Electoral Bond Scheme, 2018: A Company Law Perspective

[Abhinav Sankaranarayanan and Saurav Rajurkar are IV year students at the West Bengal National University of Juridical Sciences, Kolkata]

Background

The Electoral Bond Scheme, 2018 made headlines recently after the Supreme Court of India finally began hearing the matter and passed an interim order requiring political parties to submit the details of funds procured through electoral bonds to the Election Commission of India. While much has been written analyzing the Electoral Bond Scheme through a constitutional lens, this post seeks to scrutinize the scheme from a company law perspective and to examine its implications upon shareholders, if any.

Original Position

In accordance with section 182(1) of the Companies Act, 2013 (corresponding to section 293A(2) of the Companies Act, 1956), companies were permitted to make political contributions, subject to certain restrictions. Here, contributions made directly towards a political party as well as those made indirectly in furtherance of any political process were deemed to be ‘political contributions’ for the purpose of the 2013 Act.[1] To the exclusion of government companies, all other kinds of companies were empowered to make political contributions[2] The quantum of political contributions made in one year, however, could not exceed seven and a half percent of the average net profits made over the previous three financial years.[3] Further, companies were prohibited from making political contributions within the first three financial years of their existence.[4]

In order to make a valid political contribution, companies were first required to pass a resolution authorizing the same at a meeting of the board of directors.[5] Further, companies were required to disclose, on an annual basis, the particulars of political contributions made and the political parties to which the amounts had been contributed.[6]

Here, in order to avoid these onerous obligations, most companies began making political contributions indirectly through ‘electoral trusts’, which were recognized by the Electoral Trusts Scheme, 2013.[7] These electoral trusts were non-profit companies which had been incorporated solely for the purposes of election financing under section 8 of the 2013 Act. When companies ‘routed’ their contributions through electoral trusts, they did not have to comply with the detailed disclosure requirements set out in section 182(3).[8] Rather, they merely had to disclose the quantum of their contribution to the electoral trust.[9] The requirements set out in section 182(3) however, were applicable to electoral trusts which had to comply with the same.[10]

Current Position

With the passage of the Finance Act, 2017 and the Electoral Bond Scheme, 2018, there was a comprehensive overhaul of the procedure governing political contributions made by “persons” including companies.[11] In a bid to provide anonymity to entities that make contributions to political parties, the concept of ‘electoral bonds’ has been introduced. The term ‘electoral bond’ refers to a bond issued in the nature of a promissory note by the State Bank of India (SBI).[12] To the exclusion of government companies, all other kinds of companies are empowered to purchase electoral bonds, provided they have been in existence for three or more financial years.

Companies can purchase these bonds from one of the authorized branches of the SBI and only registered political parties can receive such bonds.[13] These bonds must be deposited within fifteen days from the date of issue, failing which it will expire.[14] Whilst purchasing electoral bonds, companies are required to comply with the know-your-customer (KYC) norms set out by the Reserve Bank of India.[15] As the electoral bond does not carry the name of either the buyer or the payee, the identity of the donor is known only to the bank.[16] In this regard, to ensure confidentiality, the Electoral Bond Scheme specifically provides that the information provided by the buyer is to be disclosed only upon request by a competent court or upon the registration of a criminal case.[17]

Significantly, the seven and a half percent cap on political contributions that was provided for previously has been deleted with the passage of the Finance Act.[18] Consequently, there is now no upper limit restricting the quantum of political contributions, regardless of whether the company is profitable or not. Further, companies are no longer required to disclose the names of the political parties to which they have contributed.[19] Rather, it suffices if they disclose the total amount contributed in this regard in their profit and loss account.[20]

Analysis

The introduction of the Electoral Bond Scheme and the Finance Act demonstrates a marked shift in the approach adopted by the Government of India towards political contributions made by companies. Whereas the Companies Act, 1956 and the Companies Act, 2013 sought to restrict the ability of companies to make political contributions and placed a premium upon transparency and disclosure obligations, the Electoral Trust Scheme and now the Electoral Bond Scheme have established a framework facilitating the concept of election financing by corporations while at the same time emphasizing the notion of anonymity. Further, this shift can also be illustrated by the gradual elimination of the cap on political contributions by companies. According to the 1956 Act, this cap was fixed at five percent of the average net profits earned in the preceding three financial years and was subsequently increased to seven and a half percent by the 2013 Act. Now, following the passage of the Finance Act, the cap has been eliminated altogether. Here, it is pertinent to note that, in addition to restricting the ability of companies to make political contributions, the cap also served important policy objectives from both political as well as corporate governance perspectives. From a political perspective, the cap ensured limited interference of corporations in the functioning of political parties.  More importantly, from a corporate governance perspective, the cap mandated that only profitable concerns could make political contributions, thus ensuring that loss-making companies do not expend their resources towards extraneous considerations such as election financing. Furthermore, since profit-making was a prerequisite to make political contributions, shell companies or conduit concerns could not be set up with the sole objective of routing money towards election financing. Accordingly, by eliminating the cap altogether, the Government has acted in a regressive manner and has possibly contributed towards financial instability.

Similarly, the robust disclosure obligations have been undermined over time. As noted earlier, the 2013 Act required the disclosure of both the particulars of the contribution as well as the names of the political parties to whom the amount was paid. According to the Electoral Trust Scheme, the companies were no longer required to disclose the names of the political parties to whom they had contributed and merely had to disclose the amount paid to the trust. However, the names of the political parties to whom contributions had been made still had to be disclosed by the electoral trust. While this disclosure obligation was incorporated purportedly in order to ensure transparency in election financing, it failed to achieve its intended purpose. This was because major electoral trusts received contributions from several companies and contributed to a disparate set of political parties, making it difficult to determine which company had contributed to which political party. For instance, the Satya Electoral Trust received contributions from a wide variety of prominent companies, including Bharti Airtel, DLF, and Hero MotoCorp and made contributions to a diverse set of political parties, including the INC, the BJP, and the RJD. Thus, the Electoral Trust Scheme placed severe restrictions on the shareholder’s ability to know which political party their company had made contributions towards.

Now, with the passage of the Electoral Bond Scheme, the identity of the donor has become completely anonymous and there exists no mechanism to ascertain which entity has contributed to which political party. Under such circumstances, it becomes impossible to unearth possible quid-pro-quo arrangements between political parties and corporations. In this regard, it is pertinent to note that 99.8 percent of all contributions received by political parties from March 2018 through January 2019 have been through electoral bonds. Under such circumstances, it is imperative that a certain degree of transparency be infused, and companies be mandated to disclose the names of political parties to whom they have made contributions to their shareholders.

– Abhinav Sankaranarayanan & Saurav Rajurkar

[1] Section 182(2) of the Companies Act, 2013 provides for an indicative list of contributions which are deemed to have been made either to a particular political party or towards a political purpose.

[2] Section 2(45) of the Companies Act, 2013 defines a “government company”.

[3] See the first proviso to Section 182(1) of the Companies Act, 2013.

[4] Section 182(1) of the Companies Act, 2013.

[5] See the Second Proviso to Section 182(1) of the Companies Act, 2013.

[6] Section 182(3) of the Companies Act, 2013.

[7] For example, both the Aditya Birla Group as well as the Tata Group made political contributions through electoral trusts.

[8] MCA Circular No. 17/27/2013-CL-V.

[9] Id.

[10] Id.

[11] Provision 2(d), Electoral Bond Scheme, 2018.

[12] Provision 2(a), Electoral Bond Scheme, 2018.

[13] Provision 3(3), Electoral Bond Scheme, 2018.

[14] Provision 6(1), Electoral Bond Scheme, 2018.

[15] Provision 4, Electoral Bond Scheme, 2018. See FAQ 11, as provided by the SBI for the KYC documents required to be submitted by companies.

[16] Provision 2(a), Electoral Bond Scheme, 2018.

[17] Provision 7(4), Electoral Bond Scheme, 2018.

[18] Section 154(i) (a), Finance Act, 2017.

[19] Section 154(ii), Finance Act, 2017.

[20] Id.

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