In India, elections are always round the corner. In some or the other state, there are elections waiting to happen. Companies are though creatures of law but are run by individuals and due to varied reasons, these individual would like to make contributions to some political parties. In this context, the basic question arises as to whether political contributions by companies permissible under Indian laws?

To answer this, one needs to take into account the Companies Act, 1956, Representation of the People Act, 1951 (RPA) and the Foreign Contribution (Regulation) Act, 1976 (FCRA).

Companies Act, 1956:

Section 293A of the Companies Act regulates such contributions by Indian companies. A company incorporated under the Companies Act (other than a government company) can make contributions to political parties that are duly registered under RPA. The section places certain restrictions and limitations regarding political contributions.

Essentially, a government company or a company that has existed for less than three years is not permitted to make such contributions.

The limits, compliance, disclosure and penal provisions prescribed under the Act are as under:

1) Limits: Five per cent of its average net profits determined in accordance with the provisions of sections 349 and 350 during the three immediately preceding financial years.

2) Compliance: Contribution shall be made by a company with prior resolution authorizing the making of such contribution passed at a meeting of the Board of directors.

3) Disclosure:

1) Disclose in its profit and loss account

2) Of any amount or amounts contributed by it to any political party or for any political purpose to any person

3) Giving particulars of the total amount contributed and the name of the party or person to which or to whom such amount has been contributed

4) Penalty: In case of default of the above:

1) On the company – fine which may extend to three times the amount so contributed; and

2) Every officer in default – imprisonment for a term which may extend to three years and shall also be liable to fine.

Representation of the People Act, 1951

Section 29B allows registered political parties to accept voluntarily offered contributions from Indian companies. Contributions of more than Rs20,000/- have to be declared by the political party to the Election Commission.

Foreign Contribution (Regulation) Act, 1976

There is an express prohibition on political parties receiving funds from a “foreign source” as defined in FCRA.

A “foreign source” as defined in FCRA includes a foreign company or a company which is a subsidiary of a foreign company, or a multinational corporation. It also includes a company within the meaning of the Companies Act, if more than one half of the nominal share capital of such a company is held either singly or in aggregate by (a) a government of a foreign country or territory; or (b) citizens of a foreign country or territory; or (c) corporations incorporated in a foreign country or territory.

A company will be treated as a “subsidiary” of another company when the other company (a) controls the composition of the board of directors; or (b) exercises or controls more than half of the total voting power of such company; or (c) when the other company holds more than half of the nominal capital of such company. So, a subsidiary of a foreign entity may be prohibited from making contributions to political parties even if such subsidiaries are companies incorporated under the Companies Act.

Foreign contribution as used in FCRA includes direct and indirect contributions. If a foreign entity uses an Indian entity as an intermediary to contribute funds to a political party in India, then such funds may be considered an “indirect foreign contribution” by a “foreign source” and consequently, political parties will not be allowed to accept them.

Section 4 of FCRA also prohibits an Indian company from delivering any amount accepted by it from any “foreign source” to any person if such Indian company knows that such person intends or is likely to deliver such amounts to a political party. These restrictions primarily aim at checking abuse of funds received from a “foreign source” and ensuring that what cannot be contributed directly by a foreign source is not contributed indirectly.

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