Unveiling the Veil: The Apex Court's rejection of electoral bonds within framework of Corporate Governance and Companies Act

The article examines the recent Supreme Court judgment on the electoral bond scheme from corporate governance prism and its various fallouts.
Sarvagya Legal - Tanu Priya Gupta, Khushi Sharma
Sarvagya Legal - Tanu Priya Gupta, Khushi Sharma

A Constitution bench of the Supreme Court of India, in its recent unanimous verdict dated February 15, 2024, struck down the Electoral Bond Scheme (EBS), which was introduced in 2017 by the present government in a bid to reform political funding.

The bench declared the EBS to be unconstitutional, arbitrary, and unfair. Undoubtedly, the verdict is well received, and the mood is jubilant. In fact, for many, this judgement has emerged as a beacon of new hope, and it has reassured citizens’ belief in democracy.

Yet, one cannot ignore the fact that the previous system allowed funding via "suitcases of illicit cash," and it may just be that EBS was a lesser of two evils that could have provided structured and legal avenue for corporate donations: combating the illicit cash financing problem, if not for other rationales such as preventing corruption, quid pro quo arrangements, retributions/ victimisations, or opaque political financing. 

EBS is nevertheless so tainted with malevolence that constitutional authorities such as the Reserve Bank of India (RBI) and the Election Commission of India (ECI) opposed the scheme even before it was implemented. The EBS has proved to be violative of not only the provisions of the Constitution of India but also some major laws of the land, such as the Reserve Bank of India Act 1934, the Representation of the People Act 1951, the Income Tax Act 1961, and the Companies Act 2013.

The Companies Act, 2013 endured major amendments in its provisions regarding contributions to political parties. This article analyses the unconstitutionality of electoral bonds primarily through the lens of such shifts in company law and departures from corporate governance.

In tandem with the EBS, amendments to the Companies Act, 2013 were enacted to allow for unlimited corporate funding. The company law's tryst with corporate political funding is historically marked by significant polarisation, as is apparent from the amendments themselves:

  1. The Companies Act of 1956 did not contain provisions for contributions to political parties by companies or individuals.

  2. The 1960 Amendment Act introduced Section 293A, limiting political contributions by companies to twenty-five thousand rupees per financial year, or 5% of their net profit from the preceding three years, and requiring disclosure of contributions and political party names in their profit and loss accounts. 

  3. The Amendment Act of 1969 amended the provisions of Section 293A and again banned contributions to political parties or for political purposes.

  4. The Amendment Act of 1985 allowed companies to contribute to political parties or for political purposes, including direct or indirect expenditure on advertisements or publications. However, restrictions like the company (which is not a government company) must have been in existence for more than three years and a necessary board resolution allowing political contributions were added. Further, penalties for violations were made more stringent.

  5. Section 182 of the Companies Act, 2013 made further modifications by providing an increase in the cap on contribution from 5% to 7.5% of their average net profits over the preceding three financial years, which can be made to the political parties. Also, under this amendment, companies were required to disclose their political contributions in their annual financial statements. It provided for stricter consequences for violations and extended the fine to five times the contribution.

Unregulated and Uncontrolled Contributions

The unamended Section 182 of the Companies Act, 2013 provides for prohibitions and restrictions regarding political contributions, which include a cap of 7.5% of the average net profits preceding three financial years. This aims to prevent excessive corporate influence in politics while ensuring that political funding remains transparent and accountable.

In introducing the EBS, Section 154 of the Finance Act, 2017 amended Section 182 of the Companies Act, 2013 and removed the 7.5% funding limit and dissolved the requirement for it to be from net profits. The amendment also did away with the necessity of disclosing the specifics concerning such political contributions.

Section 182(1) Prior to and Upon amendment
Section 182(1) Prior to and Upon amendment
Section 182(3) Prior to and Upon amendment
Section 182(3) Prior to and Upon amendment

The removal of the 7.5% cap resulted in unregulated and uncontrolled contributions. Earlier, participation was restricted to for-profit companies. However, the implementation of no-cap made it possible for shell corporations to make substantial contributions, thereby creating more avenues for money laundering and quid pro quo transactions. Furthermore, the absence of a contribution cap could significantly impede shareholders' ability to exert control over the board's decisions.

The Apex Court has rightfully declared this scheme iniquitous. Ironically, this scheme was launched to curb the circulation of black money but has only derived look-alike results in the name of donations and contributions. The Court also observed that the said amendment, which treated companies and individuals alike for the purposes of political donations, is capricious, given that corporations wield a significantly greater impact on the political process than individuals.

Lack of Transparency

Non-disclosure of the particulars of contributions could only be a grave misprint on corporate governance. Corporate governance, at its core, includes transparency and accountability. In contrast, the anonymity that electoral bonds provide allows for opaque political funding and promotes a lack of accountability. This totally makes farce of India's commitment to develop a robust accountable corporate sector.

Besides, this anonymity of the contributions could also result in the mismanagement and mishandling of a company’s assets, gravely affecting not only shareholder rights but also the operations of the company. Furthermore, non-disclosure of contributions in cases of public companies departs from the standards of fair play and business ethics, that stakeholders justifiably assume while placing their trust in a company. This further gives rise to legitimate concerns regarding mismanagement, which may have repercussions on the rights of various stakeholders.

Thus, the Electoral Bond Scheme has been fairly concluded to be arbitrary due to its discriminatory and non-transparent nature. The deletion of the 7.5% gap is rightly held to be in violation of provisions of the Constitution of India, making the Apex Court call for complete disclosure of contributions received by the political parties. Moreover, the scheme is not only a threat of non-abidance but also goes against the model of ‘Corporate Governance.’

The Apex Court has rightly canvassed that there is a lot of room for contribution to politics, but only when the lights are on!

About the authors: Tanu Priya Gupta is an Advocate-on-Record, Supreme Court of India and a Partner at Sarvagya Legal and Khushi Sharma is an Associate at Sarvagya Legal.

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