The International Journal
of Not-for-Profit Law

Volume 4, Issue 2-3, March 2002

India

Some Effects of the New Budget Bill

By AccountAid India*

Many NPOs in India make grants to others. These organisations are allowed a deduction for the grants (made) from their taxable income. The NPOs are also allowed to accumulate up to 25% of their income for future use.

The new Budget has proposed that NPOs must spend 100% of the income in the year of receipt. If this is not possible, then they can accumulate it for a specific project. The accumulated amount must be spent within the next four years. Spent, on what?

If the new Budget bill is passed, then the expenditure from accumulated funds must be direct expenditure (spent by the NPO itself). This means that accumulated funds cannot be used to make grants to other organisations.

This does not make a difference to most implementing NPOs. However, grant-making agencies will be in great difficulty. They must make their grants in the first year itself. Or pay 35% tax on the grants made next year!

Why has the Government proposed such a change? It may have thought that people will be able to avoid the 100% expenditure requirement by passing the unspent balance around.  This change will help the Government put a stop to it. However, in this process, Indian grant-making agencies may fold up. Financial networks will become unviable. However, foreign grant-makers will remain unaffected.

One is reminded of a Panchatantra story at this point: A king had a faithful monkey for a bodyguard. One day the monkey was fanning the king while he slept. Just then a small fly started buzzing around the king. The monkey tried to wave the fly away using his fan. When this did not work, he picked up the king’s sword and slashed at the fly, which had now settled on the king’s chest. The fly flew away, and the king was …

So as Kartak, the jackal says to his friend Damanak in Panchatantra, it is better to have an intelligent enemy rather than a foolish friend…

[References:

Proposed amendments to Section 10(23C) and 11. Union Budget 2002-03

The above are budget proposals, presented here for discussion only. The final law may be different. The interpretation may also vary somewhat on a deeper study in a specific case.

Section references to Income Tax Act, 1961. Applicable to India

*Copyright AccountAid India 2001.

AccountAid is an Indian NPO which provides information about legal, fiscal, and accounting developments that affect the NPO sector in India.  This note is taken from the AccountAid Listserve.  Information on using this or other AccountAid material is available at www.AccountAid.net.  Please do not re-circulate this information without the copyright notice.

Effective Governance Through Effective Boards

By Noshir Dadrawala*

The Centre for Advancement of Philanthropy (CAP) held a half-day conference on the theme, “Effective Governance Through Effective Boards”, on January 25, 2002 at West End Hotel, Mumbai. The chief resource person was Dr. Marilyn Wyatt, Director (Global Programme) of the National Center for Nonprofit Boards, (recently renamed “Board Source”) U.S.A.  About 45  senior Board executives and staff of philanthropic organisations in India participated.

Mr. R.M. Lala, Chairman of CAP and Director of Sir Dorabji Tata Trust, presided over the conference.

Mr. Noshir Dadrawala, Executive Secretary of CAP, gave the introductory address. He said that Boards are expected to provide the right leadership and a sense of direction to the organisation. “Good quality meetings held by the Board,” he stressed, “are the key to good decision making. Often, it is at the meeting table that the quality of the organisation and its leaders is truly revealed.”

Mr. Dadrawala also stated that effective Boards were characterised by a high level of interest in and commitment to their organisation’s objectives, where the Board members were reasonably intelligent and competent, with the courage of their convictions and willing to work in co-ordination with others. He added that effective Boards usually have good rapport with their staff and it was this “partnership with the staff” that helps the organisation to grow. He felt that staff members, as well as Board members amongst themselves, had the right to disagree, although everyone, finally, had to accept the majority decision.

Mr. Lala felt that the Chief Executive should neither be a doormat nor should he be aggressive, because otherwise the trust would suffer. The Chief Executive, he emphasised, should be a person of integrity, and one who is able to build a team of committed persons. Recounting/recollecting from his own experience as Director of Sir Dorabji Tata Trust, he said that he used to always take his senior (executive) staff to Board meetings in order to give them the necessary exposure and training and make them feel that they matter. “Their growth is my mission,” he stated.

Mr. Lala said that Indian Boards should recognise the expertise around them and tap the minds of those who were interested in volunteering of themselves.

Dr. Marilyn Wyatt said that in the Western world, governance by Boards was linked to terms like accountability, transparency, self-regulation and sustainability. Good governance by Boards had started only 20 years ago, she stated.

“Governance, according to the Webster Dictionary,” said Dr. Marilyn Wyatt, “was derived from the Latin word, “gubernare” meaning “to steer, to guide” and it included the Board’s authority to make decisions and direct the activities of the organisation, as well as being accountable for the organisation’s conduct.”

Governance and management exist in relation with checks and balances. Where the Board and staff members are the same, it would be difficult to distinguish between governance and management. This would be a tricky situation, felt Dr. Wyatt, with the same people making and executing decisions.

In some countries, an unenabling legal environment was one of the hurdles to good governance faced by NGOs, with the laws governing NGOs being very vague and contradictory. She said that in Egypt, there was a government official on every Board and therefore, independence of Board members was hampered. In Czechoslovakia, there were no Boards, only civic organisations existed. In Slavic languages, she added, governance and management meant one and the same thing.

Corruption was another big hurdle and it could border on conflict or duality of interest, especially in decision making.

The Board, she said, should be a mirror of the organisation to the public and articulate to them about the work the organisation was doing. She observed that some Boards were ineffective because they didn’t know what to do – there was no strategic planning, no resource development because the Board, as a team, was unaware about such things.

Dr. Wyatt stated that although a strong, charismatic CEO, with his vision and leadership, was an asset in several ways, yet this same person could also be an obstacle to good governance – he might put family members on the Board, leading to “passive governance” by the Board. Moreover, a Board headed by a strong CEO would be in a very tight spot if this CEO left the organisation or if there was a scandal or if the organisation ran out of money.

“Good governance,” observed Dr. Wyatt, “is the key to sustainability of individual organisations and the non-profit sector as a whole.”

Dr. Wyatt observed that while the private sector was geared towards profit-making, the non-profit sector benefited the public and had services to offer to the public as a whole – safeguarding this responsibility was one of the keys to effective non-profit governance.

With regard to what a good, effective Board should do, Dr. Marilyn Wyatt said that it should set the direction – it should ensure the long-terms goals of the organisation were achieved, and should articulate the values of the organisation and delegate authority to the CEO. The Board should identify the resources that were needed and the ways to obtain these, as also channelise these resources towards the organisation’s goals.

An effective Board, continued Dr. Wyatt, provides oversight, evaluates outcomes and establishes policies. It ensures accountability and monitors the progress of the organisation in areas of programming.  It “opens doors” for the organisation. It models its work according to the strategic needs of the organisation, agrees on the organisation’s mission and sometimes even rewrites mission statements.  With the help of the CEO, it focuses on what matters and concentrates on the big picture.

Additionally, explained Dr. Wyatt, a good Board is one where the Board members function as a team, as a collective body that is legally responsible – it functions within the legal framework and also works according to the spirit of the Law. Such Boards recruit new Board members strategically. There is a Nomination Committee on some Boards which identify individuals who have the proper skills. Finally, an effective Board evaluates its own performance periodically.

Dr. Wyatt said that Boards could be made to function more effectively through capacity building, community building and tools. “Capacity building,” she said, “entails giving NGOs the knowledge and systems they need to improve the effectiveness of the Board of Directors, while community building involves bringing together NGO leaders and experts who are interested in governance, to share their experiences and exchange information. The tools, like publications, research projects and online resources, would help in capacity and community building and would, therefore, lead to more effective functioning of the Board.”

“Good governance,” concluded Dr. Wyatt, “is a victory, not a gift. It’s a difficult job, a challenge, and hard work pays off in the end.”

After a short tea break, the discussion session began.

Ms. Tara Sabavala of the Sir Dorabji Tata Trust inquired whether the desire for change came from the Board or the CEO. Dr. Wyatt said it could come from any source – the Board needed to evaluate its performance and recognise the need for change.

Dr. Armaity Desai, former Director of the Tata Institute of Social Sciences (TISS), felt that employees should also participate in policy decisions of the Board. Dr. Wyatt felt that the staff should support the Board and although strategic planning may have been done by the Board and the staff working closely together, yet it was the Board that was finally legally and ethically responsible for decision-making.

Mr. Arvind Deshpande, Founder-Director of CAP and Honorary Secretary of the Leslie Sawhny Programme, noted that some Board members may be there only for their “star value”, who never participated in Board meetings, yet whose names helped the Board to raise finance. Was this okay? Dr. Wyatt stated that in U.S.A., such eminent people’s names would be included on the Advisory Council, but NOT on the Board of Directors. These high profile names could then be used for the organisation’s advertisements, on its letterheads. She added that if such people were inducted onto the Board, then the Board should also induct committed people who will do all the hard work.

In response to Mr. Deshpande’s second query as to how Boards should be evaluated – whether by their own objectives or by expectations from other people, Dr Wyatt felt that they should set their own standards to evaluate themselves against.

Dr. Swapan Garain of the S.P. Jain Institute of Management & Research stated that a good  relationship between the Board and the CEO, as well as the independence of the Board, was necessary for effective governance.

Mr. M. Raghuram, Senior Advisor at Mahindra & Mahindra, was of the opinion that only a person who was committed to the core values of the organisation should be invited on the Board.

Dr. Roda Billimoria, Managing Trustee of the Sir Shapurji Billimoria Foundation, agreed with Mr. Raghuram and said that at the Rite Step, trustees were selected with regard to their degree of commitment and professional involvement with the issue of integrated education. As a result, in three and a half years of existence, they had moved forward, from taking little steps to big strides.

Mr. Darius Forbes, Founder Director of CAP and Patriarch of the Forbes Marshall Group of Companies, said that when business organisations were formed, their objectives (mentioned in their registration documents) were always broad-based – why, then, was so much insistence always placed on the objectives of NGOs, as mentioned in their trust deeds/memorandum of association, being very specific? Dr. Wyatt stated that in the U.S.A., the organisation’s core objectives were put in the mission statement, which would be a very concise statement, just 25-30 words about why the organisation exists, what it does and who it serves. The other broader outline of objectives could be incorporated in the general statement. The mission statement, she emphasised, was like the Northern Star – the point of reference for navigating organisations. She also made a mention about the necessity of all Board members knowing their “elevator speech” (a 3 to 4 minutes speech about the kind of work the organisation basically does), in case an outsider inquires about its organisation (outside the Boardroom, e.g., in the elevator).

Dr. Aniruddha Malpani of the Health Education Library for People (HELP) suggested that CAP could act as a match-making organisation for NGOs and people who are interested in being on the governing Board.

In this connection, Ms. Zahida Noorani, fund raising trainer and consultant, said that in the U.S., there were agencies who would interview prospective board members and prospective NGOs and try to match the prospective person with the requirements of the NGO.

Dr. Armaity Desai noted the different environments in which we function and the diverse variety of Indian NGOs,  and the community-based organisations at the local level and youth groups and women’s groups at the grassroot levels. Many NGOs manage themselves (without any Boards) and do their own decision-making, therefore acting as beneficiaries as well as the organisers of such organisations. She said that there was tremendous variety of NGOs and each variety had its own issues and problems. Therefore, she felt that CAP should act as a sort of mediator and find out the different kinds of intervention needed by the different groups.

While concluding the session, Mr. Noshir Dadrawala said that CAP will continue to stay in touch with Dr. Wyatt and Board Source and consider various programmes for sensitising boards, including publication of resource material and board development meetings and conferences.

* Noshir Dadrawala is Executive Secretary of the Centre for the Advancement of Philanthropy.  He can be reached at centphil@bom7.vsnl.net.in.

Finance Bill Provisions Affecting NGOs

By Noshir Dadrawala*

The Budget proposed by Finance Bill 2002 severely restricts the rights of trustees in India to allocate funds to the objects of the trust.  Is such a restriction at all necessary?  One would like to question the rationale of the proposed changes sought to be passed as law.

Any restriction on the power of the trustees could be justified only if it gains better achievement of the objects of the charity as a whole.  The proposal to tax, for instance, donations to other charities if it is made out of accumulated surplus is a glaring example of unnecessary legislative interference without gaining any discernable goal.  All charities cannot be presumed to have the wherewithal to efficiently achieve an object of charity.  If a trustee funds another trust better qualified, why should a donation to that trust be held improper?  Flow of funds from one charity to another will only help philanthropy and cannot be viewed with suspicion as one would view inter-corporate loans!

Let us examine the budget proposals:

The budget proposal does away with free accumulation up to 25% of the income of the trust each year.  This free amount was available to the trustees to create endowment funds, sinking funds for property or made available on a buffer if donations/grants fail to come on time.  It was a wholesome provision.

This has been done away with.  What is the reason?  Does it mean we can accumulate  more than 25% each year?  The answer is no, as we have to spend it in the following five years.  Here, also, there is an additional restriction – while in the earlier provisions, 25% was totally free of any encumbrance, in the budget proposal, however, the accumulated income has to be spent on “specific purpose” and should not include donations to other charities.

What is this specific purpose?  As per the earlier CBDT circular, specific purpose would relate to infrastructure facilities for implementing a particular object of the trust or capital expenditure on creating the necessary asset for the purpose of the object.  One will notice it is no more a simple application on the objects of the trust.  To get the assessing officer to give his consent for application under section 11(2) is, by itself, an uphill task!

One questions as to what is gained by these fine distinctions between the plain object of a charity and a specific purpose of a charity?  This has no merit at all, except to increase debate with assessing officers and consequent litigation.  The proposal seeks to imply that the ideal format will be for each charity to spend 100% of its income received on the objects in the same year and if not received, then only in the year of receipt or the year following it!

To tax donation from one charity to another out of its accumulated income has, indeed, no rationale.  How much tax will such a proposal yield? And from which fund can this tax be paid?

* Noshir Dadrawala is Executive Secretary of the Centre for the Advancement of Philanthropy.  He can be reached at centphil@bom7.vsnl.net.in.