Speculative Investments

Speculative Investments

Rule 4 of FCRR 2011 provides that FC cannot be invested in any kind of risk prone investment. It prohibits investments in:

  1. Equity linked mutual funds or shares
  2. Any investment which has element of risk with gain or loss
  3. 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, following activities are speculative activities:

  1. 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 kind of mutual fund and investment in share market is speculative activity.
  2. 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 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 organization.

Chit scheme in this case denotes Chit scheme denotes a transaction by which a person 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 subscriber and the one who bids for highest discount is declared the winner and is given the prize amount. The amount that the chit winner forgoes as discount is distributed amongst the subscribers as dividend after subtracting the promoter’s commission.

Investments which are not speculative

A debt-based secure investment shall not be treated as speculative investment. However, what kind of investment can be considered as debt secure investment is ambiguous. For instance, investment such as a Mutual Funds Monthly Income Plan, Income Fund, Short Term Fund, and Ultra Short Term Fund & Liquid Fund can be considered as debt-based secure investment is not clear.

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.

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