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Be practical about philanthropy

A trust or Section 8 company works best for families. For a group of like-minded people supporting the same cause, opt for a society structure

Tinesh Bhasin  |  Mumbai 

Women pradhans bringing about change in Bihar, UP

Elizabeth and Sunil Mehta's Muktangan programme is probably the best reflection of India's changing philanthropy space. An initiative of the Paragon Charitable Trust, it educates underprivileged children in innovative ways. When they started the programme in 2003, the annual budget was Rs 10-12 lakh. As the programme expanded, so did the donors and their contributions. Muktangan now has an annual budget of Rs 12 crore.

According to Bain & Company's India Philanthropy Report 2015, there were 100 million more donors in 2013, compared to 2009. "The philanthropic space has been transformed. Today, a deeper pool donates larger amounts to a greater number of players in the non-profit sector," it says.

While it's easy to cut a cheque, but it's not as easy to know how the funds were deployed and gauge the impact. Many wealthy people, therefore, prefer to set up their own entities, where they have more control and accountability.

You need to, first, narrow down on a cause. In India, education receives the highest grants, followed by health care, says Noshir Dadrawala, chief executive of the Centre for Advancement of Philanthropy - founded among others by H T Parekh of HDFC, Russi Lala of Sir Dorabjee Tata Trust, and Darius Forbes of Forbes Marshall.

Before giving out donations or grants, work with some non-governmental organisations (NGOs) in the chosen space, suggests Mehta. This will help the person to understand how NGOs implement projects and raise funds. If you only have a small sum to spare for philanthropy, it's better to donate directly than forming your own entity. "An entity makes sense for those who want greater control, accountability, and wish to support the cause continually," says Dadrawala.

Vijay Dhingra, partner, Deloitte Haskins & Sells, says before a person set out to form an entity, he/she needs to consult the family members. They need to agree to the idea. After the person passes away, it's the family members that will need to continue with the activity.

Be practical about philanthropy
Structure of entity

While many address charitable organisations as NGOs or foundations, these are not the legal terms. In India, philanthropy can be done through three types of legal entities - a trust, a society, or a Section 8 company (a Section 25 company under the earlier Companies Act). While all the three have the same income tax (I-T) laws governing them, most individuals or families opt for either a Section 8 company or a trust for philanthropic work. The well-known charitable entities like those of the Tatas are registered as trusts, says Dadrawala.

"Before deciding on the entity, the person should study the laws of the state they wish to function in. If one is looking for any benefits from the government, like land for education or an institute, they need to be registered as a society or Section 8 company," says Rajesh Narain Gupta, managing partner at SNG & Partners. In some states, the charity commissioners regulate societies and trusts, which sometimes result in excessive bureaucratic intervention and red tape.

Dadrawala says none of these institutions can have business income of over 20 per cent of the total income if they want tax relief - except if they are working for relief of the poor, education, medical relief, preservation of the environment or preservation of national monuments. Else, they need to pay tax on the entire income.

He also suggests one starts with a small amount, until the entity receives permission for various tax deductions from the I-T department. All the three structures also have restrictions on where the corpus can be invested. For example, investing in stocks is not allowed, either directly or indirectly.

Trusts: This is the easiest to form and can be done within a week. The cost of registration is less than Rs 10,000. Usually, a trust needs a minimum of two trustees. Most of the functioning of a trust depends on the deed. For example, if one trustee has to be given any special voting rights, the deed should mention it. The recurring cost is upwards of Rs 50,000 a year, including the cost of maintaining the books of account, audit cost and fee for filing annual I-T return.

Section 8 company: This is more complex as compared to a trust or society and could take up to six months. Running a charitable institution under this structure helps in standardising of governance mechanisms and giving the entity a professional aura, says Arpita Vinay, director at Centrum Wealth Management.

A minimum of two individuals can register this. It comprises a two-tier structure, a general body and a board of directors. The voting rights can vary, depending on the shareholding, and it requires an annual general meeting and at least, one board meeting every quarter. The compliance cost and procedures are similar to that of a trust. The only additional requirement is that the filings need to be done with the registrar of companies.

Society: This structure is used when like-minded people come together. Individuals and families wanting to do charitable work usually don't opt for this structure. It requires a minimum of seven people to form a society. It takes up to two months to register it and costs less than Rs 10,000. It comprises a two- tier structure, a general body and a managing committee. A general body meeting is required as prescribed in the bylaws. The society also needs to have elections to select members of the managing committee.

Take help from professionals

There are only a few trusts or Section 8 companies that do the actual work on the ground. In a majority of the cases, they donate the money to a non-governmental organisation (NGO) working in the area that the trustee or board of directors are passionate about.

There are professional agencies that connect philanthropists to such NGOs. Dasra was the first such agency started in India that works with most big trusts. Managing partner and co-founder Neera Nundy explains the agency runs a programme called Dasra Giving Circles. A group of 10 philanthropists come together for a common cause commit a minimum of Rs 30 lakh each for a period of three years to an NGO. The group is presented three choices of NGOs, after Dasra has vetted these on various parameters such as compliance, projects, and possibility of scaling up their operations.

The group unanimously selects one of the three, based on its work and the milestones the NGO wants to achieve in the next three years. Dasra not only monitors the fund deployment and achievements; It also gives regularly updates to the donors on the impact of their funding. And, it also provides support to the NGO and helps it achieve scale.

'Do all your due diligence before donating'

When starting out , identify one or two good NGOs working for the cause that you are passionate about. Start interacting with them and get involved. Donating money does give the satisfaction of helping a good cause but nothing can beat the happiness one experiences by working on the ground.

This will also help you to do the due diligence of the organisation before giving them funds. You can also avail services of organisations that evaluate NGOs. These include Dasra, GiveIndia, United Way of Mumbai, Credibility Alliance and Samhita. If it is not convenient to work with them, visit one of their programmes at least once and get a feel of their work. Satisfy yourself fully before putting the money.

Don't start a programme on your own unless you have relevant work experience and support of the community. It's very difficult for a community to accept an outsider and trust him/her, even if you have the best of intentions.

Sunil Mehta
Managing trustee, Paragon Charitable Trust

First Published: Sun, January 17 2016. 22:59 IST