In the universe of the Great Indian Democracy, it’s easy to make out when it’s “that time of the year”, that is, election time. Indian elections are marked by a festival-like atmosphere, full of colour, sound, and enormous gatherings of people in televised “election rallies”, the funds for which largely come from contributions to political parties, whose supporters often include cash-rich firms. Are political contributions by companies permissible under Indian laws? To answer this, one needs to take into account the Representation of the People Act, 1951 (RPA), the Companies Act, 1956, and the Foreign Contribution (Regulation) Act, 1976 (FCRA).
A company incorporated under the Companies Act (other than a government company) can make contributions to political parties that are duly registered under RPA. Section 293A of the Companies Act regulates such contributions by Indian companies. The section places certain restrictions and limitations regarding political contributions. Essentially, a government company or a company that has existed for less than three years is not permitted to make such contributions. The total contribution in any fiscal year should not exceed 5% of its average net profit during the three preceding financial years. The net profit for such purposes has to be determined in accordance with sections 349 and 350 of the Companies Act. All amounts so contributed to political parties have to be disclosed in the company’s profit and loss account, giving particulars of the total amount contributed and the name of the political party to which such amount was contributed. The board of directors of the contributing company is required to pass a resolution at a board meeting, authorizing the company to make such a contribution.
A 2003 amendment to RPA inserted Section 29B, based on which registered political parties were permitted to accept voluntarily offered contributions from Indian companies (excluding government companies). Contributions of more than Rs20,000 have to be declared by the political party to the Election Commission.
The 2003 amendment stipulated an express prohibition on political parties receiving funds from a “foreign source” as defined in FCRA. A “foreign source” as defined in FCRA includes a foreign company or a company which is a subsidiary of a foreign company, or a multinational corporation. It also includes a company within the meaning of the Companies Act, if more than one half of the nominal share capital of such a company is held either singly or in aggregate by (a) a government of a foreign country or territory; or (b) citizens of a foreign country or territory; or (c) corporations incorporated in a foreign country or territory. Hence, a company incorporated under the Companies Act either (a) as a subsidiary of a foreign company, or (b) where 51% or more of the share capital is held by a corporation incorporated in a foreign country, would be treated as a “foreign source” under FCRA and, consequently, under RPA.
A company will be treated as a “subsidiary” of another company when the other company (a) controls the composition of the board of directors; or (b) exercises or controls more than half of the total voting power of such company; or (c) when the other company holds more than half of the nominal capital of such company. So, a subsidiary of a foreign entity may be prohibited from making contributions to political parties even if such subsidiaries are companies incorporated under the Companies Act.
Foreign contribution as used in FCRA includes direct and indirect contributions. If a foreign entity uses an Indian entity as an intermediary to contribute funds to a political party in India, then such funds may be considered an “indirect foreign contribution” by a “foreign source” and consequently, political parties will not be allowed to accept them. Section 4 of FCRA also prohibits an Indian company from delivering any amount accepted by it from any “foreign source” to any person if such Indian company knows that such person intends or is likely to deliver such amounts to a political party. These restrictions primarily aim at checking abuse of funds received from a “foreign source” and ensuring that what cannot be contributed directly by a foreign source is not contributed indirectly.
To conclude, if an Indian company under the Companies Act is a subsidiary of a foreign entity, then the Indian company itself would be treated as a “foreign source” and political parties will not be permitted to accept contributions from it. But, if an Indian company is not a subsidiary and, therefore, not a “foreign source” and intends making political contributions without receiving funds for the same from any foreign entity, then political parties will beallowed to accept the same.If a foreign entity funds an Indian entity to specifically make the political contributions, the arrangement will be treated as an indirect foreign contribution to a political party, which is not permitted under FCRA.
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This column is contributed by AZB & Partners, Advocates & Solicitors.