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  • Writer's pictureRitik Agrawal

"Unraveling the Implications: Company Law Amendments in the Electoral Bond Scheme"

Ranita Jana

Xavier Law School, XIM University, Bhubaneswar

 Company Law Amendments in the Electoral Bond Scheme

INTRODUCTION:

The Supreme Court struck down the Electoral Bond Scheme[i] prior to the upcoming Lok Sabha Elections 2024 brings down unscrupulous challenges and interesting juncture to the democratic scenario of India. The disclosure of the donors to the respective political parties lifts the veil of anonymity and initiates conversations outlining the 'quid pro quo' possibilities of the capitalist donors. It is pertinent to note that the parties in power centrally or otherwise were able to attract donations via the Electoral Bonds from bigger corporates who had donated in the bracket of 100 crore or more,[ii] than the other political parties. On that note, the body corporates being the top donors in the scheme, it is also observed from the information released by the SBI to the Election Commission of India (ECI), that many loss-making and newly established corporates had donated in crores[iii]which would not be probable at this magnitude in the prior system of political donations by the companies. Considering these changes, it will be interesting to compare and analyse the contemporary legal arrangements for political donations against the former system from the perspective of company law.

ELECTORAL BOND SCHEME:

Electoral Bonds are interest-free promissory notes in the nature of bearer instruments purchased by domestic companies or individuals from the authorized branches of the State Bank of India (SBI) for donations to the eligible political parties who can encash it within 15 days of its issue.[iv] Being bearer instruments, anonymity to the buyer or payee is inherent, and ownership is presumed by the holders, who are the recipient political parties.[v]   

The bonds were available in denominations of Rs. 1000, Rs. 10000, Rs. 1 Lakh, Rs. 10 Lakh and Rs. 1 crore which any Indian citizen or company can purchase in the multiples of the above denominations to donate to their preferred political parties provided that the parties are eligible by securing at least 1% votes polled in the last general election to the Lok Sabha or the state Legislative Assembly as the case may be. The bonds which will not be redeemed within the stipulated 15 days, it will be deposited duly in the Prime Minister Relief Fund (PMRF) by the authorised bank.

While the government claims the mechanism to be an improved procedure than the prior arrangement, several significant amendments were considered and made to channelize the flow of funds to the parties in terms of the law in force.

POLITICAL FUNDING BY COMPANIES PRIOR TO 2017 AMENDMENT:

The concept of political donations was unregulated under the Companies Act 1956. It is with the amendment in 1960 that specific regulations were introduced with a cap of 5% of its average net profits or Rs. 25,000 in a financial year, whichever is higher. However, the same was banned by the subsequent amendment in 1969 under newly incorporated section 293A. The 1985 Amendment Act re-introduced regulations for political donations, wherein the companies were required to get approval for such donations, which shall not exceed 5% of the average net profits.[vi]

The revamped Companies Act 2013 liberated the cap up to 7.5% of the average net profits of the immediately preceding three financial years (first proviso to section 182) subject to the approval of the Board of Directors (second proviso) but mandated the disclosure of the details pertaining to the political party/individual the donations are made and the corresponding amount in their profit and loss statement (section 182(3).[vii]  Notably, not all companies were eligible to donate to political parties. Any company other than a government company and those that had existed for three or more financial years or were eligible to donate to political parties and for political purposes. Non-compliance with these limitations attracted stringent consequences of hefty extendable fines.

Prior to the set-up of the electoral bond scheme, electoral trusts registered under the Companies Act 1956 were in function after the UPA government introduced the Electoral Trust Scheme 2013 for these tax-exempted trusts to distribute the voluntary contributions made via cheque, bank draft, or electronic means to the political parties as their sole purpose. The audit report of such trust accounts was to be submitted to the Commissioner of Income Tax with the particulars on the donors, the beneficiary political party, and the amount disbursed by the trust through their internal mechanism.[viii] 

The Finance Act 2017 brought amendments to section 182 of the Companies Act 2013 to be read with the amendments made to the provisions of Representation of People Act 1951 (RPA) and Income Tax Act 1961 bringing substantial changes in the funding of electoral process in India.

Company Law Amendments in the Electoral Bond Scheme"

ELECTORAL BOND SCHEME INFILTRATES THE VIRES OF CONSTITUTIONALITY:

The impact of the Electoral Bond Scheme 2018 was substantial as it advanced opacity in political donations with no upper limit in the donation amount. The amendment provided under section 154 of the Finance Act 2017 done away with the first proviso to section 182 of the Companies Act 2013, and thus, even the loss-making companies or shell companies can also be engaged in contributing to the political funding provided that the Board of Directors passes a resolution in that regard. Further, the companies are exempted by law from the nuanced disclosure requirements; they need not provide the beneficiary political party or any details other than the total amount in their profit and loss statement.[ix] The amendments to the Companies Act 2013 are to be read with section 29C of the Representation of People Act 1951, which requires companies other than government companies to declare and disclose the contributions made to the political parties have been done away with for the specific donations by the electoral bonds which adds onto the opacity of the scheme.

The amendments on prima facie understanding bolster the secrecy of political donations in unbounded limit with negligible regulation for curbing money laundering, corruption and 'quid pro quo' arrangements, especially for the companies who, in general as opposed to individuals, are contributing for profit motif and not for furthering the political ideology of the legal entity.

THE DOMINOES OF UNCONSTITUTIONAL AMENDMENTS:

The Supreme Court declared the Electoral Bond Scheme unconstitutional while scrutinising the legislations on the constitutional vires of “right to information” for exercising the free and fair election in a democracy against the right of privacy of the donors on the scope of double proportionality test and the manifest arbitrariness test.[x] 

Double Proportionality and violation of Article 19(1)(a):

The Supreme Court relying on the Central Public Officer, Supreme Court of India v. Subash Chandra Agarwal[xi] for applying the Double Proportionality test as formulated in the case of Campbell v. MDN Ltd.[xii] The Court emphasised that for determining the overriding fundamental rights  between the two conflicting fundamental rights, the Double Proportionality test is attracted to test the balancing of the rights on the ‘precise interests weighing in favour of both’ rights and not the general hierarchy of the right to privacy and right to information.[xiii] The Court, applying the test, was to determine “the means used are suitable, necessary and proportionate” in protecting the right to privacy of the political parties against the impending right of the voters to know about the particulars of political funding. To further elaborate, the Court was required to determine whether the two-tier non-disclosure (about the donors and beneficiary political party) was a 'suitable' means to further the right to privacy of the donors as was effected by such amendment; whether the means were 'necessary,' i.e., the least restrictive means to effectuate such further of the right to privacy and whether the means have a disproportionate 'balance' to the people with the concerned rights. The amendment for non-disclosure of such funding vis-à-vis section 182(3), read with section 29C of RPA, does not further secure transparency in political contributions by the companies and curb corruption through these channels.[xiv] Moreover, stricter disclosure of such contributions is necessary for companies contributing to political parties because of their ability to cause undue influence on the electoral process in terms of their strong financial presence and the predominating possibilities of a quid pro quo. In light of these, the Court held such non-disclosure of the political contributions as unconstitutional and violated article 19(1)(a) as the non-disclosure fails to confer the voter to cast an informed vote. 

Manifest Arbitrariness and Violation of Article 14:

The Apex Court, while traversing the manifest arbitrary principle to etch the precipice of the legislation, propounded that to declare any plenary statute as invalid, it must violate a constitutional provision besides being merely arbitrary in itself.[xv] Thus, it relied on the Shayara Bano[xvi] judgment as clarified in In re Special Reference No. 1 of 2012227[xvii] to settle the law that legislation can be invalidated on the ground of manifest arbitrariness where such arbitrariness is a constitutional infirmity per se.

The Apex Court further noted the close association of money and its direct or indirect influence in the electoral democracy to proceed on the effect test for determining the constitutionality of such provisions. Electoral funding premised on resolving the ‘incumbency conundrum’ in securing financial resources for participation in the elections is the central objective of political funding. This is because the financial capacity is not equally available to all and thereby, political funding per se is not invalid but immensely significant to sustain the democracy in India.[xviii] On the magnified parameter of larger public interest, the Apex Court held that the amendments in its ostensible objective merely accomplished declassifying the contributions vis-à-vis political contributions by the individuals and the companies, bringing them at par. Furthermore, by allowing unlimited contributions without specific qualifications to eligible companies, the amendments further remove the pertinent differentiation made in prior regulations between a profit-making and a loss-making company.[xix] The Court relied on Citizens United v. Federal Election Commission,[xx] to hold that corporate persons and individuals cannot be placed on the same pedestal with respect to political funding primarily because the former does not donate to political parties merely for tax-exemption but substantially to secure a better business position for themselves[xxi] which would obstruct the free and election in a democracy that denotes the equal opportunity envisioned by the Constitution.[xxii] 

Thus, the amendments allowing unlimited contribution to the political parties are violative of Article 14 and manifestly arbitrary to be rendered unconstitutional.

CONCLUSION:

The Apex Court, weighing the two clashing fundamental rights, held that the right to information about political contributions outweighs the right to privacy of the donors in larger public interest and in the perspective of ensuring a free and fair election for the idealised democracy of India. It is, however, noteworthy to consider that the rationale for finding the amendments unconstitutional is primarily, in the opinion of the author, centered around the assumption that donors were mainly the companies because the aspect of non-disclosure and unlimited funding were crucial for such bodies with higher financial ability which can influence the electoral polls and gain unethically in return against those donors who would be individuals. The Court also noted that removing the anonymity could not save the entire scheme since anonymity per se was the heart of such an electoral scheme and using the back door for the conversion of black money on the abuse of right to privacy of donors is uncalled for. 

REFERENCES:

[i] Assn. for Democratic Reforms v. Union of India, (2024) 243 Comp Cas 115

[ii] Sreejiraj Eluvangal, Data Analysis: Exploring the Connection between Power & Electoral Bonds Success, The New Indian Express (2024),

[iii] The Wire, Seven Points That Merit Investigations: The Electoral Bonds Saga Isn’t Over with Data Spilling Out, (Mar. 25, 2024),

[iv] Explained: What are electoral bonds? How do they work and why are they challenged in SC?, The Economic Times, Nov. 1, 2023, https://economictimes.indiatimes.com/news/how-to/explained-what-are-electoral-bonds-how-it-works-and-why-its-challenged-in-supreme-court/articleshow/104889034.cms?from=mdr (last visited Mar 26, 2024).

[v] Association for Democratic Reforms, ELECTORAL BONDS AND OPACITY IN POLITICAL FUNDING, 1 (2024),

[vii] Taxmann, [Opinion] Discontinuation of Electoral Bond Scheme | A Major Blow Before 2024 General Elections?, Taxmann Blog (2024), https://www.taxmann.com/post/blog/opinion-discontinuation-of-electoral-bond-scheme-a-major-blow-before-2024-general-elections/ (last visited Mar 26, 2024).

[viii] Suchitra Karthikeyan, Electoral Bonds vs Electoral Trusts | What Are They and How Do They Differ?, The Hindu, Mar. 23, 2024, https://www.thehindu.com/news/national/electoral-bonds-vs-electoral-trusts-what-are-they-and-how-do-they-differ/article67975344.ece (last visited Mar 26, 2024).

[x] Electoral Bonds Deemed Unconstitutional: Granular Electoral Finance Reforms Needed?, India Corp Law (Feb. 21, 2024), https://indiacorplaw.in/2024/02/electoral-bonds-deemed-unconstitutional-granular-electoral-finance-reforms-needed.html (last visited Mar 26, 2024).

[xi] Central Public Information Officer, Supreme Court of India v. Subash Chandra Agarwal [ Civil Appeal No. 10044 of 2010.]

[xii] Campbell v. MGN Ltd., [2004] UKHL 22 (HL)

[xiii] Supra note 1, para. 155

[xiv] Id. at para. 171

[xv] Id. at para. 186

[xvi] Shayara Bano v. Union of India, (2017) 9 SCC 1.

[xvii] Natural Resources Allocation, In re, Special Reference No. 1 of 2012, (2012) 10 SCC 1.

[xviii] Supra note 10

[xix] Supra note 1, para. 208

[xx] Citizens United v. Federal Election Commission, 2010 SCC Online US SC 10

[xxi] Supra note 1, para. 2

[xxii] Id. at para. 202

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