The Election season is upon us again, and it is only fitting that The Supreme Court of India has taken up a clutch of petitions challenging the constitutionality of Electoral Bonds that were introduced in 2017 as a means of donations to political parties.
The capital involved is expectedly huge. After all, India is the world’s fifth largest economy and the most populous nation that goes through a 5-year election cycle with an overlap between 28 state elections and the national one. Electoral Bonds, as a fund-raising instrument, are primarily targeted towards corporates – including public limited companies except for those run by the government. And while the constitutional bench of Supreme Court headed by the Chief Justice would evaluate it for constitutionality, it is important to conduct an analysis from the perspective of Companies Act 2013 as well as from the purview of good Corporate governance. This article offers an in-depth analysis of these implications.
Companies Act, 1956 permitted an entity to make donations to political parties but there were restrictions. Companies were required to pass a resolution and an authorization from the board of directors was necessary. For direct contribution to political parties, it was necessary to have an annual disclosure of the political parties that they have contributed to. And most importantly, the contribution could not exceed 5% of the average profit of preceding three financial years.
It was also permitted to make indirect contributions to the political parties, such as contributions through an ‘electoral trust’. This route attracted lesser scrutiny and became the most preferred route. Electoral Trust Scheme, 2013 recognized these trusts. Usually, these were non-profit companies that were constituted solely for the purpose of political donations. These trusts merged donations from various entities into one large corpus and then donated to various political parties. Therefore, while it was possible to ascertain which individuals and entities donated to an electoral trust, the donations from the trust to the political parties could not be traced back to them.
Companies Act, 2013 relaxed the restriction of maximum donation from 5% to 7.5% of the average profit in the preceding three financial years. But the disclosure obligations were not modified or relaxed. The direct route attracted maximum scrutiny and the indirect route through electoral trusts and others remained the preferred mode of donations. Anonymity from public disclosure was allowed to foster, even when majority of the conduits were public listed companies, utilizing money from their reported profits for political donations without disclosing the recipients.
The Finance Act, 2017, and the Electoral Bond Scheme, 2018, elevated this scheme of things to the next level. Among others, these bills brought in three sweeping changes:
- Introduction of Electoral Bonds: A new specialized financial instrument was introduced in the form of Electoral Bonds. This is a promissory note that can be purchased from State Bank of India, and can be donated to a political party within 15 days. The note does not bear the names of either the purchaser or the recipient. While the SBI does comply with the RBI norms of KYC while issuing the Bonds, this information can only be retrieved through a court order. Even then, only the purchaser’s identity is revealed, and not that of the recipient political party.
- Anonymity Provision: Electoral Bonds bypassed the disclosure requirements set by the Companies Act, 2013. While the Companies Act, 2013 necessitated that for direct contributions to political parties, identities of both the doner and the recipient must be disclosed, Electoral Bonds allowed for that disclosure to be avoided. In turn, this also made the indirect donation route using electoral trusts somewhat redundant, giving more maneuverability to doners.
- Removal of Donation Cap: Most significantly, the Finance Act, 2017 removed the cap on the maximum donation that a company can make. Companies can now donate unlimited amounts, provided they have existed for more than three financial years.
Legal and Ethical Concerns
This brings us to the present scenario in the Supreme Court. Since the introduction of the Finance Act 2017 and Electoral Bonds Scheme 2018 various litigants have approached the apex court. The court is reviewing a clutch of these pleas. Reporting on the first day of the hearing, The Economic Times wrote,
Adjudicating on a clutch of petitions challenging the Centre's electoral bond scheme permitting anonymous funding to political parties, a bench headed by Chief Justice of India DY Chandrachud orally remarked that electoral bonds facilitate anonymised "not just in relation to the donee but also in relation to the rest of the society."
During the resumed hearing, the CJI, speaking for the bench, verbally observed that "in the case of a company, even shareholders won't be told who you are contributing to".
Earlier this week, attorney general R Venkataramani, in a statement filed in the Supreme Court, had submitted that citizens do not have the right to information under Article 19 (1)(a) of the Constitution regarding the funding of a political party.But with respect to a listed company the shareholders are not just ordinary citizens. They are invested stakeholders to the company that is utilizing the profits towards the said donations to the political parties. When one considered the fact that all restrictions towards the maximum donation has been removed by the last bill the situation becomes specifically acute. The checks and balances for good corporate governance have been sorely lacking. In an extreme scenario this could potentially mean that a company can disregard its shareholders in entirety while spending all the proceeds and profits towards an anonymous donation to a political outfit. The shareholders will be mere bystanders, lacking any instrument that help them question the decisions of the company management, let alone influence or prevent it.
Best Practices for Better Corporate Governance
Therefore, the following Corporate Governance best practices are suggested:
- Avoid Corporate Donations: Companies should refrain from political donations, leaving such contributions to individual promoters and management. Promoters and management may make their choice of donation in their personal capacity, which is different from utilizing company profits, which are shareholder money.
- Digital Channels: If unavoidable, use Electoral Bonds for donations as they offer a formal, digital mechanism. To its credit, the Electoral Bonds provide for a more transperant digital mechanism, wherein the recipient political party must use official accounts to collect the donations.
- Self-Regulation: Companies should voluntarily cap donations and disclose them to shareholders. Adhering to the previous limit of 7.5% or lower as a benchmark can be a good start. The Finance Act 2017 may not be mandating the maximum cap on donations, but the company must self-regulate and declare to its shareholders the maximum amount up to which it is willing to make donations to political parties.
- Board Authorization: Maintain the practice of board approval and full disclosure. The formal procedure of passing the resolution and getting the authorization of the board, as well as robust disclosure obligation of the previous regime encourages good governance, and should be followed even when they are not mandated by the current law.
- Transparency in Quid-Pro-Quo: Any potential reciprocal benefits arising from political donations should be reported to the board for review.
The ongoing Supreme Court case on Electoral Bonds brings into focus the need for a balanced approach that respects both the political funding requirements and the principles of corporate governance.
The conflict of interest is apparent in the fact that an elected political government can enact laws that facilitate fund-raising for political parties even at the cost of good corporate governance. The judiciary must do the balancing act for the shareholders and citizens at large. Companies must exercise caution and adhere to best practices to maintain transparency and accountability.
References and Further reading