Donor Due Diligence


Understanding Organisation Due Diligence for Donor Funding

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Session layout
  1. Donor landscape in India
  2. Overview, rationale, importance, process, being ready
  3. Institutional areas covered during due diligence viz.,
    • Constitutional
    • statutory and regulatory
    • Mission, Vision and core values
    • Governance
    • Policies and procedures
    • Audit and assurance
    • state of health-financial statements
    • Visibility & Reputational


Social sector investment in India

(Source: India Philanthropy Report 2024-BAIN & Co)

*HNI/UHNI includes Family Foundations

-HNI-net worth of Rs. 5 cr, -VHNWI-net worth between Rs. 5 cr and Rs.25 cr, -UHNI-net worth above Rs. 25 cr


So which are the donor categories in India

Donor due diligence is imperative for all above funding entities also considering specific regulations maybe except retail.

What donors look for before funding NPOs


Due diligence

  1. Literal meaning of due diligence is ‘required carefulness’ to avoid harm or loss
  2. Due diligence is universal whether it is for profit or not for profit
  3. In donor funding parlance, due diligence is scrutiny/evaluation of an organization and its work by a donor for selection to partner on an engagement.
  4. The key areas evaluated during donor due diligence
    • Organizational due diligence
    • Programmatic due diligence
  5. Common scenarios for donor-donée engagement
    • Donor reach out to organization directly
    • Organization reach out to donor directly
    • External agency hired by donors reach out to organization
    • Organizations apply for grants against EOI/RFP placed in public domain


Rationale for org due diligence

Objective for org due diligence


Data collection for due diligence

Methodologies for data collection for due diligence

  1. Desk review through secondary data
  2. Data obtained from organisation
  3. Self-assessment checklist obtained from NGO
  4. Scrutiny of audit/assurance reports of past/current donors
  5. Onsite visit/meeting org leadership for org due diligence
  6. Field visit for programmatic due diligence for a pending grant proposal

The exercise maybe conducted by donor staff or third-party professionals

Process of org due diligence
  1. Begins once a proposal is submitted against EOI or standalone as pre-award activity of the grant management life cycle
  2. Conducted by grantor before formal engagement with a grantee
  3. Involves detailed scrutiny for various aspects of compliance, finance etc
  4. Hard and soft due diligence-quantitative data vs qualitative factor


Areas covered during Org due diligence

  1. Constitutional
  2. Statutory and Regulatory
    • Registration/approval
    • Compliance
      • Registration related
      • Constitution related
  3. Mission, Vision and core values
  4. Governance
  5. Policies and Procedures
  6. Audit and Assurance
  7. State of financial health-financial statements
  8. Visibility

Constitutional

1. Type of charitable organisation permitted in India as per applicable law:

Each type of entity has its unique features. We are talking of public charitable or religious cum charitable institution but not private or religious institution. Mere constitution does not entitle the entity to benefits like tax exemption, FC receipts etc unless compliance of such specific laws is ensured.

2. Registration/incorporation documents-MOA C RCR for society, Trust deed for trust and MOA and AOA for section 8 company

These documents is charter and rules and procedures for running the entity

3. Mandatory provisions-name, state, geography, objects, General body, Governing body, Powers and Duties, Accounts, Banking, Audit, Dissolution, irrevocability for trust.

Very important that constitution documents are complete

4. Registration of constitution documents with appropriate authorities as per statute and state procedures-sub registrar or charity commissioner for trust deed, deed and not trust is registered, Registrar of society or as prescribed for society and ROC for section 8 company both for section 8 License and COI

5. Knowing your registration no and date is crucial-like for a trust

2a. Statutory Registration/Approval

Please note: Information is for reference only. Read our disclaimer here.

Areas of Internal controls which are focus during Donor Financial Due Diligence

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Why adhere to filing requirements?

2b (i). Compliance-Regulatory (Reporting)

  1. Income tax filing
    • Form 10B/10BB-Annual Audit Report
    • Form ITR-7-annual income tax return
    • Form 10BD-statement of donation
    • Form 10BE-Donation receipt/certificate
    • Form 9A/10 for deemed application/accumulation
    • Form 15CA/CB for making remittance abroad
  2. Income tax proceedings-ITR-7 acknowledgement, IT assessment-143(1) and (1A), 143(2), 143(3) etc
  3. FCRA
    • Annual Return in Form FC4
    • changes through forms FC-6A to 6E-change in name, objects, FC bank, office bearers
    • Renewal in Form FC-3C if covered through blanket permission (31.12.24 at present)
  4. TDS/TCS related
    • Monthly challan -Quarterly return
  5. EPF/ESI-ECR for EPF and payment challan for ESIC-15th of following month. Six monthly ESI return (Apr-Sep-11 Nov, Oct-March-12 May)
  6. PT payment as per state requirement
  7. SCE-reporting as per specific state act including annual reporting as required
  8. GST-monthly payment challan based on GSTR-3B, Monthly or quarterly return and Annual GST Return
  9. Gratuity-GGS policy premium based on actuarial calculation for compliance with Payment Gratuity Act
  10. Annual disclosure requirements as per Listing Obligations & Disclosure Regulations (LODR) of SEBI if registered on SSE

2b (ii). Compliance-constitution related

Annual reporting to registration authority

Vision & Values

Mission, Vision & Core Values of an organisation share the purpose of its existence and its direction and culture.

Why? The above helps donors assess whether there is alignment of organisation with their funding priorities and goals

Formulation, revision as org evolves and implementation in letter and spirit as robust internal controls framework. Policies should facilitate action and therefore policies are dynamic documents evolving with the org.

Policies should be in simple language and easy to understand and follow by all staff categories, that is key.

Audits & Assurance

Type of audit conducted for NPOs

Are statutory auditors approved by the General Body and with a formal agreement.

Audit process-periodicity, MRL, ML, independent auditor report and financials with Unique Document Identification No (UDIN) no from UDIN portal of ICAI, ATR.

Red flags, adverse observations, litigations etc pointed in audit reports.

Assurance undertaken-broader range of subjects.

Audit and assurance provide proxy indicators to donors on red flags for deciding to fund or otherwise Often, donors do get in direct touch with auditors.

Annual financial statements-separate for FC funds

Provides insights and assurance on ‘state of financial health’

Key points:

Key components of audited financial statements:

Balance Sheet-liability and assets of an org as at a point of time
ICE statement during a time period
RCP (cash) statement

Movement of inflow and outflow of cash

Accounting Policies and Notes to Accounts

Most organisations do not pay attention to this, many times these are not included in financial statements

Accounting policy exhibits the standards followed for arriving at and presenting various items of financial statements. ICAI has prescribed accounting standards to be followed so that the financial statements are standard, comparable and consistent. Notes to accounts is management’s explanatory notes for certain important items of financial statements for explaining and clarifying to the reader.

What do the donors look in audited financials?

Visibility & Reputational-Market due diligence

Please note: Information is for reference only. Read our disclaimer here.

Preparing for a Successful Financial Due Diligence by Donors with Practical Tips

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Risk-control tangle

What are internal controls

Internal controls are rules, procedures and mechanisms that help mitigate risks (risk management) to an acceptable level. Internal Controls are an integral part of an NGO's planning, implementation, monitoring and achieving desired results

Internal controls help with:

Examples of Internal Controls

What donors focus while reviewing Internal controls during due diligence

Governance & Delegation


Governance & Delegation

Accounts and Finance


Costs, Budgets and Budgetary Control


Human Resources

HR policy is a key policy that donors look for which details

Understanding of various social security laws-central and state is essential so that policy and procedures are as per law

Team due diligence: leadership, experience, alignment with mission, vision and culture values, transparency etc


Procurement

Procurement Policy

Fixed asset and inventory management

Cash and Bank

Grant and donor management

Statutory proceedings and penalties

MIS and software related

Integrated MIS where all parts are on the same app.

Mandatory accounting Record and Retention

The specified books of accounts shall include:

Other documents


Donors may stipulate record retention clauses in their respective grant contracts. For other records, specific provision maybe made in policy


Tips for making your organisation due diligence ready

Please note: Information is for reference only. Read our disclaimer here.

Understanding, Owning and Sharing a Donor Grant Contract Among Internal Stakeholders

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Session layout

What is a Grant

Exchange transaction vs Grant

  1. Exchange transaction (as per GST Act) involves:
    • Supply of goods and services
    • Consideration
    • In course of furtherance of business
  2. Grant is not exchange transaction since there are
    • No specific beneficiaries
    • Nothing in return from beneficiaries or benefit derived by grantee
    • Not for furtherance of business

Understanding above for grant contract is crucial otherwise contributions maybe considered as exchange transactions inviting GST and TDS implications and also charitable status maybe jeopardised

Grant Management

  1. Involves two key players-
    • Grantmakers-grantor/donor
    • Grantseekers-grantee/donee
  2. Grant management is a system that includes identifying, applying for and securing grants, adhering to grant conditions, evaluating outcomes.
  3. Grant management process in grant management system (GMS) is the grant management lifecycle

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Grant Management Life Cycle

  1. Pre award
    • Planning-need identification, SWOT, due diligence preparatory etc
    • Scout Funding opportunity
    • Grant application & review-eligibility and Qualification
  2. Award
    • Award Negotiation
    • Award Decision
    • Award Notification/Contract
  3. Post Award
    • fund request-advance, reimbursement etc,
    • Implementation
    • Reporting-program and finance
    • Post award amendment-key changes and approval, budget realignment, NCE
    • Performance/impact
    • Closeout
    • Reapplication

Principles of grant management

Pre-requisites for robust grant management system

  1. Policies & Procedures (Finance & HR)-ensuring strong internal control environment
  2. Accounting-ICAI Technical Guide on accounting for NPOs (Jan 2022)-framework
    • Fund based accounting
    • Accrual basis of accounting
    • Maintenance of books of accounts and other records
    • Accounting Standards as framework for recording, reporting and presenting in
      financial statements
  3. Segregation of duties-checks and balances, dedicated finance staff
  4. Encourage audit and assurance-risk mitigation

Fund Accounting

NGOs follow Fund Accounting for managing grants

Features:

Type of funds for NPOs

Grant word is not comprehensively defined in Indian laws, referred to as Voluntary contribution/donation (VC) in Income Tax law. FC under FCRA and CSR fund under CSR law
ICAI has classified funds for NPOs in its Technical Guide on Accounting for NPOs:

  1. Unrestricted funds-Funds with no specific restrictions on use (purpose)/time
    • Corpus (acknowledged in IT law)-non-refundable, non reducible, reinvestment obligation.
      Corpus only
      • when specific donor direction that it be treated as corpus by donor
      • not income but capital per IT Act
      • to be invested in section 11(5) modes of investment
      • considered application when replenished
      • not application if given to another charity.
      • Corpus income shown in I&E
    • Donations i.e. no obligations attached, a gift
    • Designated/earmarked funds-appropriated and set aside for specific purpose/future, self imposed by management and not binding in law
    • General funds-surplus/deficit transferred from I&E which are not designated. Free reserves
  2. Restricted funds: funds with conditions/restrictions
    • Project/program grants-to be utilized as per terms and conditions of award, Restriction-by purpose and by time. There could be other conditions/restrictions. Principle of fund based accounting
    • Endowment: fund amount cannot be utilized, only income utilized for general/specific purpose as per donor stipulation. The recipient owns it but does not control it.
    • Restricted funds maybe:
      • Permanent restriction
      • Temporary restriction: restricts use for a certain period or meeting objectives after which it becomes unrestricted.

Format of financial statements as per ICAI

BALANCE SHEET AS AT______


SOURCES OF FUNDS (LIABILITIES) Schedule Current Year Previous Year
Unrestricted funds


Corpus Fund/General Fund/Designated Funds


- Restricted funds: Unutilised Grants (Deferred Revenue), Endowment


- Loans/Borrowings: Secured/Unsecured


- Current liabilities & provisions


TOTAL


Application of Funds (Assets)


- Fixed assets: Tangible Assets/Intangible Assets/Capital Work-In-Progress


- Investments: Long Term/Short term


- Current assets: Loans, Advances, & deposits. Grant Receivable


TOTAL


Significant Accounting Policies and Notes on Accounts


Net Assets

Format of financial statements as per ICAI

Name of Entity______


Income & expenditure account for the period/year ended______


Income Schedule Schedule Current Year Previous Year
Grants & Donations


Other Income-rent, interest, incidental business Income, Fee & Subscription.


Total (A)


Expenditure


Program Exp


Administrative and General Expenses, Finance costs


Depreciation & Amortisation Expenses


Total (B)


Excess of Income over Expenditure (Surplus) or excess of Exp over Income (Deficit)(A-B) (Net Income in for profit entity)


Balance Being Surplus (Deficit) Carried to Balance Sheet-General Fund, Transfer to Designated fund, Building fund/ Others
(specify)



Accounting for grant recognition by NGOs in India

Practise followed as per convention-no legal directive:

Option 1: Gross grant treated as income

Option 2: Gross grant routed through Balance Sheet only-asset and liability side settled

Option 3: Grant treated as income to the extent of expenditurewhile unutilised grant is a liability--hybrid method

Recipient, Sub-recipient and Vendor

Recipient is the organization receiving the grant. A recipient is sometimes called the Prime recipient because it has full responsibility for grant funds. The document evidencing this arrangement is grant contract

Sub-recipient is involved in substantive activities of the award project. The recipient passes on some or all of its duties to the sub-recipient called sub award. All the terms and conditions from the grant award flow down to sub-recipients through a document evidencing it called sub grant contract

Vendor/service provider provides goods/services to the recipient so the recipient can accomplish the project’s purposes. Selected terms and conditions might be passed through to the vendor. The document evidencing is a goods/service contract

Cost-Key concepts

Classification of expense for NPOs

NPOs should follow functional expense head for presenting reports, that is what is the basis for their constitution and work. Broadly the functional heads are two-Program/service delivery and Support/Admin & General

Costs for a project for NGO

  1. Direct costs (100% direct traceability to a program/support function) to benefit the beneficiary as per project design. No cost if no project.
  2. Common/Shared costs-benefit multiple projects
    • shared cost apportionment based on time, space, no of employees/beneficiaries/no of project locations

Understanding and computing direct and shared cost crucial for correct and realistic budget formulation

Apportionment method and share of common cost included in common cost policy
Common cost be reviewed every year within the purview of common cost policy

  1. Total cost for a project:
    a. Direct cost+
    b. Common Direct cost
    c. Shared cost apportioned to the project
  2. Institutional/Management cost/indirect cost if permitted basis donor
    grant management policy to address contingency/create a reserve

Other types of cost

Capital & Revenue cost:

Capital Costs: Capital costs are one-time fixed assets purchases that will be used for revenue generation over a longer period- more than one year.

Revenue Costs: are referred to as operating expenses are short-term expenses that are used in running the daily business operations.

Fixed and Variable Costs:

Fixed cost is one that does not change in total within a reasonable range of activity. Since the fixed cost remains constant in total, the fixed cost per unit of activity decreases when the volume increases and vice versa.

Variable cost or expense is where the total cost changes in proportion to changes in volume or activity.

Cost Principles in grant budgeting for NPOs

Costs budgeted for a project grant should be

Please note: Information is for reference only. Read our disclaimer here.

Successfully Managing a Grant Contract End-to-End with Practical Tips

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Session layout

Budget basics

The purpose of budget is to:

Pre requisites

Types of Budgets:

Activity budget

Activity based budget as the name suggests, covers the costs required for implementing a project activity. In ABB, one looks at resources required for completing an activity and the resources cost

For example, if project strategy is to build capacity of civil society leaders, workshops is an activity. Workshops costs would be towards hiring resource persons, booking a venue, transportation cost, food, lodging and materials and handouts.

Activity Budget for Conducting a Workshop
Particular of Expense Rate per unit No of Units Total in Rs
Trainer Fees @ Rs 1000 per day 3 days 3,000
Venue @ Rs 500 per day 3 days 1,500
Rental for Furniture @ Rs 500 per day 3 days 1,500
Rental for Equipment @ Rs 100 per day 3 days 300
Catering Exp for Lunch and tea two times @ 100 per person 55 persons X 3 days = 165 16,500
Conveyance paid to attendees

@ Rs 50 per person per day

50 attendees x 3 days = 150

 7,500
Printing of handouts @ Re 1 per page 50 pages x 50 copies = 2500 pages 2,500
Grand Total

32,800

Line Item Budget

Line Item Budget
Expenses Unit # of Units Unit rate ($) Cost ($)
Human Resources:



CEO Per day 3 350 1050
Trainer Fees Per day 2 200 400
Subtotal Human Resources


1450





Travel:



Trainer Airfare Per person 1 300 300
Participant Transportation Per person 30 10 300
Subtotal Travel


600





Equipment and Supplies:



Materials and hand-outs Per person 30 15 450
Subtotal Equipment and Supplies


450





Other Costs and Services:



Venue Per day 2 300 600
Catering Per person 30 15 450
Subtotal Other Costs and Services:


1050





Subtotal


3550
Overhead (10%)


355
Total


3905

Other Types of Budget

Incremental budget: Next year’s budget prepared by making marginal changes to the current year’s budget. The current budget is used as a base to which incremental assumptions are added or subtracted from the base amounts to determine new budget amounts.

Value Proposition Budgeting focuses on allocating the ideal amount of financial resources that provides the highest value to the customer. Another name for Value Proposition Budgeting is Priority Based Budgeting or value based budgeting.

Zero-based budgeting (ZBB) based on efficiency and need at that point rather than budget history. Formulation starts from scratch that only includes operations and expenses essential, no expenses are automatically added to the budget. Cost rationalization

Performance based budget (PBB) considers input of resources and the output of services. The goal is to link funding to results delivered, thus called Outcome based budgeting

Fixed Budget: not modified for variation in actual activity and costs.

Flexible budget: budget changes in response to activity level and costs.

Budget Justification Note

Separate word document to explain the budget nos

Balanced, Surplus and Deficit budgets

Budget Monitoring & Budgetary Control

Budget Monitoring is the process:
Budgetary Control is the process to:

Interest apportionment

HR cost allocation

Robust Grant Monitoring System

Grant monitoring is a process to measure/review performance during grant period. It assesses physical & financial progress, identify risks and corresponding mitigation measures, ensure that funds are used as intended and programs achieve desired outcomes and impact.

Important Tools and Process:

Grant Contract: General Conditions

MOU versus grant contract/agreement distinction

Grant Contract: Operational Conditions

Grant Management Challenges

How to manage grant effectively

Managing grant is about maximising impact through

Please note: Information is for reference only. Read our disclaimer here.