Improving governance of non-profit entities

March 30, 2021 3:45 AM

The number of registered societies has increased manifold in the last 20 years, and the estimated total value of output of the 31.7 lakh societies registered in India is Rs 41,292 crore. During the course of explosive expansion of societies, many problems have become apparent. Many of the societies have multistate operations; however, the regulation is premised on the assumption of local nature of operations

The report also states that 54% of the funding for these societies comes from grants, while 16% is from donations and offerings and 16% from incomes/receipts from operations.

By Nagendra Nath Sinha
The Societies Registration Act came just after India’s First War of Independence, in 1860, when the control of the country passed on to the Empire. The British government, being unfamiliar with the ways of Indian governance and probably a little suspicious of the functioning of the East India Company, wanted to fashion the governance on the pattern of its mother country. They were also not sure as to what the workload would be; therefore, they entrusted the responsibility to the Registrar of Joint Stock Companies. This is bare-bones legislation, essentially creating a legal persona and only requiring them to submit annual list of members.

This regulatory structure continued for 90-odd years. Once India’s Constitution was written, the regulation of the ‘society’ fell into hands of state governments, deriving from Entry 32 of the State List on ‘unincorporated literary, scientific, religious and other societies and associations’. Many state governments enacted their own legislations or carried out extensive amendments, framed rules and extended governance. However, the regulatory reach and capacity of the legislation remained weak.

Meanwhile, the number of such societies has registered explosive growth as a result of expansion of the economy and the society, and realisation of the useful role that the civil society and self-governing institutions can play in managing their activities in many sectors of public and private activity, discharging welfare functions and managing public private partnerships without the need for extensive legislative regulation. Sports bodies like the BCCI, hospital and educational institutions, government bodies like state health societies, etc, all have been registered as ‘societies’.

The number of registered societies has also increased manifold in the last 20 years. A report on the non-profit institutions (NPIs) in India (March 2012) by the National Accounts Division of the Central Statistics Office (the Ministry of Statistics and Programme Implementation) found that there were only 1.44 lakh societies registered till 1970, followed by 1.79 lakh registrations in the period 1971 to 1980, 5.52 lakh registrations in the period 1981 to 1990, 11.22 lakh registrations in the period 1991 to 2000, and as many as 11.35 lakh societies were registered after 2000. This pace has continued.

According to the MOSPI report, the estimated total value of output of the 31.7 lakh societies registered in India is Rs 41,292 crore, which is the sum of salary, wages and allowances, honorarium paid, interest paid, rent paid, other operating expenses (goods and services purchased for current activities of institution), provision for depreciation, taxes paid, and consumption of stocks. The report also states that 54% of the funding for these societies comes from grants, while 16% is from donations and offerings and 16% from incomes/receipts from operations.

During the course of explosive expansion of societies, many problems have become apparent. Many of the societies have multistate operations; however, the regulation is premised on the assumption of local nature of operations. Many institutions having huge scale of financial operations—like the BCCI and many research institutions, societies created to administer schemes or run institutions, temple bodies, or even non-profits—are covered by the said legislation, but the level of regulation comparable to companies seem to be non-existent.

Even a simple act of filing of annual audited returns is not insisted. Many of the NPIs traced had poor employment and financial records, and even if they did, they often refused to furnish their audited accounts, especially if they did not receive funds from statutory bodies. Lastly, even if societies file their financial statements with the Registrar’s office, there is no mechanism to maintain this database—a sad commentary on the quality of statistics at the state level.

A uniform countrywide approach is essential, therefore. There are some other regulations—for example, those arising out of the Income Tax Act or the Foreign Exchange Regulation Act, which only cover some aspects of governance and cover a minor aspect of it. There is also a mechanism called the NGO Darpan, which has been created for those NGOs that seek central government funding or support. Again, its coverage, at best, would be partial.
A comparison with the Companies Act is instructive in this regard. The companies’ legislation governs not only the way companies would be formed and operated, governed and managed, how the Board of Directors should be selected, key managerial roles and responsibilities, how their Boards will be constituted, but also how they should accept share, take deposits and pay dividends, keep accounts, file returns, resolve disputes, and also provisions for inspections and investigations. A more significant aspect of the regulation is setting up elaborate machinery for registration as well as their governance. In this connection, the response of the central government has been vigorous. Not only there is a separate ministry for its regulation, but also an elaborate set-up of the Registrar of Companies with multiple offices and sufficient staff.

Further, the set of tribunals for settlement of disputes and its appeal has also been created. Computerisation of its functioning has added to the effectiveness of the administration of the Act. It may not be perfect, but is certainly vigorous.

So, what are our arguments for improving the governance framework? First, for improving the governance you need data. It is extremely difficult to get any data in the current set-up, fragmented and paper-based as it is. Second, to ensure democratic functioning of NGOs, as participation in these provides education and experience to a large number of people in governance, certain minimum regulation is needed—for example, conducting elections and holding regular meeting of its Board and general body, finalising accounts, ensuring audit, preparing annual reports, and so on.

As mentioned earlier, 52% of funding in the 2012 survey of NPIs came from public sources; therefore, there is sufficient public stake in efficient and transparent functioning of the NGO sector. Fourth, if we wish to add credibility to the entire NGO sector and that would help more philanthropy money to flow in, improvement in governance and regulation is essential. Observers may recall that the finance minister had floated the idea of a ‘social stock exchange’ for NGOs. Some of it might have arisen from the concerns for bringing in more efficient governance.

Fifth, registration of societies and amendment thereto is a harrowing experience. Improving governance and service delivery would add to the ‘ease of doing business’, in this case actually ‘charity’ credo of the PM.

So what is our prescription for it? One, enact a model law and circulate to all the states for adoption, as has been done for many areas. Two, formulate comprehensive modular software, as has been done for registration of land-related documents. There should be flexibility therein for states to add modules to it. States and the Union could form a SPV for doing it, and this SPV could charge the NGOs a small fee for maintenance of their data and it could be linked to the size of operations. Three, set up separate department and directorates, as the case may be, in states for governance of NPIs.

Some observers have suggested setting up an Office of Charity Commissioner (as in Maharashtra). If the state has done so for cooperatives, there is no reason why it should not do for NGOs choosing the society route. An efficient dispute redressal mechanism also needs to be created. Currently, the only recourse possible is civil courts. Not only the costs are prohibitive, but this also adds to the burden of courts. The central government may also think of supporting states under a centrally-sponsored scheme for strengthening the regulation of NGOs, which may, inter alia, support smaller NPIs by way of capacity-building. Self-regulation can also be part of the regulatory framework, with light-touch regulation being applied to such entities.

The central government may need to legislate for multistate societies for which recommendations of an expert group are already available since July 2012. At the central level, the Ministry of Corporate Affairs (MCA) may expand its current involvement in supporting states in governing the registered societies and may draw from its rich experience of administering the Companies Act. Mandatory registration and periodic renewal under Section 12A of the IT Act, linking it with a common registration number, for the moment drawn from the NGO Darpan, may help bridge transition to the proposed regime.

There is another unfinished agenda in governing the NGO sector relating to fragmentation of domains for administering different governing frameworks concerning NGOs. The Ministry of Law and Justice is the administrative ministry as far as ‘trusts’ are concerned, while other forms of registration such as those for societies, S8 companies, etc, are with the MCA. It may help if all of these are brought under the MCA.

The author is secretary, Ministry of Rural Development. Views are personal

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