SC Strikes Down Electoral Bonds and Questions Companies Act Section 182: A Transformative Verdict on Corporate Influence in Indian Elections

Association for Democratic Reforms & Anr Vs. Union of India & Ors. (Supreme Court)

SC Strikes Down Electoral Bonds and Questions Companies Act Section 182: A Transformative Verdict on Corporate Influence in Indian Elections

On February 15, 2024, the Supreme Court of India delivered a groundbreaking verdict, declaring the electoral bonds scheme, introduced in 2018, unconstitutional. The scheme, enabling anonymous donations to political parties through interest-free bonds issued by the State Bank of India, was ruled to infringe upon citizens’ right to access government-held information, impeding transparency in political funding.

Opposition parties and activists had challenged the scheme, contending that it fostered corruption and hindered transparency. The court directed the State Bank of India to cease issuing such bonds, disclose the identity details of purchasers, and provide information about redeemed bonds to the Election Commission within a week.

What exactly section 182(1),(3) and (4) says?

Section 182 of the Companies Act outlines prohibitions and restrictions concerning political contributions by companies. In accordance with this provision:

(1) Any company, excluding government and those existing for less than three financial years, is permitted to contribute directly or indirectly to any political party. However, such contributions are subject to limitations. The amount contributed by the company in any financial year, either individually or cumulatively, cannot exceed seven and a half per cent of its average net profits over the three immediately preceding financial years. Additionally, a company can only make such contributions if a resolution authorizing it is passed at a Board of Directors meeting. This resolution, in compliance with other provisions of this section, serves as legal justification for the contribution.

(3) It is mandatory for every company to disclose in its profit and loss account any amounts contributed to a political party during the relevant financial year. The disclosure should include details of the total amount contributed and the name of the political party receiving the contribution.

(4) In case a company makes a contribution in violation of the provisions of this section, it is liable to punishment. The company may face a fine of up to five times the contributed amount, and every officer of the company involved in the contravention may be subject to imprisonment for a term extending up to six months, along with a fine not exceeding five times the contributed amount. For the purpose of this section, the term “political party” refers to a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951).

What Apex Court Said?

Section 182(3) of the Companies Act and Section 29C of the Representation of the People Act, modified by the 2017 Finance Act, need to be considered in conjunction. Section 29C provides an exemption for political parties from disclosing contributions received through electoral bonds. However, Section 182(3) extends its scope beyond electoral bonds, encompassing contributions made through all modes of transfers. According to the provisions of the RP Act, if a company contributes to political parties via methods like cheques or electronic clearing systems, the political party is required to disclose these details in its report, making the information publicly accessible. The sole purpose of amending Section 182(3) was to align it with the 2017 amendment under the Representation of Peoples Act, exempting contributions through electoral bonds from disclosure requirements. Our assertion that the electoral bonds scheme, along with relevant amendments to the RP Act and the Income Tax Act mandating non-disclosure of political contribution details through electoral bonds, is unconstitutional renders the amendment to Section 182(3) of the Companies Act unnecessary.

The court, citing various reasons, deemed the amendment to Section 182, allowing unrestricted political contributions from companies, to be clearly arbitrary. Initially, it highlighted the disproportionate impact that companies hold in the electoral process in contrast to individuals, underscoring the risk of transactions aimed at obtaining reciprocal benefits. The court concluded that treating individuals and companies equally under the scheme rendered it evidently arbitrary. Chief Justice Chandrachud provided clarification, stating—

“The capacity of a company to impact the electoral process through political contributions surpasses that of an individual. Companies exert a more significant influence in the political arena, both in terms of the substantial financial amounts contributed to political parties and the motivations behind such contributions. Individual contributions typically exhibit a certain level of support or affiliation with a political association. In contrast, company contributions are essentially business transactions executed with the intention of gaining reciprocal benefits. The amendment to Section 182 is deemed manifestly arbitrary as it treats political contributions by companies and individuals on an equal footing.”

Additionally, the court underscored the amendment’s inadequacy in differentiating between profit-making and loss-making companies. This oversight neglects the elevated potential for quid pro quo transactions by the latter, posing a significant concern.

“Prior to the amendment to Section 182, companies were restricted to contributing a specific percentage of their net aggregate profits. The provision differentiated between loss-making and profit-making companies concerning political contributions, and for a valid reason. The fundamental rationale behind this classification is that it is more plausible for loss-making companies to make contributions to political parties with an expectation of quid pro quo, rather than for the purpose of obtaining income tax benefits. The amendment introduced by the Finance Act 2017 fails to acknowledge that the potential harm arising from contributions by loss-making companies in the form of quid pro quo is significantly higher. Consequently, the amendment to Section 182 is considered manifestly arbitrary for its failure to distinguish between profit-making and loss-making companies regarding political contributions.”

In conclusion, the court underscored the amendment’s endorsement of unrestricted corporate influence in elections, a stance that runs counter to the principles of free and fair elections and political equality. The court expressed concern, stating—

The intent behind Section 182 is to combat corruption and regulate electoral financing. For example, the prohibition on government companies making contributions aims to prevent these entities from engaging in the political arena through financial support to political parties. However, the amendment to Section 182, allowing unrestricted corporate contributions, grants companies unbridled influence in the electoral process. This goes against the principles of free and fair elections and political equality encapsulated in the value of ‘One person, One Vote.’

The court was presented with a challenge to the electoral bond scheme by the Association for Democratic Reforms (ADR).  Their argument centered on the assertion that the anonymity linked to electoral bonds erodes transparency in political funding and infringes upon the voters’ right to information. Additionally, they raised concerns about the scheme enabling contributions through shell companies, thereby posing potential threats to accountability and integrity in electoral finance.

The court’s reasoning was anchored in Article 19(1)(a) of the Constitution, asserting that the anonymity afforded by electoral bonds violated the right to information. Additionally, the court made crucial observations on Section 182 of the Companies Act, which permits financial contributions by companies to political parties. The court found the amendment allowing unlimited contributions by companies to be manifestly arbitrary, citing the disproportionate influence companies wield in the electoral process compared to individuals.

This landmark judgment not only dismantled the electoral bonds scheme but also questioned the validity of Section 182 of the Companies Act. The ruling is poised to reshape political funding in India by curbing anonymous donations and advocating for transparency. The court’s decision has implications for the disclosure of political contributions, emphasizing the need for accountability in the electoral process.

The judgment, coming at a critical juncture after the issuance of the last tranche of bonds in January, has effectively halted the controversial electoral financing method. It underscores the potential return to more transparent and accountable mechanisms in political funding, dismantling a system that had opened the floodgates to dubious practices.