How Retrospective Amendments to FCRA in Budget Threaten Democracy

FCRA regulates foreign contributions (money donation) and foreign hospitality – but the amendment seeks to dilute it

10 min read

When the Union Budget 2018-2019 was presented earlier this month, the mainstream media narrative predominantly focused on certain big ticket announcements, like the ‘purportedly’ largest state-funded healthcare scheme in the world, christened as ‘ModiCare’ or the increase of custom duty on certain electronic items like mobile phones and televisions making them more expensive. However, the Finance Minister has surreptitiously slipped an amendment to the Finance act, 2016 through the following provision in the Finance Bill, 2018.

Clause 217 of the Bill seeks to amend section 236 of the Finance Act, 2016 which relates to amendment to sub-clause (vi) of clause (j) of sub-section (1) of section 2 of the Foreign Contribution (Regulation) Act, 2010.

It is proposed to bring the said amendment with effect from the 5th August, 1976 the date of commencement of the Foreign Contribution (Regulation) Act, 1976, which was repealed and re-enacted as the Foreign Contribution (Regulation) Act, 2010.

The amendment, though innocuously worded, in essence provides a carte blanche exemption to the BJP and the Congress for having flagrantly violated the extant laws of the land on receipt of foreign funding by political parties and legislatively overrules a Delhi High Court Judgement which found both the parties having received funds in violation of the FCRA in 2014.


Why the FCRA Was Enacted

The FCRA regulates the foreign contribution (money donation) and foreign hospitality (eg: free airplane tickets and hotel lodging during videsh-yaatra) given to various NGOs, institutes, judges, journalists, public servants, political parties, etc.

It was enacted in 1976 in the background of a concerted effort by foreign powers to influence the social fabric and polity of a nascently independent India through infusion of funds and intangible favours being extended to political parties, civil society organisations and the media, which in turn, would be used to shape the discourse and public opinion in a manner that was beneficial to them.

We must also remember that this period in history was the peak of the Cold War where both the blocs were trying to influence a Non-Aligned India to tilt in their favour in their efforts to have pliant leadership and governments in South Asia.

This process of installing favourable governments in foreign territories through economic inducements and cultural hegemony has been termed by various scholars as ‘neo-colonialism’, where the newly independent nations were free only in form and not in spirit.

It has perhaps been most eloquently stated in a decision of the Supreme Court reported as 68 (1997) DLT 553 PV Narasimha Rao v. Central Bureau Of Investigation: - “What is the best way to win political foes? Persuasion? Understanding? Love? Compassion? Dale Carnegie's sermons? […] secret of success lies, at least with regard to some, in mastering the art of transferring one's own bulging wallets into the eager pockets of others.”

Sir Khurshid Alam Khan on the floor of the Rajya Sabha on 9 March 1976 stated:

Sir, there was a time when territorial domination and spheres of influence of the imperialist powers and big powers were the order of the day. But now money seems to be the best way of interference in the domestic affairs of the country. But it is now a well-known and universally accepted fact that neo-colonialism is a clever substitute for the old type of crude colonialism. This is usually backed by the generous foreign contributions in various shapes, foreign hospitality.…

Given the political realities of the time, the legislators across party lines united to enact the Foreign Contribution (Regulation) Act, 1976 which was later repealed and re-enacted as the Foreign Contribution (Regulation) Act, 2010.


The Legal Provisions

Section 29(b) of the Representation of People Act, 1951 read with Section 4(1) (e) of the FCRA prohibits political parties from receiving any ‘foreign contribution’.

The term ‘foreign contribution’ has been defined under Section 2(c) of the FCRA as the “donation, delivery or transfer made by any foreign source...”  

‘Foreign Source’ has been defined under Section 2 (e) (iii) of the FCRA as including a foreign company within the meaning of Section 591 of the Companies Act, 1956 and also includes a subsidiary of a foreign company, and a multinational corporation.

Section 591 of the Companies Act, 1956 is divided into two sub-clauses.

Sub-Clause (1) defines ‘Foreign Company’ as companies falling under the following two classes, namely: (a) companies incorporated outside India which, after the commencement of the Act, establish a place of business within India; and (b) companies incorporated outside India which have, before the commencement of the Act, established a place of business within India and continue to have an established place of business within India at the commencement of the Act.

Sub-Clause (2) is a non-obstante clause which states that notwithstanding anything contained in sub-clause (1), a company incorporated outside India and having a place of business in India where more than 50% of the paid up share capital is held by a citizen of India or by one or more body corporate incorporated in India or held by the aforementioned groups in aggregate will have to comply with the provisions of the Companies Act, 1956 as if it was a company incorporated in India.


Delhi High Court Judges BJP & Congress in Breach of Ban

Association of Democratic Reforms (ADR) filed a public interest challenging a violation of the restrictions on receiving donations from a ‘foreign source’ as mentioned in the FCRA by the Congress and the BJP. They produced the annual reports of Vedanta Resources Plc, a company incorporated in England and controlled by Anil Agarwal and two of its subsidiaries Sterlite Industries and Sesa Goa to allege that both the BJP and the Congress had received donations from these ‘foreign sources’.

The interpretation of the term “Foreign Source” as defined under Section 2(e) of the FCRA lies at the heart of the present controversy.  

ADR argued that the donations made by Sterlite and Sesa to the political parties during the period when Foreign Contribution (Regulation) Act, 1976 was in vogue would be foreign contributions because Sterlite and Sesa are a “Foreign Source” as defined in the FCRA.

They argued that though the donors are companies registered in India under the Companies Act, 1956, however, more than one-half of their share capital is held by Vedanta – a company incorporated in the United Kingdom. Therefore, in view of the mandate of the FCRA, the donations in favour of the political parties are to be construed as emanating from a “Foreign Source‟ and fall within the prohibition imposed by Section 4 of the FCRA, which bans acceptance of foreign contributions by political parties.

Both the BJP and the Congress argued that the donations made by Sterlite and Sesa in favour of the political parties cannot be construed as a “Foreign Contribution‟ as they are not a “Foreign Source‟ within the meaning of Section 2(e) of the FCRA. They emphasised that the said companies are incorporated in India under the provisions of the Companies Act, 1956. 

The fact that more than one-half of their share-capital is held by Vedanta – a company incorporated in the United Kingdom – is not disputed, however, it was pointed out that more than one-half of share capital of Vedanta is in fact held by Mr Anil Agarwal, who is a citizen of India.

In this regard, much reliance was placed by the respondents upon Section 2(e) (iii) of the FCRA to contend that even Vedanta is not a “Foreign Company‟ within the meaning of Section 591 of the Companies Act, 1956 in view of the operation of clause (2) of Section 591 and therefore its subsidiaries – Sterlite and Sesa cannot be construed as a “Foreign Source‟ to attract the rigour of the Act.

The Delhi High Court in its judgement held that In light of the legislative mandate flowing from clause (1) of Section 591 of the Companies Act, 1956, Vedanta is unquestionably a “Foreign Company” by virtue of the fact that Vedanta is incorporated in the United Kingdom and has established its place of business in India, as it operates in the territory of India through its subsidiary companies like Sterlite and Sesa.

Further, it held that the operation of sub-clause (2) of Section 591 creates a legal fiction where foreign companies are expected to follow certain provisions of the Companies Act, 1956, as if they were Indian companies but does not alter their character from being a foreign company to an Indian company. The litmus test for determining whether a company is ‘foreign’ or not is the ‘situs’ or place of incorporation as defined sub-clause (1) of Section 591.

The Court in conclusion opined that it had no hesitation in arriving at the view that prima-facie the acts of the Congress and the BJP clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act, 1976 as the donations accepted by the political parties from Sterlite and Sesa accrue from “Foreign Sources” within the meaning of law.

A High Court Order Stands Ignored

The High Court in its judgement has granted the Ministry of Home Affairs (MHA) a time period of 6 months from the date of the order (28 March 2014) to take action against the BJP and the Congress.

Both the BJP and the Congress immediately filed appeals in the Supreme Court challenging the order of the High Court order.

The BJP and the Congress withdrew their appeals on 29 November 2016 and consequently their appeals were ‘dismissed as withdrawn’ by the Supreme Court. This essentially means that the judgement of the Delhi High Court had become final and binding and was to be implemented by the MHA.

ADR wrote several letters to the Election Commission of India (ECI) and the MHA urging them take action but they took no action during the pendency of the appeal and even when the appeal was dismissed by the Supreme Court.

Contrast this with the actions taken by the ECI in the matter concerning the disqualification of 20 Aam Aadmi Party (AAP) MLAs for allegedly holding an ‘office of profit’ under the Constitution.

The ECI went ahead and recommended their disqualification to the President even when a challenge to a previous order passed by the ECI on 23 June 2017 on the same matter was pending before the Delhi Court.

The ECI stated categorically in its final decision that an appeal does not preclude them taking action in the absence of a stay order. The ECI and the MHA refused to take action against the Congress and the BJP even though there was no stay issued by the Supreme Court on the Delhi High Court’s FCRA ruling.

This clearly shows how constitutional bodies are manipulated by the Congress and BJP to favour their own political interests.

ADR even filed a Contempt of Court Petition in the Delhi High Court in 2017 for non-compliance of its previous order by the MHA. Justice Chawla observed that delay in implementing the court order was “unjustified”.

Counsel appearing for MHA continued their delay tactics and told the court that the records were 40 years old and it would take time to go through. Counsel also said notice has been issued to both parties to file documents.


An Amendment to Effectively Overrule the Delhi HC

The Finance Act 2016 stated: In the FCRA, the following provision shall be inserted in sub-clause (vi) and shall be deemed to have been inserted with effect from 26 September, 2010:

Provided that where the nominal value of share capital is within the limits specified for foreign investment under the Foreign Exchange Management Act, 1999, or the rules or regulations made there under, then, notwithstanding the nominal value of share capital of a company being more than one-half of such value at the time of making the contribution, such company shall not be a foreign source.

The lawyers of the Congress and the BJP approached the Supreme Court armed with this amendment to claim that the appeal from the Delhi High Court order had become infructuous owing to the amendment of the FCRA by the Finance Act, 2016.

At this point, the Supreme Court pointed them to the first paragraph of the Delhi High Court which clearly states:

Since the writ petition drew attention to donations made to political parties for the period up to the year 2009, we record at the outset that our concern is not with the Foreign Contribution (Regulation) Act, 2010 which has come into force on September 26, 2010. Our discussion of the legal position would be with respect to the Foreign Contribution (Regulation) Act, 1976.

The Congress and the BJP withdrew their appeal subsequently, as stated earlier.

Now the present amendment in the Finance Bill, 2018 (as reproduced in the beginning of this article) seeks to legislatively overrule the decision of the Delhi High Court by changing the definition of a ‘Foreign Source’ and making it retrospectively applicable from 1976.


Constitutional Bodies or Political Cheerleaders?

The present amendment abolishes years of jurisprudence meant to combat crony capitalism by building safeguards on foreign contributions to political parties through the FCRA. 

The government with its omnipresent zeal to attract more and more FDI into the country is liberalising permissible FDI limits across sectors, reducing the provisions of restriction foreign contribution contained in the FCRA to a mere paper tiger.

The implications of encouraging such crony capitalism become even starker on a perusal of the corporates involved. Vedanta has violated several mining norms in Niyamgiri and the NC Saxena committee has recommended that they be prevented from mining in the hills. Adani finds itself accused of a Rs 50,000 crore power scam.

The independence and impartiality of the government in dealing with these recalcitrant corporates in larger public interest, is seriously under a cloud of suspicion owing to the latest amendments.

Further, this is the same government that has been hunting down NGOs with a vengeance for receiving foreign contributions to be spent on upliftment of the deprived while relaxing norms for themselves to spend on sea-planes and Burberry jackets.


Finally, what is most alarming is the way our constitutional bodies, which were formed to act as a system of checks and balances on the power of political parties, are increasingly behaving like cheerleaders to the charades of the political parties instead of upholding constitutional principles.

A democracy without a robust institutional mechanism to redress the grievances of its stakeholders is doomed to face anarchy and oppression.

It is on this sombre note that I leave you with this uncomfortable question: Is transparency and accountability in governance and politics being systematically sacrificed while we are busy fretting over the curious case of the missing ‘i’ in Padmavat?


(The writer is an Advocate and Political Consultant based out of New Delhi. The views expressed in this article are that of the writer himself. He can be reached at @abanerjee019 ‏. The Quint neither endorses nor is responsible for them.)

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