The Electoral Bond Scheme is a Bond issued in the nature of promissory note which is a bearer banking instrument and does not carry the name of the buyer.
The Constitution Bench of the Supreme Court of India (“Supreme Court”) in the landmark case of Association for Democratic Reforms and Ors. vs. Union of India and Ors (“Electoral Bonds Case”) along with striking down the Electoral Bonds Scheme 2018 (“EBS”), struck down amendments to Section 182 of the Companies Act, 2013 (“CA 2013”) which regulates contributions to political parties by companies. Specifically, prior to the amendment: a) Section 182(3) required companies to specifically disclose the name of the political party to whom they had contributed, in their financial statements; b) Section 182(1) imposed a cap on the total contributions permissible in a financial year. Non-compliance with Section 182 entailed punishment with a fine (5 times of amount contributed) and imprisonment of up to 6 months of every officer in charge. The amendments brought about by the Finance Act, 2017: a) amended Section 182(3) to provide that only the total amount contributed to political parties needed to be disclosed in the financial statements; b) the cap imposed by Section 182(1) was removed and therefore unlimited political contributions were permitted.
The Electoral Bonds Case striking down these amendments, creates a dilemma for companies regarding the disclosure requirements for contributions made under the EBS. In this piece, we examine this issue and try to provide practical guidance for companies on the position of law post the verdict of the Electoral Bonds Case.
1956: The Companies Act, 1956 (“1956 Act”) when it was enacted did not regulate contributions to political parties by companies.
1960: Thereafter, the Companies (Amendment) Act, 1960 included Section 293A to regulate contributions by companies. It stipulated the following:
Cap on contributions: The contribution should not exceed Rs.25,000/- in a financial year or 5% of the company’s average net profits during the past 3 years, whichever is greater.
Disclosure of particulars in the profit & loss account: The total amount and name of the recipient was required to be disclosed.
Penalty: Failure to comply with the disclosure requirement was punishable with a fine of up to Rs. 5000.
1969: The Companies (Amendment) Act, 1969 amended Section 293A in the following manner:
Complete ban on contributions to political parties and for political purposes.
Contravention of the ban was punishable with a fine of up to Rs. 5000 and every officer in default was punishable with imprisonment of up to 3 years, besides a fine.
1985: The Companies (Amendment) Act, 1985 amended Section 293A to permit contributions once again for political purposes and added three restrictions in addition to the earlier ones. The additional restrictions were:
Non-government companies making contributions should have been in existence for more than 3 years.
A resolution authorizing the contributions had to be passed by the board of directors.
The fines for non-compliance were increased to 3 times the contribution amount.
2013: The CA 2013 through Section 182, substantively incorporated the provisions of Section 293A of the 1956 Act, as amended in 1985, with the following changes:
Cap on contributions: a company’s contribution in any financial year should not exceed 7.5% of its average net profits from the preceding 3 years.
More stringent penal consequences: The fine was increased to up to 5 times the contribution amount.
The Finance Act, 2017 made three changes to Section 182 of CA 2013, to pave the way for the introduction of the EBS:
It omitted the first proviso to Section 182(3) which prescribed a cap on corporate funding.
It amended Section 182(3) to only require a disclosure of the total amount contributed to political parties by a company in a financial year and omitted the requirement to disclose the particulars of the amount contributed and the name of the political party.
It introduced sub-section 3A by which a party could contribute only by way of a cheque, bank draft, or electronic clearing system. The proviso to the sub-section stated that a company may also contribute through any instrument issued pursuant to any scheme notified under any law for contribution to political parties.
The Supreme Court found that the amendment to Section 182(3) to require disclosure of only the total amount contributed and not the names of the political parties in a company’s financial statements violates the right to information under Article 19(1)(a) of the Constitution of India (“Constitution”) for amongst others, the following reasons:
From the evolution of the law on contributions, it is clear as day light that the purpose of mandating the disclosure of contributions made by companies was not merely to curb black money in electoral financing, but crucially to make the financial transactions between political parties and companies transparent. The disclosure requirements were to ensure that corporate interests do not have an undue influence in electoral democracy, and if they do, the electorate must be made aware of it. However, the 2017 amendment deleted the mandate of disclosing the particulars of contributions. This violates the right to information of the voter and is necessary to identify corruption, quid pro quo transactions in governance and is also necessary for exercising an informed vote.
Section 182(3) of CA 2013 must be read together with Section 29C of the Representation of the People Act, 1951 (“RPA”) which exempted political parties from disclosure of information on contributions received through Electoral Bonds. The only purpose for amending Section 182(3) was to bring it in tune with the amendment of the RPA. Given that the amendment to the RPA and the EBS have been declared unconstitutional, the amendment to Section 182(3) becomes redundant.
The Supreme Court also found that the amendment removing the cap on political contributions by companies is manifestly arbitrary and violates Article 14 of the Constitution for the following reasons:
By removing the cap on political contributions by companies, the amendment treats companies and individuals equally. However, a company has a much graver influence on the political process, both in terms of quantum of money contributed and the purpose of making such contributions, as they are purely business transactions, made with the intent of securing benefits in return. Therefore, companies and individuals cannot be equated for the purpose of political contributions.
Further, before the amendment, companies could only contribute a certain percentage of the net profits, thus excluding loss making companies. The underlying rationale for this was the increased plausibility of loss-making companies contributing to political parties with a motive of quid pro quo and not for the purpose of income tax benefits. Hence the amendment to Section 182 of CA 2013 is also manifestly arbitrary for not making a distinction between profit-making and loss-making companies.
A well-settled principle is that when a law is declared unconstitutional, it becomes void ab initio i.e. void from the date of enactment. Recently a Constitution Bench of the Supreme Court in CBI vs. R. R. Kishore, reiterated this settled principle and held that “once a law is declared to be unconstitutional, being violative of Part-III of the Constitution, then it would be held to be void ab initio, still born, unenforceable and non-est in view of Article 13(2) of the Constitution and its interpretation by authoritative pronouncements.”
Applying this principle to the Electoral Bonds Case, the striking down of the amendments to Section 182(3) of CA 2013 will have retrospective operation and the law would apply as if the amendments were never made.
The retrospective effect of the Electoral Bonds Case means that the amended laws revert to their pre-amended state from the date of the amendment itself. This essentially has the effect of an ex post facto law.
However, Article 20 (1) of the Constitution provides an essential safeguard against criminal prosecution under an ex post facto law. Under this provision, no person can be convicted of an offence except for violating a law in force at the time of commission of the act charged as an offence. In CBI vs. R. R. Kishore, the Supreme Court reiterated that “… a person can only be subjected to penalties prescribed under the law at the time when the offence for which he is charged was committed.”
Therefore, while the effect of the Electoral Bonds Case is retrospective, any criminal liability therefrom cannot be applied retrospectively.
The effect of the striking down of the amendments to Section 182 of CA 2013 is that unamended Section 182 continues to be in force since 2017 and therefore, companies were governed and will continue to be governed by the unamended provisions. This would mean that all the necessary compliances relating to declarations and restrictions are back in force as if they were never omitted in the first place.
However, equally for acts already done under bona fide belief under the amended provisions, companies will be protected from criminal liability by the principle of such acts not being offences at the time of commission.
This means that while the Electoral Bonds Case applies retrospectively, no criminal prosecution can be brought with respect to bona fide actions taken under the amended provisions prior to the date of the Electoral Bonds Case judgement i.e., 15 February 2024.
Based on the above analysis, two scenarios may potentially arise for companies, and we set out below our analysis of the requirements for companies under these two scenarios:
Electoral bonds purchased during the years financial years 2017-18 to 2022-23: For these bonds, companies would have made disclosures in their financial statements (if already prepared and published) under the amended provisions. Given that these were made in bona fide compliance with the law as it stood on that date, companies would be protected under the principle that they cannot be punished for something which was not an offence at the time of commission. However, if for any of these financial years the company is yet to prepare its financial statements, it will now be governed by the unamended provisions and will have to disclose the details of the political party while preparing the financial statements for these years. This is because the duty to disclose under Section 182(3) arises at the time of preparation of the financial statements and not at the time of donation.
Electoral bonds purchased in the previous financial year (2023-24): For all bonds purchased in the previous financial year up until the date of the Electoral Bonds Case, the duty to disclose would arise at the time of filing of financial statements which would be in the current year. Again, because the duty to disclose arises at the time of preparation, companies would be required to disclose specifically the name of the political parties in the financial statements for 2023-24.
The Electoral Bonds Case has caused critical reversals for companies which could have serious penal consequences if not complied with. While the publicity around the Electoral Bonds Case was widespread, its consequences seem to have flown below the radar of most companies. Thus, it would be prudent for companies to take note of the consequential changes the case has brought about to the disclosure requirements relating to political contributions.
About the authors: Avinash Amarnath is a Partner and Zubin Joseph is a Counsel at Chandhiok & Mahajan.
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