[Trisha is a student at Gujarat National Law University.]
The recent ruling by the Supreme Court of India in the case of Association for Democratic Reforms and Another v. Union of India declared the electoral bond scheme to be unconstitutional. The judgment also scrutinized the 2017 amendments to Section 182 of the Companies Act 2013 (CA), and similarly declared them to be unconstitutional. This post aims to delve into the electoral bonds scheme through the lens of company law, highlighting its prejudicial nature with regard to the interests of the shareholders and calling for a better framework for electoral funding to ensure transparency and accountability.
Background
Section 182 of the CA regulates political contributions by companies in India. There have been several amendments to this section time and again. The electoral bond scheme was introduced by way of the Finance Act 2017, which made three changes to Section 182. The first proviso to Section 182(1), which prescribed a cap on corporate funding, was omitted. Additionally, Section 182(3) was amended to only require a disclosure of the total amount contributed to political parties by a company in a financial year and excluded the requirement to disclose the amount contributed to each political party. Lastly, it introduced sub-section 3A, by which a company could contribute to a political party only by cheque, bank draft, or electronic clearing system.
In addition to this, the Finance Act 2017 made certain amendments to Section 13A of the Income Tax Act 1961. The amendment mandated that any contribution exceeding INR 2,000 must be received via cheque, bank draft, electronic clearing system, or electoral bond. Further, political parties were no longer obligated to maintain records of contributions if they were received in the form of electoral bonds.
The court correctly noted that the amendments in provisions related to political funding directly contradicted their intended goal of reducing black money and enhancing transparency. Hence, the court struck these amendments down based on the principles of double proportionality and manifest arbitrariness.
Impact on Shareholder Rights
In the present case, although the petitioners raised concerns about how the electoral bond scheme violated shareholder rights, the court primarily focused on analyzing the provisions within the broader framework of fundamental and voter rights. However, it is imperative to evaluate the impact of these provisions on shareholders and their interests.
Non-disclosure of information on electoral funding to shareholders raises serious concerns regarding transparency and accountability. Public listed companies raise funds from the public, making them accountable to the public. Section 166 of the CA imposes a fiduciary duty on the director/s to act in the best interests of the shareholders. It is essential that particulars of financial information are disclosed to the shareholders as they have the right to know what their money is being used for. This helps them make informed decisions in relation to trading of securities and object to the same in case they believe that the contribution is not a sound business decision or the same is prejudicial to their interests or the company’s interests. Furthermore, it gives them the choice as to whether they wish to invest in a company which has contributed to a political party whose ideology that the shareholder does not agree with.
The amendment to Section 182(3) perpetuated the pre-existing inequality in power between shareholders and the board / promoters / management and placed the shareholders in an even weaker position. As per Section 136 of the CA, every shareholder has a right to a copy of the financial statement which also contains the profit and loss account. Non-disclosure of such financial information directly affects their right to vote and their right to sell their securities.
Moreover, the removal of the first proviso, which limited contributions to 7.5% of average net profits, opened the door to shell companies being set up with the sole purpose of making political donations without any significant business operations. This also permitted loss making companies to contribute to political parties and allowed companies to significantly influence governmental policies. Thus, the 2017 amendments were, in their very essence, prejudicial to the interests of the shareholder.
Analysis
Public disclosure and transparency are considered to be the best corporate governance practices for the corporate world and they will improve investors' confidence plus decision-making process while, at the same time, upholding the rights of the shareholders. To ensure this, the current framework with respect to corporate donations needs to be reformed.
The absence of a standard practice with respect to disclosure of political contributions allows companies to exercise their discretion while reporting them. According to Business Standard, this has led to many large listed companies reporting the purchase of electoral bonds and other political contributions in their annual reports in a variety of formats. The reports released demonstrate that while some showed it under miscellaneous expenses and donations with a note explaining the amount spent on electoral bonds or contributions to political parties, many companies have clubbed all donations without giving a breakup and some have not mentioned electoral bonds in their annual reports at all.
The only way to ensure that there is transparency and mandating disclosure. Access to financial information and channels of contributions must be comprehensive and easily accessible, this will help shareholders in exercising their other rights freely. First, there not only needs to be mandatory reporting but also strict standards on how the reporting must be done. In addition to this, companies should be asked to provide specific reason for their donation to a particular party with reference to their manifesto. Lastly, public listed companies must not be allowed to make contributions without the consent of the majority of the shareholders or the consent of three-fourths of shareholders. Moreover, we can draw from the US where political contributions made by way of a shell company which conceals the identity of the donor are illegal. As the 2024 Lok Sabha elections approach, we need to act with urgency to establish robust mechanisms and enforce stricter compliance measures to ensure transparency and accountability in the electoral funding process.