Introduction
The Electoral Bonds Scheme (EBS) and the associated amendments to the Companies Act, 2013 (CA 2013) have been subject to considerable scrutiny, leading to a landmark decision by the Supreme Court of India. This decision has nullified both the EBS and the amendments, creating a need for companies to reassess their compliance with political contributions. This analysis delves into the evolution of laws regulating corporate donations to political parties and the implications of the Supreme Court’s ruling. The case not only addresses legal and constitutional issues but also highlights the broader implications for corporate governance, electoral transparency, and democratic integrity. By understanding the historical context and the Court’s reasoning, companies can better navigate the complexities of political contributions and ensure compliance with the reinstated legal framework. This decision marks a pivotal moment in India’s electoral financing landscape, emphasising the need for transparency and accountability in the intersection of business and politics.
The Nature of Electoral Bonds
Electoral bonds are essentially promissory notes used for political funding. These bonds, being bearer instruments, do not disclose the buyer’s identity. This anonymity in the political financing process has been a point of contention, leading to the Supreme Court’s intervention.
The Supreme Court’s Verdict
In the landmark Electoral Bonds Case, the Supreme Court of India struck down both the Electoral Bonds Scheme (EBS) and the amendments made to Section 182 of the Companies Act, 2013 (CA 2013). This decision has profound implications for corporate political contributions and transparency in electoral financing.
Key Points of the Verdict:
1.Original Disclosure Requirements:
Before the 2017 amendments, Section 182(3) of CA 2013 mandated that companies disclose the names of the political parties to which they contributed in their financial statements. This requirement aimed to ensure transparency and allow the public to see which companies were financially supporting which political parties.
2. Cap on Contributions:
Section 182(1) imposed a cap on the total contributions a company could make in a financial year, limiting it to a certain percentage of the company’s net profits. This cap was intended to prevent excessive corporate influence on politics and ensure that only financially healthy companies made contributions.
3. Penalties for Non-Compliance:
The original provisions included strict penalties for non-compliance. Companies failing to adhere to these regulations faced fines up to five times the amount contributed and imprisonment for responsible officers, reflecting the serious nature of these rules.
Changes Introduced by the 2017 Amendments:
– Reduced Transparency:
The Finance Act of 2017 amended Section 182(3) to require companies to disclose only the total amount contributed to political parties without naming the recipients. This change significantly reduced the transparency of corporate political contributions.
– Removal of Contribution Cap:
The amendments removed the cap on the total contributions companies could make, allowing unlimited donations. This change raised concerns about the potential for increased corporate influence in politics, particularly from large corporations.
– New Contribution Methods:
The amendments also introduced a new subsection, 3A, specifying that contributions could be made via cheque, bank draft, or electronic clearing system, and through any instrument issued under a notified scheme, including the EBS.
Implications of the Verdict:
The Supreme Court’s decision means that the original, more stringent disclosure and contribution limits are back in force. Companies must now revert to these regulations, ensuring greater transparency and accountability in their political contributions. The ruling emphasises the need for an open and transparent electoral financing system, where corporate contributions are clearly disclosed, allowing the public to scrutinise and understand the financial relationships between companies and political parties. This decision reinforces the importance of maintaining the integrity of the democratic process by preventing undue corporate influence and promoting informed voting.
Supreme Court’s Reasoning
The Supreme Court found the amendments problematic for several reasons:
1. Transparency and Right to Information :
The Court emphasised that the original disclosure requirements aimed not only to curb black money but also to ensure transparency in the financial dealings between companies and political parties. The amendments diluted this transparency, violating voters’ right to information under Article 19(1)(a) of the Constitution. The electorate needs to know about corporate influences on political parties to exercise informed voting.
2. Constitutional Concerns:
The amendment to Section 182(3) was seen as aligning corporate disclosure laws with the EBS and amendments to the Representation of the People Act, 1951 (RPA), which exempted political parties from disclosing contributions received through electoral bonds. With the EBS and the RPA amendments declared unconstitutional, the corresponding changes to Section 182(3) became redundant.
3. Equality and Arbitrary Treatment:
By removing the cap on political contributions, the amendments equated companies with individuals. The Court noted that companies, due to their financial power and business motives, wield more significant influence over the political process than individuals. Treating them equally disregards the potential for corporate contributions to distort the democratic process. Furthermore, the removal of the cap allowed loss-making companies to contribute, raising concerns about contributions being used for quid pro quo arrangements rather than legitimate business interests.
Legal Principles and Retrospective Effect
When a law is declared unconstitutional, it is considered void from its inception. The Supreme Court reaffirmed this in the CBI vs. R. R. Kishore case, stating that unconstitutional laws are non-existent from the date of their enactment.
This principle means the striking down of the 2017 amendments to Section 182 of CA 2013 has a retrospective effect, reverting the law to its pre-amended state from the date of the amendment itself. However, Article 20(1) of the Constitution provides a safeguard against retroactive criminal prosecution. No one can be convicted of an offence that wasn’t an offence at the time it was committed. Hence, actions taken in good faith under the amended provisions prior to the Supreme Court’s judgement on February 15, 2024, cannot be subjected to criminal liability.
Implications for Companies
The Supreme Court’s ruling has significant implications for companies, necessitating a return to the original disclosure requirements and contribution limits. Companies need to understand the following scenarios:
1. Electoral Bonds Purchased from 2017-18 to 2022-23:
Companies that made disclosures under the amended provisions in their already prepared and published financial statements are protected from retrospective criminal liability. However, for financial years where statements are yet to be prepared, companies must comply with the unamended Section 182. This means they must disclose the names of the political parties to which contributions were made.
2. Electoral Bonds Purchased in 2023-24:
Contributions made in the previous financial year up until the Supreme Court’s judgement must be disclosed in the financial statements for 2023-24. Companies are required to list the names of the political parties, adhering to the unamended disclosure requirements.
Evolution of Corporate Political Contributions Law
To comprehend the current legal position, it is essential to trace the historical development of laws governing corporate political contributions:
– 1956: The original Companies Act, 1956, did not regulate political contributions.
– 1960: The Companies (Amendment) Act introduced Section 293A, capping contributions and mandating disclosure of the recipient’s name.
– 1969: Amendments imposed a complete ban on corporate political contributions, with severe penalties for contravention.
– 1985: Contributions were permitted again under stricter conditions, including board resolutions and fines for non-compliance.
– 2013: CA 2013 incorporated the 1985 provisions with increased contribution caps and stricter penalties.
– 2017: The Finance Act removed the cap on contributions and relaxed disclosure requirements, paving the way for the EBS.
Supreme Court’s Decision and Its Consequences
The Supreme Court’s decision has far-reaching effects. The key takeaways include:
– Restoration of Original Provisions:
The unamended Section 182 is reinstated, meaning companies must disclose political contributions transparently, including the names of recipients, and adhere to the 7.5% cap on contributions relative to their average net profits from the preceding three years.
– Bona Fide Compliance Protection:
Actions taken in good faith under the amended provisions before the judgement date are protected from criminal liability. This protection ensures that companies are not penalised for following the law as it stood at the time.
– Immediate Compliance Requirements:
Companies must immediately revert to the original disclosure requirements for any future political contributions and amend their financial statements accordingly for past contributions if not yet finalised.
Practical Guidance for Companies
Given the Supreme Court’s ruling, companies should take the following steps:
1. Review Past Contributions:
Companies should review their political contributions from 2017 onwards to ensure compliance with the unamended provisions of Section 182. This includes disclosing the names of political parties in financial statements where required.
2. Update Financial Statements:
For financial years 2017-18 to 2022-23, if financial statements are yet to be prepared, companies must include detailed disclosures as per the unamended Section 182.
3. Prepare for Future Compliance:
For contributions made in 2023-24 and beyond, companies should ensure compliance with the restored disclosure requirements and contribution caps.
4. Consult Legal Advisors:
Given the complexity and potential legal implications, companies should consult legal advisors to navigate the changes and ensure full compliance.
Conclusion
The Supreme Court’s decision in the Electoral Bonds Case marks a significant shift in the regulatory landscape for corporate political contributions in India. By striking down the 2017 amendments and restoring the original provisions of Section 182 of CA 2013, the Court has reinforced the importance of transparency and accountability in political financing. Companies must now adapt to these changes, ensuring their political contributions are fully disclosed and within legal limits. This ruling not only impacts corporate compliance but also strengthens the democratic process by promoting greater transparency in electoral financing. Moving forward, it is crucial for companies to stay informed and vigilant about regulatory changes to maintain compliance and support a transparent political environment. This case underscores the need for continuous scrutiny and adjustment of corporate practices in line with evolving legal standards, fostering an electoral system where voters are well-informed and corporate influence is adequately regulated. The decision sets a precedent for future legislative and judicial actions aimed at enhancing the integrity of political contributions.
FAQs
1. What is the Electoral Bonds Scheme (EBS)?
The Electoral Bonds Scheme is a method for companies and individuals to donate to political parties anonymously. These bonds are bearer instruments, meaning they do not carry the donor’s name, and can be purchased from specified banks.
2. Why did the Supreme Court strike down the Electoral Bonds Scheme?
The Supreme Court found that the EBS and the associated amendments to the Companies Act, 2013 (CA 2013) reduced transparency in political funding. This lack of transparency was deemed to violate the right to information under Article 19(1)(a) of the Constitution.
3. What changes did the Finance Act, 2017 introduce to Section 182 of CA 2013?
The Finance Act, 2017:
– Amended Section 182(3) to require only the total amount of political contributions to be disclosed, not the recipients.
– Removed the cap on the total contributions a company could make in a financial year.
– Introduced a new subsection, 3A, specifying permissible methods of contribution, including through the EBS.
4. How did the Supreme Court view the amendments made by the Finance Act, 2017?
The Court found that the amendments:
– Reduced transparency in political contributions, violating the right to information.
– Aligned with the now-unconstitutional EBS and amendments to the Representation of the People Act, 1951 (RPA).
– Were arbitrary, as they removed the contribution cap and treated companies and individuals equally despite their different capacities to influence politics.
5. What is the significance of the Court’s decision on corporate political contributions?
The decision reinstates the original, more stringent provisions of Section 182 of CA 2013. Companies must now disclose the names of political parties they contribute to and adhere to a cap on contributions, enhancing transparency and accountability in political financing.
6. What are the implications for companies that made contributions under the EBS from 2017 to 2023?
Companies must review their financial statements for compliance with the restored disclosure requirements. While actions taken in good faith under the amended provisions are protected from retrospective criminal liability, companies must now disclose detailed information for past contributions if financial statements have not yet been finalised.
7. How does the decision affect future corporate political contributions?
Going forward, companies must fully disclose the names of political parties they contribute to and comply with the cap on contributions as per the unamended Section 182 of CA 2013. This ensures greater transparency and aligns corporate political contributions with the original legislative intent.
8. What protections are in place for companies regarding retrospective compliance?
While the Supreme Court’s decision has retrospective effect, Article 20(1) of the Constitution protects companies from criminal prosecution for actions that were not offences at the time they were committed. Thus, bona fide actions under the amended provisions before the judgement are shielded from criminal liability.
9. How can companies ensure compliance with the Supreme Court’s ruling?
Companies should:
– Review and update financial statements to include required disclosures for political contributions.
– Ensure future contributions are within the cap and properly disclosed.
– Consult legal advisors to navigate the changes and avoid potential non-compliance issues.
10. What does this decision mean for the transparency of political funding in India?
The decision reinforces the importance of transparency in political funding, ensuring that corporate contributions are clearly disclosed. This allows the public to scrutinise financial relationships between companies and political parties, promoting informed voting and preventing undue corporate influence on politics.
Author : Supriya Jadhav, a student at Government Law College, Mumbai
