new rules for all, just because the most privileged Indian charities that enjoyed unparalleled exemptions and poor regulatory oversight are accused of violating the law?
 
On 6th January, Business Standard (BS) reported that the forthcoming Budget could have a new provision to the Income-tax (I-T) Act enabling tax authorities “to seize trustees’ personal assets if there’s a breach of objectives governing registered charitable trusts.” The article quotes an anonymous source to say, “Public trusts have become the easiest route to launder money due to lack of governance and proper monitoring. The operation of trusts is mostly opaque and there’s no system to track them.” The source also says, “Since these trusts also receive funds from genuine people, the managers of these trusts should be questioned and held liable for not fulfilling the objectives.”
 
This sweeping indictment of all NGOs is patently false, grossly exaggerated and smacks of a biased mindset. Over the past five years, non-profits and NGOs have been subject to multiple registrations with various ministries and face stringent clearances and tough new rules to regulate every aspect of their functioning. Hundreds of NGOs have had their permission to obtain foreign donations (under the Foreign Contributions Regulation Act –FCRA) cancelled; some have shut shop and others are struggling with coercive action by banks, including freezing of legitimate donations received when their FCRA permission was valid. Tough rules and steep fines are prescribed even for inadvertent mistakes in the use of these funds. As always, grievance redress in India is abysmal and the hardship suffered by them is crippling. 
 
As opposed to this, the BS source appears to catalogue allegations primarily against six powerful and extremely wealthy Tata Trusts which enjoyed unique privileges and exemptions for decades. 
 
Correcting legal anomalies that gave a special status to the Tata Trusts by introducing a sunset clause is a necessary action. Punishing them for lapses, pointed out by the Comptroller and Auditor General (CAG) is also fair, if they are proven. But why bring draconian new rules that will hurt smaller NGOs that have no clout, access or money like the Tata Trusts? 
 
India already has no tradition of volunteering time or donating money to social causes (as opposed to religious issues). Threatening to ‘seize the assets’ of trustees will force eminent and qualified persons to step away from NGOs. Trustees of most NGOs today, except the really large philanthropies set up by our IT czars or industrialists, offer their time and goodwill as a service to society. Why should the government create a disincentive to any formal association with social causes? The question is not about compliance, but misuse of punitive powers by the State and its enforcement agencies. 
 
Noshir H Dadrawala, chief executive of the Centre for Advancement of Philanthropy (CAP), points out that this “may have immense and far reaching consequences” for several foundations; only limited liability companies registered under Section 8 (earlier Section26) of the Companies Act may be unaffected. Let us understand how this situation has come about. 
 
The Tatas are India’s most respected corporate house and have better business practices, ethics and governance standards than most others. This has allowed the group to get away with some egregious lapses in good governance and decency. The unceremonious sacking of former chairman Cyrus Mistry, its political deals through corporate hustler Niira Radia, and Ratan Tata’s strange dalliance with the notorious S Sivasankaran are a few examples. 
 
But it has always been able to ride out these disgraceful events with nary a dent to its pristine image. This time, however, two important issues under litigation could have serious implications for the group. First, the alleged misuse of tax exemptions and the historical exemption enjoyed by the six powerful trusts to hold shares and, thereby, control the Tata group.
 
It is now public knowledge that the Tata Trusts operate like a business conglomerate and are privy to all corporate decisions of Tata group companies. Its former managing trustee, R Venkatramanan, a confidante of Ratan Tata, also enjoyed enormous power, pay and perks, on par with CEOs (chief executive officers) of top corporate houses. This has also turned contentious. He has joined the Reliance group after several controversies about his role.
 
It is CAG that first highlighted many irregularities in the functioning of the Tata Trusts in 2013 and, again, in 2019. The issues have also noted by Parliament’s Public Accounts Committee (PAC) in its 104th report in 2018. Far from political vendetta, much of this reflects how the government and its agencies are reluctant to apply the rulebook to the Tatas. 
 
But the matter is now in court, thanks to the bruising war with Cyrus Mistry who was sacked on 24 October 2016 as group chairman by the Tata Trusts led by Ratan Tata. In December, Mr Mistry won a sweeping order in his favour before the National Company Law Appellate Tribunal (NCLAT) and the matter is now in the Supreme Court.
 
CAG Reports: In 2013, CAG reported that Jamshetji Tata Trust and Navajbai Ratan Tata Trust were given irregular tax exemptions by the tax department, the ‘tax effect’ of which was a sizeable Rs1,066.95 crore. The exemptions to the Dorabjee Tata Trust had implications of Rs30.34 crore, it said. There are two of the six large charitable trusts of the group.
 
The government only permits charitable trusts to invest their money in bank deposits. The six Tata Trusts, however, enjoy a legacy exception to this rule, going back to June 1973, which continues to this day. 
 
They are now accused of misusing this exemption to buy and hold shares even after the cut-off date. In fact, the Trusts control the group through their 66% stake in Tata Sons, the group holding company. It is alleged that the Trusts were donated valuable Tata Consultancy Services in 1999-2000 which were sold and converted to preference shares in 2008. Here is what the 2019 CAG report has to say, unfortunately without naming them:
 
 
Tax Exemption: In 2019, CAG expanded on its findings and discovered some that several trusts, including the Tata Trusts, were violating tax exemption rules under Section 12AA. This should have led to a cancellation of their tax exemption. But the I-T department has been inexplicably lenient, as is clear from the CAG 2019 findings given below.
 
 
In 2015, when things began to heat up, the Tata Trusts claimed they had voluntarily surrendered the tax registration. The I-T department, however, says that there is no provision for ‘surrender’ of a registration and cancelled the registration of six Tata Trusts— Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust -- in October 2019. They have challenged this decision before the I-T appellate tribunal. 
 
The CAG report of 2019 clearly shows that the tax department was rather benevolent to the Tata Trusts and seems to have acted only after the CAG’s 2019 report. Is specifically refers to shares held after 1 June 1973 which is the exemption date. Here is what it says:
 
 
Foreign Donations: Another sticky issue for the Tata Trusts is the huge foreign donation made to Harvard and Cornell Universities. The law permits such donations by charitable trusts only if it promotes ‘international welfare in which India is interested’.
 
CAG 2019 notes that a trust established in 2008 donated Rs430 crore to two foreign universities, Rs232 crore of endowment fund and Rs197 crore for financing a campus building. This was done between 2009 and 2015. Interestingly, the CBDT (central board of direct taxes) had first objected to this donation but then reversed its order permitting a retrospective exemption for the donation of $100 million.
 
CAG termed the reversal ‘erroneous’ and ‘irregular’, quantified the tax impact at Rs135 crore and called for a review of all such tax concessions. 
 
There are other issues as well, including the controversially high salary paid to the former managing trustee of the Tata Trusts. But, so long as new regulations and law are aimed at curbing misuse and ensuring a level playing field, it is a good thing. On the other hand, introducing sweeping new rules, based on specific violations by a privileged few, will bludgeon smaller NGOs doing serious work among the neediest sections of society. 
 
 

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    COMMENTS

    Cheruthon Ninan

    6 months ago

    Not an expert in this field but as a major donor to ngo. I find most of the so called ngo are doing the service for their own employment and survival. I want to know how many ngo declare that donors 100 percent contribution goes to the ultimate beneficiary. Let the ngo pay from their own sources for all expenses. This never happens in reality. I fully support this initiative. Ngo should be responsible. The irony is Articles from this website try to protect the common man and work for common good but this article seem to screw tata group. Again my personal opinion only

    REPLY

    Sucheta Dalal

    In Reply to Cheruthon Ninan 6 months ago

    Just out of curiosity, what are the "own sources" that NGOs who do charitable work have? Most often, founders start the NGO with their own resources and zero payment. They formalise the activity and start getting donations only when their work begins to have an impact. What "own" sources will they have at that time? Also, won't you has a donor have verified the work and impact before donating big time as you claim to do? Your entire view seems biased and motivated - your last line doesn't even make sense. Also, the comments about the Tatas are from CAG and PAC -- or do you have the same low and negative opinion about those bodies too? They are also trying to "screw the Tata group"?

    Meenal Mamdani

    6 months ago

    Ms Dalal is spot on as she has been before on many issues.

    The convoluted procedures and regulations that make life miserable for the trustees here is part of the mindset of the bureaucracy in India. "You are guilty unless proven innocent" is the rule by which the bureaucrats operate.

    Ms. Dalal is most likely well aware of the regulations for small NGOs in USA.
    I have a small non-profit family operated organization in USA which specifically says in its set up that it is meant to provide help to those registered NGOs in India that are doing worthwhile work. Setting it up was a breeze. As long as the total donations to the NGO and disbursals are less than 50 thousand dollars, all that I am required to do is file an e-postcard every year where I answer simple questions online to continue the tax-exempt status of this entity. I have sent funds from this to registered charitable organizations in India who have FCRA permission. Of course, the Internal Revenue Service can audit me at any time and I am careful to maintain complete documentation as I am well aware that I will land in hot water if I try to cut corners.

    This light touch regulation allows many well meaning people to donate their money to worthy causes. Just think of the good that can be done in India if Indian govt changes its paranoid, blinkered position on NGOs.

    SuchindranathAiyerS

    6 months ago

    You said it. Right since 1947 Ibdia has made law to punish or benefit entire classes, which are then selectively applied.

    Sudhir Mankodi

    6 months ago

    Disappointed with the article! Not a fair assessment quoting only BS. It\'s a known fact that operations of majority of these trusts are opaque and either money or muscle power have majority say in running of the trusts. If trustees have nothing illegal to do, why should they fear of such stringent provisions? In fact they should welcome such steps as one badly managed trusts ignoring the national interests is giving bad name to all. And if the govt. favours one particular trust, it will be blamed for bringing favouritism!

    REPLY

    Cheruthon Ninan

    In Reply to Sudhir Mankodi 6 months ago

    Fully agree with this view.

    Sucheta Dalal

    In Reply to Sudhir Mankodi 6 months ago

    This is a typical reply -- nothing to fear? You seem to have missed reading the entire article, the documents from CAG reports and the main point being made. I wonder HOW that can possibly happen!! Doesn't matter!!

    Venugopal Reddy B

    In Reply to Sucheta Dalal 6 months ago

    I feel both the aspects are correct, Draconian rules will create hardship to genuine small NGOs and might even discourage them, While dishonest guys will circumvent them with money and influence.
    But it is also fact that majority of the influential NGOs or run by powerful with connections to political and Civil servants and has vested interests. Some of them run by so called self proclaimed self anointed intellectuals are used by foreign nations to drive their own agenda which some times detrimental to Interests of india.

    Meenal Mamdani

    In Reply to Venugopal Reddy B 6 months ago

    I don't think Ms Dalal is saying that the govt should not have strict rules or that they should not be enforced.
    If I understand her point, she is saying that the govt is using the same rules that apply equally to a small NGO whose donations are less than say 10 lakhs and a large NGO whose donations and disbursals amount to several hundred crores.
    Surely we all agree that a bhajiwala at a street corner should be regulated by a different set of rules than those that would apply to an air-conditioned large grocery store.
    The heavy hand of govt not only stifles individuals from engaging in small philanthropic endeavors but also gives the officials in the Charity Commissioner's office ample opportunity to indulge in corruption.

    RBI to Put Urban Cooperative Banks Under Vigil If Their Net NPAs Exceed 6%
    Amidst the regular failure of cooperative banks and massive fraud in Punjab & Maharashtra Cooperative (PMC) Bank, the Reserve Bank of India (RBI) revised its supervisory action framework (SAF). To ensure expeditious resolution of financial stress being faced by some of the UCBs, RBI will place them under supervision if net non-performing assets (NPAs) of these lenders exceed 6% of net advances. Depending upon the severity of the stress, the central bank may ask them to curtail their lending powers, among other safeguards.
     
    In a notification, RBI says, "Although supervisory action taken will primarily be based on the criteria specified under the revised SAF, it will not be precluded from taking appropriate supervisory action in case stress is noticed in other important indicators or parameters or in case of serious governance issues. Reserve Bank will also not be precluded from taking any supervisory actions other than those indicated in this circular, based on merits of each case."
     
    An urban cooperative bank could also be placed under SAF when it incurs losses for two consecutive financial years or has accumulated losses on its balance-sheet. The RBI's trigger is the mess at the PMC Bank recently.
     
    Further, issue of show cause notice for cancellation of banking license may be considered by the RBI "when continued normal functioning of the UCB is no longer considered to be in the interest of its depositors or public", the notification says.
     
    "Supervisory action already taken under the earlier SAF will be reviewed and revised instructions, if any, will be issued to the UCBs concerned," it added.
     
    Following the exposure of scam in the PMC Bank, which has over 9.15 lakh depositors, the RBI imposed restrictions on withdrawals.
     
    A UCB may also be placed under SAF when its capital to risk-weighted assets ratio (CRAR) falls below 9%. Depending on the severity of stress, the RBI says it may take one or more of the actions - advising the UCB to submit a board-approved action plan for increasing CRAR to 9% or above within 12 months, advising the board of directors of the UCB to review the progress under the action plan on a quarterly or monthly basis and submit the post-review progress report to the RBI.
     
    This may also need reduction in exposure limits for fresh loans and advances and restriction on fresh loans and advances carrying risk-weights beyond the specified limit. Restriction on expansion of size of the balance sheet can also be applied, RBI says.
     
    Further, restriction on fresh borrowings, except for meeting temporary liquidity mismatches, could follow as a plan and prohibition on sanction or disbursal of fresh loans and advances other than loans against collateral security of term deposits, national saving certificates (NSCs), kisan vikas patra (KVP) and insurance policies.
     
    Prohibition on expansion of size of the deposits is also an RBI formula to check the UCBs.
     
    The revised SAF will be implemented with immediate effect. Supervisory action already taken under the earlier SAF will be reviewed and revised instructions, if any, will be issued to the UCBs concerned, RBI concluded.
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    COMMENTS

    m.prabhu.shankar

    6 months ago

    The current problem we face in the financial system is implementaion of the existing rules and regulations first. Regulatory bodies should be alert and implement the existing procedural codes which itself will take care of most of the issues that we face. We can focus on new rules later. No point in creating new rules and then not tracking / implementing those rules.

    Ashok Agarwal

    6 months ago

    MAJOR/DANGEROUS CONCERN, WHAT Rbi is taking steps for not making it fool year after year by any banks. Why RBI auditors not arrested/dismissed so far in PMC Bank fraud.When negligence becomes cause of deaths, it becomes criminal negligence. What the RBI do in such case or the only depositors go on dying.

    suneel kumar gupta

    6 months ago

    All these actions do not directly affect depositor who is most imp entity in the banking business. A day will come when people will find other avenues or private parellel business will flourish and bank deposits will be drastically reduced and this business will collapse.

    Anurag Sinha

    6 months ago

    Small but welcome step. RBI is doing some commendable job under Mr Das. but people should be cautious when they deal with cooperative banks, chit funds. so many scams so many times yet people get greedy and end up losing more. Be careful dear people. In this age of information read before you believe. use emails and phones to search and interact before you decide to buy a new product(not just capital market, anything)

    Read and then only invest/buy. Even then start small. Buy small quantities and then buy some more once you witness the real potential/benefit. Being careful will go a long way than being greedy.

    REPLY

    B Ravi

    In Reply to Anurag Sinha 6 months ago

    This is not a question of greedy. When these banks are working 40 years time where were this RBI. One day without notice find that this is under RBI regulation. Why does RBI EXTEND the validity why not take firm decission. Martha sahakari bank having more then 40 branches and the bank is running for last 40 years. Bank was giving 1% more interest then these gov. bank. what is greadyness in this.
    What is the gain of RBI rather interest.

    Hanuman Jayanti

    6 months ago

    How would RBI Catch Coverup Accounts? KYC as mandated was all false. So IS KYC a sham to waste public time. Govt rules KYC to be updated every 2 years. Banks call up customers and ask for KYC again. Where was this accounted in Audit of PMC Bank.

    B Ravi

    6 months ago

    What about Maratha Sahakari Bank ltd which is under your regulation. At least declare in advance that you would take over any other bank so that people will before withdraw their money and need not suffer. you regulate but we retired people are nowsuffering because of your control on Maratha sahakari bank ltd. Yo have made our life vwry misserable at end oflifetime. we are now 75+ in age. Think about it do the needest at earliest

    DrRajesh Bheda

    6 months ago

    rules are ok if they are implemented properly. If proper auditing is done then stress will show much before reaching 6%. Window dressing should face strong action then & only then it will be effective

    NCLAT rejects RoC plea to modify Tata-Mistry judgement
    The National Company Law Appellate Tribunal on Monday rejected to the plea by the Registrar of Companies (RoC) to modify the appellate tribunal judgement in the Tata-Mistry case.
     
    The NCLAT had in its December 18 verdict termed the RoC's decision to allow conversion of Tata Sons from public to private as illegal and RoC had filed a plea at the appellate tribunal to remove the word "illegal" from its verdict among other observations.
     
    The two-judge bench headed by NCLAT Chairman Justice S.J. Mukhopadhaya observed that the judgment did not cast any aspersions on the RoC. The bench had reserved its order in the matter on Friday saying that it would clarify that its order terming RoC decision of allowing Tata Sons to convert from public to private as 'illegal' did not cast any aspersion on the RoC.
     
    Mukhopadhaya said that the NCLAT can only clarify and not change the judgement, adding that the Supreme Court, being the highest judicial authority can change the judgement if it finds it incorrect.
     
    NCLAT in its verdict had ordered the reinstatement of Cyrus Mistry as the Tata Sons' Chairman and also directed the RoC to enlist the company as a public company.
     
    Tata Sons, however, has moved the Supreme Court against the judgement. In another major turn of events Cyrus Mistry on Sunday declared that he would not take up the chairmanship of the group or any other directorial post.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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