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Aditi

Corporate Political Spending in India: A Corporate Governance Perspective

[Aditi is a student at Rajiv Gandhi National University of Law.]


Corporate funding of political parties predates the pre-independence times when Tatas and Birlas provided the much-needed resources to succor the Indian freedom struggle marshalled by the Indian National Congress. However, the favour for corporate political donations soon dwindled with rising concerns about the undemocratic impact of such donations, from the addition of Section 293A to the Companies Act 1956 in 1960 allowing such donations within the stipulated limitations to a complete prohibition in 1969. However, this prohibition was overturned in 1985 by amending Section 293A to allow corporate political spending with stipulations pertaining to the ceiling amount and other disclosures to promote transparency and discourage the use of back channels by the companies. The Companies Act 2013 (2013 Act) taking after its predecessor continued the regulated approach under Section 182 though it had become less regulated over the years.


Recently, the Hon’ble Supreme Court of India (SC) in its landmark verdict in the case of Association for Democratic Reforms v. Union of India (judgment) declared the Electoral Bond Scheme 2018 (Scheme) as unconstitutional on account of being violative of Article 19(1)(a) of the Constitution of India. The Scheme provided donor anonymity with respect to their donations to political parties. The dictum of the court has been hailed as an impetus to democracy and there is no denying that. While the implications of the judgment on representative democracy are much and rightly discussed, the author in this article presents a focused analysis of the activity of corporate political spending from shareholders perspective. While doing so, the author does not go into the righteousness or legality of corporate political spending. The judgment and corporate political funding in India has been examined in the light of the principles of transparency and accountability which form the bulwark of corporate governance in India.


Shareholder Aspirations


There is a surge in shareholder activism on environmental, social, and governance (ESG) issues due to a number of factors, including increased involvement from institutional investors, a reduction in information asymmetry, and reinforcement of corporate governance standards.  More and more shareholders are interacting with management on social governance issues. Two of the most basic yet key principles of corporate governance are accountability and transparency. A growing number of potential investors take into consideration the ESG compliance of a company before making any investment via the purchase of shares. However, the anonymity and lack of disclosure around where the company is placing the funds of a company is a fraud on the shareholder who may be investing in the company because of their alignment with the ESG ecosystem of the company but the company may be channeling its funds to finance a party which works in counter to those norms. This can be prevented by robust disclosure mechanisms and engaging shareholders in the decision-making. The G20/OECD Principles of Corporate Governance also endorse the disclosures and shareholder participation to ensure that the companies’ lobbying activities are coherent with their claimed sustainability-related goals and targets. This is primarily to ensure the long-term credibility of the company and boost shareholder trust.


The Journey of Corporate Political Spending Post the 2013 Act


Section 182 of the 2013 Act pertains to prohibitions and restrictions regarding political contributions by companies, establishing that only a company which has been in existence for more than three financial years (FYs) and is not a government company is eligible to contribute to a political party either directly (e.g. by direct transfer of the fund to party’s exchequer) or indirectly (e.g. by funding the events of the party via the creation of brochures without applying charges for the same) via a board resolution. The section was amended via the Finance Act 2017 (2017 amendment) making the phenomena of corporate political spending unfettered and opaque. Before the 2017 amendment, Section 182 provided for a maximum ceiling of 7.5% of the net average profits of the company in the preceding 3 FYs and mandatory disclosures of the contributions in the profit and loss account of that year along with the recipient political party. However, the 2017 amendment completely did away with both the aforementioned requirements.


Now, the disclosure requirement was left to being a mere formality wherein the company only needs to disclose the amount contributed for political purposes with no requirement to disclose the recipient. The amendment added a proviso allowing the companies to “utilize any instrument, issued pursuant to any scheme notified under any law” for the purposes of political contributions, which most probably signaled at the introduction of the electoral bonds scheme, which was notified the very next year, in 2018. Section 29C of the Representation of the People Act 1951 mandated disclosures by political parties in case of contributions exceeding INR 20,000. However, the 2017 amendment exempts disclosure of contributions made by electoral bonds. A double whammy of the 2017 amendment and the option of electoral bonds completely insulated the political contribution from the scrutiny of the general public, specifically the shareholders. However, the SC in the  judgment struck down the above changes brought by the 2017 amendment among many other provisions. While the judgment did bring transparency to the process, the issue of accountability and fairness to stakeholders continues to exist in the present corporate political spending structures in India.


Need for Ensuring Accountability and Fairness to Stakeholders


In India, electoral bonds and direct corporate bonds accounted for nearly 84% (amounting to INR 13,800 crores) of the total donations to registered recognized political parties for the FYs 2016-17 to 2021-22. This illustrates the highly valued ecosystem of political contributions of the country having a significant impact on the political policies of a nation. While the standalone contributions from the corporate sector approximately make up 28% of the total, it won’t be providing a complete estimate of the quantum of contributions for the period due to the use of electoral bonds which secured the anonymity of the donors whether individual or corporations. Funneling huge amounts from the corporate coffers which are under the common ownership of the shareholders calls for a part in decision-making. As pointed out earlier, decisions about political contributions are spearheaded by a handful of people i.e. the board of directors (board). While the decisions of the use of company reserves are left to the commercial acumen of the board, the same seems fair and equitable because the options for the board are either announcing dividends, buyback of shares or issuance of bonus shares apart from reinvesting them in the business activity the company is engaged in. All of these options pertain to the channelization of funds in the direct welfare of the shareholder value. However, when it comes to expressing preferences among political parties, can we reasonably argue that corporate funds should be subject to the political inclinations of the Board members rather than reflecting the majority sentiment of the shareholders? Denying shareholders the direct right to decide on this matter seems unjustified.


In the United Kingdom (UK), the UK Companies Act 2006 (UK Act) incorporates the system of shareholder consent under Part 14 of the UK Act. The conception of shareholder consent is based on an argument that was made in London in the late 1990s: if a corporate manager finds a political cause compelling, then she should not use other people’s money to support it. Rather, she should reach into her own pocket and spend her own money. Such a system provides shareholders with much entitled say. It is recommended that the shareholders be authorized to vote on questions like whether the political contribution should be made at all or not; if yes, then to what extent; what should be time period for such authorization; and if the power to make such an authorization be delegated to another authority under the company management with the prescribed limits. Such a mechanism is an option and available under Section 183 of the 2013 Act allowing a body authorized in an annual general meeting to make contributions on behalf of the company to the National Defence Fund or any other fund for the purpose of national defence. This can be replicated in the corporate decisions of political spending, thereby strengthening the bulwark of corporate governance in India.


Conclusion


A commonly quoted direction is that if you are doing the right thing, then do it the right way. The judgment of the SC focused on the constitutional validity of the Scheme based on the balancing exercise between informational privacy to political affiliation and informational interests of voter. From the corporate governance perspective, the judgment helps the purpose of transparency and accountability, but there is scope for improvement on the corporate political spending. Involvement of shareholders in the decision-making processes ensures that the owners of the company are not mere viewers of corporate activities and are participants as well. The 255th Report of the Law Commission of India released before the scheme also criticized the exclusion of shareholder to be direct participants in the decision making of corporate political spending by a company which was taken note of by the Company Law Committee (Committee) in its 2016 report. The Committee’s small note on political spending had asked for wider consultation with industry chambers, political parties and other stakeholders by the Ministry of Corporate Affairs before taking a final decision. However, the regime grew to become more and more opaque despite the recommendations to the contrary until the SC’s decision. It cannot be ignored that strong corporate environment in India guided by principles of corporate principle is the need of the hour in this evolved and shareholder-led corporate sector. Currently, India needs to revamp its laws to practice what it preaches and aspires to be i.e. a global hub.

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