Rule 4 of FCRR 2011 provides that FC cannot be invested in any kind of risk-prone investment. It prohibits investments in:
Equity-linked mutual funds or shares
Any investment which has an element of risk with gain or loss
Participation in any scheme related with chit fund, land, etc which promises high return and is not related to the objectives
Under rule 4 of the foreign contribution (regulation) rules, 2011, the following activities are speculative activities:
Any activity or investment that has an element of risk of appreciation or depreciation of the original investment, linked to market forces, including investment in mutual funds or in shares such as investment in various kinds of mutual fund and investment in share market is a speculative activity.
Participation in any scheme that promises high returns like investment in chits or land or similar assets not directly linked to the declared aims and objectives of the organization or association is a speculative activity.
Therefore, an organization borrowing money under FCRA cannot invest in chit fund or money circulation scheme or activities like lottery or real estate that is extraneous to the functioning of the organization.
Chit scheme, in this case, denotes Chit scheme denotes a transaction by which a person is generally known as foreman enters into an agreement with a specified number of persons that every one of them shall contribute a specified sum of money, generally by way of monthly installment over a definite period. The money that is pooled in is then auctioned every month amongst subscribers and the one who bids for the highest discount is declared the winner and is given the prize amount. The amount that the chit winner forgoes as a discount is distributed amongst the subscribers as dividends after subtracting the promoter’s commission.
Investments that are not speculative
A debt-based secure investment shall not be treated as a speculative investment. However, what kind of investment can be considered as debt secure investment is ambiguous. For instance, investments such as a Mutual Funds Monthly Income Plan, Income Fund, Short Term Fund, and Ultra Short Term Fund & Liquid Fund can be considered as a debt-based secure investment is not clear.
The compliance requirement for investment
Every association shall maintain a separate register of investments. Every register of investments maintained under the Act shall be submitted for audit to a chartered accountant.
An organization that wants to borrow money and is registered under FCRA needs to ensure that it is not engaged in speculative activities and is abiding by the compliance requirement under the Foreign Contribution (Regulation) Rules, 2011.