Political contributions by foreign owned companies to be permitted – and with retrospective effect

It
was earlier posted
here that a proposed amendment through the Finance Bill 2016 will permit certain
CSR contributions by companies with majority foreign holdings. There is a
further implication to this that also needs consideration. This amendment will
also permit political contributions by such companies.

The
amendment is proposed to have retrospective effect from 26th September
2010. This will effectively neutralise the Delhi High Court’s decision in Association for Democratic
Reforms vs. UOI
after such date. Thus, political contributions made in past
from such date would also be legalised.

The decision of the Delhi High Court may be recollected. The question before the Court was about companies
with more than 50% foreign holding. Were such companies a “foreign source” as
defined in the Foreign Contribution (Regulation) Act 1973 (FCRA 1973)? FCRA
1973 prohibited political parties, etc. from accepting contributions from such
companies. Certain companies were found to have more than 50% foreign holding
and yet they had given contributions to political parties. Section 2(1)(e) of
FCRA 1973 deemed companies with “more than one-half of the nominal value
of its share capital” held by foreign citizens/corporations incorporated in a
foreign country to be a “foreign source”. Thus, the Court held that such
contributions were in violation of FCRA 1973.

FCRA
2010 and FCRA 1973 are, in this aspect, worded similarly. Thus, the ratio of
the Delhi High Court’s decision should apply to FCRA 2010 too. The consequences
under FCRA 2010 for accepting such contributions (including for those who
assist in such acts) are quite stringent and include imprisonment.

The
proposed amendment now seeks to neutralise this and that too retrospectively. Thus, companies having more
than 50% foreign shareholding but within the limits specified under FEMA will
not be treated as a “foreign source”. The political parties would thus be able
to accept contributions from such companies without being in violation of FCRA
2010. 

Curiously, under the Companies
Act, 2013, there are different limits for contribution for CSR, for charity and
for contribution to political parties. The indicative limits for CSR
expenditure is 2%, for contribution
for charitable and other funds is 5%
and for political contributions, it is 7.50% of profits.

About the author

CA Jayant Thakur

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