Constitutionality of amendments under Section 182 of Companies Act, 2013 with regard to Political Contributions by Companies, and Electoral Bond Scheme
The Supreme Court of India delivered a seminal judgement in the case of Association for Democratic Reforms & Anr v/s Union of India & Ors. declaring Section 182(3) of the Companies Act (as amended by Section 154 of the Finance Act 2017) violative of Article 19(1)(a) and unconstitutional.
The Court also declared the deletion of the proviso to Section 182(1) of the Companies Act that permits unlimited corporate contributions to political parties is arbitrary and violative of Article 14.
Further, the Court has declared the Electoral Bond Scheme, the proviso to Section 29C(1) of the Representation of the People Act 1951 (as amended by Section 137 of Finance Act 2017) and Section 13A(b) (as amended by Section 11 of Finance Act 2017) as violative of Article 19(1)(a) and unconstitutional.
Now, the amendment made under Section 182 in 2017 is void or as if it was not made at all. Therefore, the original provisions of Section 182 (i.e. prior to the amendment made by the Finance Act, 2017) are restored.
Impact of Supreme Court’s Decision (Association for Democratic Reforms & Anr v/s Union of India & Ors.)
Considering the amendment made to Section 182 of the Companies Act, 2013 vide Finance Act, 2017 have been declared unconstitutional, now a Company needs to ensure the following :-
1. Contribution to a Political Party (either directly or through an Electoral Trust) in any Financial year should not exceed 7.5% of the average net profits during the 3 immediately preceding Financial years.
2. Details of name of the Political Parties and the amounts contributed to such political parties are disclosed in the Profit and Loss account.
3. The Company cannot participate in any Electoral Bond Scheme.
Let us understand why the Apex Court has decelerated the aforesaid provisions as violative of Article 14 and Article 19 of Constitution of India and unconstitutional.
Before the 2017 amendment, Section 182(3) of the Companies Act, 2013, mandated companies to disclose the details of the amount contributed to a political party along with the name of the political party to which the amount was contributed in its Profit and Loss account.
After the said amendment in 2017, Section 182(3) only requires the disclosure of the total amount contributed to political parties in a Financial year.
For example: under Section 182(3) as it existed before the amendment, if a Company contributed rupees twenty thousand to a political party, the company was required to disclose in its Profit and Loss account, the details of the specific contributions made to that political party. However, after the 2017 amendment, the Company is only required to disclose the contribution of Rupees twenty thousand to a political party under the provision without disclosing the details of the political party to which the contribution was made..
As discussed in the earlier segment, the Companies Act 1956 was amended in 1960 to include Section 293A by which contributions by companies to political parties and for political purposes were regulated. Companies were permitted to contribute within the cap prescribed. All such contributions were required to be disclosed by the Company in its Profit and Loss account with details as prescibed. Companies which contravenes the disclosure requirement were subject to fine. It is crucial to note here that contributions to political parties by companies were regulated long before the Income Tax Act was amended in 1978 to exempt the income of political parties through voluntary contribution.
It is clear as day light that the purpose of mandating the disclosure of contributions made by companies was not merely to curb black money in electoral financing but crucially to make the financial transactions between companies and political parties transparent. Contributions for “political purposes” was widely defined in the 1985 amendment (which was later incorporated in Section 182 of the Companies Act 2013) to include expenditure (either directly or indirectly) for advertisement on behalf of political parties and payment to a person “who is carrying activity which can be regarded as likely to affect public support to a political party”. This indicates that the legislative intent of the provision mandating disclosure was to bring transparency to political contributions by companies. Companies have always been subject to a higher disclosure requirement because of their huge financial presence and the higher possibility of quid pro quo transactions between companies and political parties. The disclosure requirements in Section 182(3) were included to ensure that corporate interests do not have an undue influence in electoral democracy, and if they do, the electorate must be made aware of it.
Section 182(3) as amended by the Finance Act 2017 mandates the disclosure of total contributions made. This requirement would ensure that the money which is contributed to political parties is accounted for. However, the deletion of the mandate of disclosing the particulars of contributions violates the right to information of the voter since they would not possess information about the political party to which the contribution was made which, as we have held above, is necessary to identify corruption and quid pro quo transactions in governance. Such information is also necessary for exercising an informed vote.
Section 182(3) of the Companies Act and Section 29C of the RPA as amended by the Finance Act must be read together. Section 29C exempts political parties from disclosing information of contributions received through Electoral Bonds. However, Section 182(3) not only applies to contributions made through electoral bonds but through all modes of transfer. In terms of the provisions of the RPA, if a company made contributions to political parties through cheque or ECS, the political party had to disclose the details in its report. Thus, the information about contributions by the company would be in the public domain. The only purpose of amending Section 182(3) was to bring the provision in tune with the amendment under the RPA exempting disclosure requirements for contributions through electoral bonds. The amendment to Section 182(3) of the Companies Act becomes otiose in terms of our holding in the preceding section that the Electoral Bond Scheme and relevant amendments to the RPA and the IT Act mandating non-disclosure of particulars on political contributions through electoral bonds is unconstitutional.
In terms of Section 136 of the Companies Act, every shareholder in a company has a right to receive a copy of the financial statement which also contains the Profit and Loss account. The petitioners submitted that the non-disclosure of the details of the political contributions made by companies in the financial statement would infringe upon the right of the shareholders to decide to sell the shares of a company if a shareholder does not support the political ideology of the party to which contributions were made. This it was contended, violates Articles 19(1)(a), 19(1)(g), 21 and 25. We do not see the necessity of viewing the non-disclosure requirement in Section 182(3) of the Companies Act from the lens of a shareholder in this case when we have identified the impact of non-disclosure of information on political funding from the larger compass of a citizen and a voter.
In view of the above discussion, Section 182(3) as amended by the Finance Act 2017 is unconstitutional.
Challenge to unlimited corporate funding
The Companies Act 1956, as originally enacted, did not contain any provision relating to political contributions by companies. Regardless of the same, many companies sought to make contributions to political parties by amending their memorandum. In Jayantilal Ranchhoddas Koticha v. Tata Iron and Steel Co. Ltd., the decision of the company to amend its memorandum enabling it to make contributions to political parties was challenged before the High Court of Judicature at Bombay. The High Court upheld the decision of the company to amend its memorandum on the ground that there was no law prohibiting companies from contributing to the funds of a party.
Subsequently, in 1960, Parliament enacted the Companies (Amendment) Act 1960 to incorporate Section 293A in the 1956 Act. The new provision allowed a company to contribute to: (a) any political party; or (b) for any political purpose to any individual or body. However, the amount of contribution was restricted to either twenty-five thousand rupees in a financial year or five percent of the average net profits during the preceding three financial years, whichever was greater. The provision also mandated every company to disclose in its profit and loss account any amount contributed by it to any political party or for any political purpose to any individual or body during the financial year to which that account relates by giving particulars of the total amount contributed and the name of the party, individual, or body to which or to whom such amount has been contributed.
In 1969, Section 293A of the 1956 Act was amended through the Companies (Amendment) Act 1969 to prohibit companies from contributing funds to any political party or to any individual or body for any political purpose based on the Report of the Santhanam Committee on Prevention of Corruption.
In 1985, Parliament again amended Section 293A, in the process reversing its previous ban on political contributions by companies. It allowed a company, other than a government company and any other company with less than three years of existence, to contribute any amount or amounts to any political party or to any person for any political purpose. It further provided that the aggregate of amounts which may be contributed by a company in any financial year shall not exceed five percent of its average net profits during the three immediately preceding financial years. This provision was retained under Section 182 of the Companies Act 2013. The only change was that the aggregate amount donated by a company was increased to seven and a half percent of its average net profits during the three immediately preceding financial years. Section 154 of the Finance Act 2017 amended Section 182 of the 2013 Act to delete this limit contained in the first proviso of the provision.
The petitioners argue that Section 154 of the Finance Act 2017 violates Article 14 of the Constitution. The primary ground of challenge is that the amendment to Section 182 of the 2013 Act is manifestly arbitrary as it allows companies, including loss-making companies, to contribute unlimited amounts to political parties. It has also been argued that the law now facilitates the creation of shell companies solely for the purposes of contributing funds to political parties. On the other hand, the respondent has questioned the applicability of the doctrine of manifest arbitrariness for invalidating legislation.
Validity of Section 154 of the Finance Act 2017 omitting the first proviso to Section 182 of the Companies Act
We now turn to examine the vires of Section 154 of the Finance Act 2017. The result of the amendment is that: (a) a company, other than a government company and a company which has been in existence for less than three financial years, can contribute unlimited amounts to any political party; and (b) companies, regardless of the fact whether they are profit making or otherwise, can contribute funds to political parties. The issue that arises for consideration is whether the removal of contribution restrictions is manifestly arbitrary and violates Article 14 of the Constitution.
During the course of the arguments, the learned Solicitor General submitted that the limit of seven and a half percent of the average net profits in the preceding three financial years was perceived as a restriction on companies who would want to donate in excess of the statutory cap. The learned Solicitor General further submitted that companies who wanted to donate in excess of the statutory cap would create shell companies and route their contributions through them. Therefore, it was suggested that the statutory cap was removed to discourage the creation of shell companies.
Thus, the object behind limiting contributions was to discourage loss-making companies from contributing to political parties. In 1985, Parliament prescribed the condition that only companies which have been in existence for more than three years can contribute. This condition was also included to prevent loss-making companies and shell companies from making financial contributions to political parties. If the ostensible object of the amendment, as contended by the learned Solicitor General, was to discourage the creation of shell companies, there is no justification for removing the cap on contributions which was included for the very same purpose: to deter shell companies from making political contributions.
After the amendment, companies similar to individuals, can make unlimited contributions and contributions can be made by both profit-making and lossmaking companies to political parties. Thus, in essence, it could be argued that the amendment is merely removing classification for the purpose of political contribution between companies and individuals on the one hand and loss-making and profit-making companies on the other.
One of the reasons for which companies may contribute to political parties could be to secure income tax benefit. However, companies have been contributing to political parties much before the Indian legal regime in 2003 exempted contributions to political parties. Contributions are made for reasons other than saving on the Income Tax. The chief reason for corporate funding of political parties is to influence the political process which may in turn improve the company’s business performance. A company, whatever may be its form or character, is principally incorporated to carry out the objects contained in the memorandum. However, the amendment now allows a company, through its Board of Directors, to contribute unlimited amounts to political parties without any accountability and scrutiny. Unlimited contribution by companies to political parties is antithetical to free and fair elections because it allows certain persons/companies to wield their clout and resources to influence policy making. The purpose of Section 182 is to curb corruption in electoral financing. For instance, the purpose of banning a Government company from contributing is to prevent such companies from entering into the political fray by making contributions to political parties. The amendment to Section 182 by permitting unlimited corporate contributions (including by shell companies) authorizes unrestrained influence of companies on the electoral process. This is violative of the principle of free and fair elections and political equality captured in the value of “one person one vote”.
The amendment to Section 182 of the Companies Act must be read along with other provisions on financial contributions to political parties under the RPA and the IT Act. Neither the RPA nor the IT Act place a cap on the contributions which can be made by an individual. The amendment to the Companies Act when viewed along with other provisions on electoral funding, seek to equalize an individual and a company for the purposes of electoral funding.
In view of the above discussion, we are of the opinion that companies and individuals cannot be equated for the purpose of political contributions
Thus, the amendment to Section 182 is manifestly arbitrary for treating political contributions by companies and individuals alike.
Author Bio
Very analytical and thought provoking article.