DHARMASHASTRA NATIONAL LAW

UNIVERSITY, JABALPUR

(Session 2022-2023)

Topic

POLITICAL CONTRIBUTIONS BY COMPANIES IN INDIA

Submitted To: Submitted

By:

Ms. Shruti Nandwana Sanskrati Jain

[Assistant Professor Section B

Of Law] BALLB/116/20
 Semester -V

Acknowledgement

The completion of this project required counselling and assistance from many people and I
am thankful towards them for their counselling in my project.

I would like to express my deep gratitude towards my teacher Assistant professor Ms. Shruti
Nandwana, who took acute interest in my project and guided me all along. I am feeling
extremely privileged to have her as my instructor in the project. I owe my deep gratitude to
the vice-chancellor Prof. V. Nagraj for his valuable support throughout the project. This
project helped me in gathering a lot of knowledge and becoming more aware of things related
to my topic.

I would like to extend my gratefulness to my parents and friends for their valuable support
and advice.

I am making this project not only to get marks but also to enhance my knowledge. At the end
I would like thank everyone who helped me and invested their valuable time for this project.

Sanskrati Jain
 TABLE OF CONTENTS

Acknowledgement................................................................................2

Introduction..........................................................................................4

Research Objecives...............................................................................5

Research Question................................................................................5

Research Methodology.........................................................................5

Literature Review.................................................................................6

Provision Regarding Political Contribution by Indian Companies......7

Issues with Corporate Political Contribution Regime in India.............8

Conclusion And Suggestions..............................................................10

Annotated Bibliography.....................................................................12
 SYNOPSIS

Introduction

Companies are no more an economic entity per se, as they were at their inception. The role of
a company has now become of a socio-economic entity playing important role in both the
areas of the nations where they are operating. Companies provide employment to citizens of
the nation, trade with them and companies also possess huge financial resources playing
important social and economic role in the building and development of a nation. Supreme
Court has also recognised this changing nature of company in National Textile Workers'
Union v. P.R. Ramakrishnan1 and held that it would be wrong to look upon the company as
something belonging to the shareholders. The traditional view that the company is the
property of the shareholders is now an exploded myth. Today social scientists and thinkers
regard a company as a living, vital and dynamic, social organism with firm and deep-rooted
affiliation with the rest of the community. The public interest element is quite a predominant
factor in the Act itself. The transformation of a company's character from private to public is
going on right before our eyes even as the institution of private property is also losing its
diathesis.2

The traditional nature of a company has changed over the period and now choosing
competent leaders, enabling a healthy opposition, achieving economic stability, ensuring
reasonable policies and laws, and, at the risk of sounding corny, creating, and maintaining a
good society all depend on businesses participating in politics or making political donations
has become integral part of company. Engagement and participation are also required to
maintain effective checks and balances within the government. In a way, companies’
financial resources are very huge and with new idea of company playing an important in the
social and economic aspects of the country, it can also impact the political situations of any
country. The company may contribute to a particular political party in lieu unjust and
unfettered enrichment after it coming into power. Companies can taint the very idea of free
and fair elections and possess the ability to influence voters’ behaviour as having access to
social as well as economic aspect.3
1
National Textile Workers' Union v. P.R. Ramakrishnan, (1983) 1 SCC 2289
2
Mr. M. Govindarajan, A Company is a Social Institution Having Duties and Responsibilities towards the
Community, Tax Management India [(02 December 2022, 19:00)],
[https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=882].
3
Ibid.
The Representation of People's Act, 19504 permits political parties to accept donations from
Indians. Every political party is obligated to acknowledge donations upon receipt under
Section 29B of the Representation of People's Act5 from any individual or organization,
excluding Government companies, who makes a voluntary contribution to the party.
Furthermore, according to Section 2 of the Foreign Contribution (Regulation) Act of 19766,
no political party may take any contributions from foreign sources. Moreover, political
parties are required under the Representation of People's Act to disclose the specifics of any
contributions exceeding Rs 20,000 and to create a report for them each fiscal year. All
contributions from individuals, corporations, not-for-profit organizations, etc., must be
disclosed to the Indian Election Commission. The list of donations must include the donors'
names, addresses, and other information. A political party would be ineligible to receive any
tax relief if it failed to submit the report. But all the above-mentioned provisions for political
contribution are subject to Companies Act provisions in case the contributor is a company,
which invariable act as safety valve for the political system and safeguards the democracy of
the nation.

Research Objectives

 To understand the provisions regarding restrictions on the political contribution made

by a company under Companies Act.
 To evaluate the above-mentioned provisions and find the loopholes in the present
provisions.

Research Question

Whether the provisions restricting the extent of political contributions by the companies
under the Companies Act are sufficient and capable enough to achieve its objectives of
saving the political system and democracy from being influenced adversely?

Research Methodology

Doctrinal research also known as, theory-testing or knowledge building research has been
done to shape the project. The research was done mainly by e-resources. A lot of research has
already been conducted on the same topic. There is no field work required here. For my

4
The Representation of the People Act, 1950, No.43, Acts of Parliament, 1950 (India)
5
The Representation of the People Act, 1950, § 29B, No.43, Acts of Parliament, 1950 (India)
6
The Foreign Contribution (Regulation) Act, 1976, § 2, No. 49, Acts of Parliament, 1976 (India).
research work the data has been collected from various databases, and newspaper articles
from The Hindu, The Indian Express was taken. With the help of internet various books’
summary and their excerpts were read. Various materials that are available on e-sources have
been critically analysed and the similar ideas have been put forward in the project. The
primary as well as secondary documentary sources are utilized to make the study up-to-date,
orderly and scientific. Various reports, books, articles, journals, judicial decision, website,
international, constitutional norms, and national measures will be taken as important research
tools. Besides these methods, some other methods will also be applied according to the need
of the study.

Literature Review

Transparency and Accountability in Political Funding by Shelly Mahajan and Maj. Gen.
Anil Verma (Retd.) this article explains that a well-functioning democracy is built on
transparency and openness in political party finance, even if political money is a must for
political parties to perform their part in the democratic process. Lack of transparency of the
sources of party funding encourages corruption and fosters reciprocal agreements between
powerful contributors and elected officials. Policy choices are co-opted in nations where
political parties or leadership are unduly dependent on money from a select group of
contributors. When one party has unrestricted access to surplus campaign funds, the level
playing field is undermined. Recent "reforms" to political financing in India, however, have
done nothing to hold parties responsible for the funding they receive and have instead
legitimized secrecy. India is moving against this trend in the name of "transparency." This
essay gives a general review of the political finance system in India, including its laws,
current problems, and the effects of an inadequate regulatory system. The paper ends by
outlining some potential steps that could be taken to improve political financing's
accountability and transparency and to revive India's electoral politics.
Provision Regarding Political Contribution by Indian Companies

Companies are allowed to donate to political parties and claim the tax deduction under
section 80GGB of Income Tax Act7. It must adhere to every criterion listed in Section 182 of
the Companies Act, 20138. This section explains how to make a political donation and how to
disclose it in the profit and loss account. An Indian Company is permitted to donate any
amount to any political party under Section 182. A company that is not a government
company and which is in existence for at least last three financial years may contribute to a
political party/parties registered under the Representation of Peoples Act.9

Prohibitions and Restrictions on Political Contributions

Every company must adhere to the following guidelines before making a political
contribution:

 Passage of Board Resolution - Every business is obliged to approve a Board

resolution prior to making any political contributions. Political donations may be
made during BOD meetings under Board Resolution.
 Types of Political Contribution – Is covered under the ambit of Section 182(2) –
Types of political contributions are-
 whatever sum that a company spends (directly or indirectly) on advertising
placed in a periodical on its behalf or in support of a political party. It may
take any shape, including: (a memento, brochure, pamphlet, etc.)
 any sum spent on advertising in a newspaper that is not produced by or on
behalf of a political party but rather serves that party's interests.
 a contribution, subscription, or payment made by a firm on its behalf or/for its
account to a person who, to the knowledge of the company, is engaging in any
action that may be logically viewed as having the potential to influence public
support for a political party. [Section 182(2)(a)]
 Disclosure requirement-Section 182(3)- The company must properly disclose the
amount donated by the company throughout the fiscal year in the profit and loss
statement.

7
Income Tax Act, 1961, § 80GGB, No. 43, Acts of Parliament, 1961 (India).
8
The Companies Act, 2013, § 182, No. 18, Acts of Parliament, 2013 (India).
9
Ibid.
  Mode of Payment- Section 182(3A)- A company can only make political
contributions through banking channels. It is not possible to make it in cash.

The cap on the amount that a company can donate, which was previously set at 7.5% of the
average profits of the previous three years, has been removed by recent amendments to this
section. The previous requirement that the name of the political party to which the
contribution has been made be disclosed in the P&L account was removed as a result of the
amendments. As a result, the Companies Act has a strong framework that permits Indian
companies to make political contributions. For the purpose of this section banking channels
imply (i) a cheque drawn on a bank (Account Payee), (ii) a bank draft (Account Payee), or
(iii) the use of an E-clearing system via a bank account.10

Issues with Corporate Political Contribution Regime in India

Many companies decide not to participate in politics by contributing to candidates or

otherwise, most likely out of scepticism, that it might tarnish the company’s image that by
making political contribution company lieu of contributions made may be excepting any
benefits from that political party when it comes in power. Moreover, the transparency and
vigilance regime keep a keen on such political transactions. But company is a socio-economic
institution and works to maximize the profits it invariably gets indulged in politics and that is
considered somewhat immoral in the society.

Section 183 of Companies Act, 201311 allows company to contribute any amount as it thinks
fit to the National Defence Fund or any other Fund approved by the Central Government for
the purpose of national defence. And Section 135 of the Companies Act, 201312 has made
Corporate Social Responsibility mandatory for every company that has a net worth of Rs. 500
crore or more, or a turnover of Rs. 1,000 crore or more, or a net profit of Rs. 5 crore or more
during any financial year must spend a minimum 2% of the average net profits made during
the 3 immediately preceding financial years. The above given two provisions provide ways to
companies to evade the requirements and consequences of political contribution as suggested
under section 182. Companies contribute to private funds of politicians like PMNRF,

10
Ajay Bahl, Political Contributions: Indian Legal Regime, azbpartners.com [(29 th Nov. 2022 12:39)],
[https://www.azbpartners.com/bank/political-contributions-indian-legal-regime/].
11
The Companies Act, 2013, § 183, No. 18, Acts of Parliament, 2013 (India).
12
The Companies Act, 2013, § 135, No. 18, Acts of Parliament, 2013 (India).
PMCARES etc. in the name of CSR and try to bypass the scrutiny of Election Commission,
Central Vigilance Commission etc.

Another flaw in corporate political regime is giving the Board of Directors the authority to
decide which political party to donate to. Why should a coterie of 10 or 15 Directors decide
how to use corporate cash rather than the thousands of shareholders who are the true owners
of the business? In the long run, quid pro quo agreements between business houses and
political parties are inevitably more likely because shareholders still do not have a voice in
corporate political fundraising under Indian law.

Apart from this, the harsh reality is that political leader or politicians only make these laws
and regulations regarding the political contribution, so the result is more than obvious. One
might look at recent changes that have made it simpler for Indian corporations to support
political parties and are predicted to give political finance more impetus. Let us take the
example of electoral bonds, electoral trusts, recent amendments etc.

While amended section 182 eliminated the requirement to identify the recipient political party
in the P&L account, there is still an independent requirement that political parties submit
information about contributions they have received to the Election Commission of India at
the end of each fiscal year (ECI). This contribution is open to the general public. The amount
contributed and the donor's information, as well as the names of the political parties to which
contributions were made, will therefore be made public despite the exemption provided by
section 182 of the Companies Act. Political donations are frequently made through electoral
trusts. The identities and amounts of an electoral trust's contributors must be disclosed to ECI
at the end of each fiscal year, but there is no need that the donations be tied to a particular
political party. The electoral trust is subject to a separate requirement that it disclose the total
amount distributed to each political party without identifying individual contributors.13

The Electoral Bonds Scheme was announced by the government on January 2, 2018, to allay
worries about donor anonymity and any other potential implications in the donor's mind.
Electoral bonds are bearer bonds that may be bought by a qualified contributor using a check,
demand draft, or electronic payment method. Electoral bonds are non-identifiable and have a
15-day validity period after issuance. The bonds may be distributed to registered political

13
Samya Chatterjee and Niranjan Sahoo, Corporate Funding of Elections: The Strengths and Flaws,
[orfonline.org] (published on 15th Februray 2014),
[https://www.orfonline.org/wp-content/uploads/2014/03/IssueBrief_69.pdf].
parties that received at least 1% of the vote in the most recent Lok Sabha or legislative
assembly elections once they have been acquired. The political party can then use a bank
account with a recognized bank to cash them out.

Electoral bonds guarantee the donor's anonymity since, after the bond has been bought and
delivered, neither the government nor the authorized bank nor any other person can link the
bond to the donor. The Ministry of Finance has said that the serial numbers on the bond
instruments are not documented by the Government/issuing bank or shared and, as a result,
cannot be used to monitor the contribution or the buyer considering a recent dispute about
their traceability.14

A political party cannot accept contributions from abroad. However, when Foreign
Contribution (Regulation) Act15 was amended in 2010, changing the meaning of the phrase
"foreign source," a candidate or party would be permitted to take contributions from overseas
businesses that are registered in India.

Conclusion And Suggestions

Given that rules governing political funding are enacted by politicians themselves in a
democracy, no regulatory system can ensure that regulations are effectively enforced. The
ability and desire of parties and other stakeholders to respect the law in letter and spirit and
control their use of funds is crucial.

Money has a significant impact in politics, which is a well-known truth. According to the
ECI's Guidelines on Transparency and Accountability in Party Funds and Election
Expenditure, "concerns have been expressed in various quarters that money power is
disturbing the level playing field and vitiating the purity of elections." The Supreme Court
has also highlighted the influence of money power in its various rulings, including Kanwarlal
Gupta v. Amar Nath Chawla16 and Ashok Shankarrao Chavan v. Madhavrao17.
Unquestionably, having more money gives you an edge in elections, thus wealthy politicians
and parties stand a better chance of winning.

14
National Watch and Association for Democratic Reforms, Electoral Bonds and Opacity in Political Funding,
adrindia.org, (30 November 2022, 16:38),
[https://adrindia.org/sites/default/files/Electoral_Bonds_And_Opacity_In_Political_Funding_English.pdf]
15
The Foreign Contribution (Regulation) Act, 2010, No. 42, Acts of Parliament, 2010(India).
16
Kanwar Lal Gupta v. Amar Nath Chawla & Ors., 1975 AIR 308
17
Ashok Shankarrao Chavan v. Madhavrao, (2014) 7 SCC 99
Companies and big corporate houses, having access to huge financial resources and public
finances can change the fate of any election by funding and publicising a particular political
party. The huge and gigantic financial power of a company and its access to financial
resources of the nation it can influence the voting behaviour through abusing its dominant
financial and economic resource and fraud the very intrinsic object of democracy. It also
creates a high degree of compulsion for corruption in the political arena. Hence, the corporate
political funding and other relations shall be kept under scrutiny by competent authorities and
save the democracy from being defiled from the abuse of their dominance in the country.18

The Law Commission of India's 255th Report on Electoral Reforms 19 and the Association for
Democratic Reforms have offered several proposals to curb this menace, but these have not
yet been put into action. Here are a few examples: -

 According to the Law Commission report, stringent execution of disclosure is

essential to government scrutiny of political financing. In this sense, statutory support
for the ECI transparency principles is required.
 State Funding: To lessen the incentive to raise money and abuse power, any reform in
state funding should be preceded by reforms such as the decriminalization of politics,
internal party democracy, electoral finance reform, transparency and audit
mechanisms, and stricter enforcement of anti-corruption laws.
 Political party fundraising investigation shows that almost 75% of contributions
originate from unidentified sources. Donations made anonymously should be
prohibited or regulated. According to a recommendation made by the Law
Commission, anonymous donations should not account for more than 20% of all
contributions made each year. The Law Commission has suggested that a team of
auditors chosen by CAG assess the political parties' finances.
 There is currently no limit on the amount that may be donated to a political party.
According to recommendations, a donor's annual gift to a political party should be
capped at a certain amount, and the public and law enforcement should be informed
of such payments.

18
Rajindar Sachar, Clean Politics demands No Corporate Funding to Political Parties, Vol XLVII, Mainstream,
Page No. 19, 2009, [http://www.mainstreamweekly.net/article1322.html]
19
Law Commission of India, “Electoral Reforms,” Report No. 255, 12-March-2015, available at
https://cdnbbsr.s3waas.gov.in/s3ca0daec69b5adc880fb464895726dbdf/uploads/2022/08/2022081635.pdf (Last
visited on November 28, 2022).
  Spending limitations: The Law Commission has suggested a cap on political party
spending during elections. All election-related expenses should be handled by the
political party and candidates through a bank account set up specifically for that
purpose.
 Penalties for Parties who fail to disclose information have been recommended by the
Law Commission, along with the establishment of an independent investigating
agency.

Annotated Bibliography

1. National Textile Workers' Union v. P.R. Ramakrishnan, (1983) 1 SCC 2289

In this judgement, the court explained that the traditional view that the company is the
property of the shareholders is now an exploded myth. Today social scientists and thinkers
regard a company as a living, vital and dynamic, social organism with firm and deep-rooted
affiliation with the rest of the community in which it functions. This judgement helped in
providing the authority to the premise of this article and the opinion of J. Reddy helped the
author in understanding the evolving nature of the company and build the premise of the
article further.

2. Mr. M. Govindarajan, A Company is a Social Institution Having Duties and

Responsibilities towards the Community, Tax Management India [(02 December 2022,
19:00)],[ https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=882].

This article beautifully illustrated, how the nature of a company’s functions and
evolution of company as an entity from performing for economic and financial gains to a
social institution having duties and responsibilities towards the community in
which it functions. The article adduced various arguments with the help of case laws and
opinions of learned judges in order to demonstrate that the evolution of company as an
institution and changed its basic objective of that from profit maximization to earning of
profit while also striving for welfare of society in which it functions. It helped in building the
premises of this article.

3. Ajay Bahl, Political Contributions: Indian Legal Regime, azbpartners.com [(29th Nov.
2022 12:39)], [https://www.azbpartners.com/bank/political-contributions-indian-legal-
regime/].

This article categorically explains the related provisions to the topic of research at
hand. This blog by co-founder of reputed firm helped in understanding the practical
application of the provisions of various legislations relating to corporate political funding.
This article helped author summarizes the current Indian legal regime on political
contributions by companies.
4. Samya Chatterjee and Niranjan Sahoo, Corporate Funding of Elections: The Strengths
and Flaws, [orfonline.org] (published on 15th Februray 2014),
[https://www.orfonline.org/wp-content/uploads/2014/03/IssueBrief_69.pdf].

The nexus between corporates and politics is a phenomenon that has been witnessed
in many countries across the globe including India. Political funding, especially corporate
donations, is one of the primary causes of cronyism and corruption in the country and
requires urgent reform. With the reading of this paper author understood that there has been
increasing focus on principles of transparency and accountability in corporate funding. The
pernicious nexus between politicians and business houses, more than evident in these times,
necessitates a thorough review of this dimension of funding India's democracy.

5. National Watch and Association for Democratic Reforms, Electoral Bonds and Opacity in
Political Funding, adrindia.org, (30 November 2022, 16:38),
[https://adrindia.org/sites/default/files/Electoral_Bonds_And_Opacity_In_Political_Fundi
ng_English.pdf]

This paper helped in understanding the very politics in enactments and recent trends
in the legal evolution relating to corporate political funding. The recent modifications and
enactments have led to intransparency and opacity in the political contributions made by
companies with various provisions, such as, the removal of cap in donation at 7.5% of the
average profits of the previous three years, the requirement of the name of the political party
to which the contribution has been made be disclosed in the P&L account was removed. The
report helped in reaching to the conclusion and suggestion that the enactment relating to the
political fundings are in the hands of politicians and how they are trying to exploit it. This
article also helped in understanding the root cause of the problem and also some very fruitful
suggestions to it.

6. Kanwar Lal Gupta v. Amar Nath Chawla & Ors., 1975 AIR 308 and Ashok Shankarrao
Chavan v. Madhavrao, (2014) 7 SCC 99

This case laws highlighted the use of money power during election and its
influence over the voters. Not only can money buy advertising and canvassing facilities such
as hoardings, posters etc. and all the other paraphernalia of an election campaign, but it can
also provide the means for quick and speedy communications and movements and
sophisticated campaign techniques. If, therefore, one political party or individual has larger
resources available to it than another individual or political party, the former would certainly,
under the present system of conducting elections, have an advantage over the latter in the
electoral process. The former would have a significantly greater opportunity for the
propagation of its programme while the latter may not be able to make even an effective
presentation of its views. If these cases are read with the present corporate political funding
regime, we can infer that in order to win elections and acquire power politicians tend to
liberalise the corporate funding to political party, as corporate houses have access to huge
financial resources.
7. Rajindar Sachar, Clean Politics demands No Corporate Funding to Political Parties, Vol
XLVII, Mainstream, Page No. 19, 2009, [http://www.mainstreamweekly.
net/article1322.html]

This article highlighted the upsurging problem of corporate money power

muddying the political process in the country. The authority for the argument included J.
Chagla’s opinion highlighting the inherent danger in permitting companies to make
contribution to the funds of political parties which may grow enormously and may ultimately
overwhelm and even throttle democracy. The article is convinced beyond any doubt that
contribution by companies is given not because of any ideological reason but as a device to
be in the good books of the ruling party. The article helped in drawing the backdrop of
conclusion and what are the reasons why the said law is so that it can further the very
problem of intermingling of corporate houses financial power with the democratic and
political process of country.

8. Law Commission of India, “Electoral Reforms,” Report No. 255, 12-March-2015,

available at https://cdnbbsr.s3waas.gov.in/s3ca0daec69b5adc880fb464895726dbdf/
uploads/2022/08/2022081635.pdf (Last visited on November 28, 2022).

Here, the law commission considered the issue of “Electoral Reforms” in its entirety
and suggest comprehensive measures for changes in the law. The Law Commission has
proposed wide ranging reforms on the issue of candidate expenditure limits; disclosure
obligations of individual candidates and political parties; and penalties imposable on political
parties; as well as examining the issue of state funding of elections. The Law Commission
has suggested that a team of auditors chosen by CAG assess the political parties' finances and
the ECI will then upload these accounts online or keep them on file for public inspection.
This helped in writing the suggestions for the problems highlighted the project.