[This article was originally published on 18 February 2024 and is being reposted after the Election Commission released the electoral bonds data on 14 March 2024.]
The Supreme Court (SC), while outlawing the electoral bonds (EBs) scheme also declared as unconstitutional the amendments made by the Finance Act 2017 in Section 182(1) and Section 182(3) of the Companies Act.
These two amendments in the Companies Act had permitted companies (including loss-making ones) to make political donations, without being circumscribed by the previously fixed limit of 7.5% of the average three-year profits. They were also provided statutory assurance that they were not to disclose the details of the EBs donated to any political party specifically.
Indian companies made political donations through EBs worth more than Rs 16,000 crore, acting in accordance with the amended provisions of the Companies Act, i.e., well within the law of the land.
The SC judgment mandates all these political donations to be specifically put into the public domain by 13 March 2024. Has the judgment left the companies, that purchased and donated the EBs to the political parties, in the lurch? Is this fair?
What are the consequences of the judgment on companies that provided EBs and corporate political funding? Should something be done to protect the disclosure of donations through EBs made before the date of the judgment?
EB Details on Election Commission Website Soon
Besides stopping the issuance of EBs forthwith, the SC also directed the State Bank of India (SBI), the sole issuer of EBs, to provide the details of EBs purchasers, along with the date and denomination of each EB to the Elections Commission of India (ECI). The details of contributions received by all the political parties, along with the date of encashment and denomination, are also to be provided.
The ECI has been directed to place all these details on its website by 13 March 2024. Under these directions, everyone would be able to know specific amounts of political donations made by all the companies via EBs.
The information relating to which company gave how much to each political party, however, will not be immediately discernible.
Each EB had a non-visible distinctive number which only can establish a complete connection between the purchaser company and the recipient political party for each EB. The disclosure of details for each numbered EB is not covered in the SC's directions.
EBs Provided a Big Push to Corporate Funding
Section 182 of the Companies Act regulates corporate political donations by laying down prohibitions and restrictions.
The proviso to Section 182(1) of the Companies Act, before the 2017 amendments, prescribed that political contributions in any financial year would not exceed seven and a half percent of the company’s average net profits during the three immediately preceding financial years. Further, sub-section 182(3) mandated every company to disclose in its accounts specific amounts contributed to a specific political party.
These two provisions constituted what everyone believed was a completely transparent mode of corporate political funding.
Unfortunately, companies made very little political contributions under this transparent system. In four years (2012-13 to 2015-16), a total of Rs 956.77 crore political contributions were made by the corporates at an average of less than Rs 240 crore per year. Another factoid is that the BJP received the bulk of it, i.e., Rs 705.81 crore.
The statutory protection provided by the amended Companies Act gave wings to corporate political funding with a total of Rs 16,518 crore of EBs purchased in about six years, an annual contribution of Rs 2,753 crore per annum, more than 10 times the average of the pre-EBs era. The BJP received just less than 60% of the total.
Judgment Delivers a Deadly Blow to Corporate Political Funding
The companies do not make political contributions in India for any charitable considerations or to promote pristine electoral democracy. They do it for purely business considerations.
The companies, in general, also don’t want to disclose the contributions made to specific political parties. As the EB system provided this assurance, the companies made use of their legitimate revenues to purchase EBs through completely transparent banking channels and disclosed total contributions in their accounts. This pragmatic transparency made the EB scheme click.
Consequent to the SC judgment, the companies would first suffer considerable embarrassment as the details of political contributions emerge, with the extent of total contributions, the political parties they contributed, and so on. This will lead to many questions about their political affiliations and preferences, and the why and how of the political contributions made by them.
With the amendments in Section 182 struck down, which will have a retrospective effect, the loss-making companies would have violated the law as they could not have made political contributions through EBs. Likewise, the companies that contributed in excess of 7.5 per cent of the profits, would have also fallen foul of the law retrospectively.
While the companies would have to take the details of all the political contributions made to their Board of Directors with granular information about contributions made to each of the political parties, it is not clear how would such companies regularise the wrongful contributions made, and how the regulators and the law enforcement agencies would treat these irregular payments.
The companies that used EBs to make political contributions in line with the law of the land but have now fallen foul of it retrospectively are going to face considerable heat, not only on political considerations but also for acting irregularly.
Government Should Ask for a Review or Take Other Measures
EBs are history now. India goes back to the pre-EB days.
The completely transparent mode of corporate political contributions is restored. The companies may also fall back to the bad old days of siphoning off funds and providing cash donations of lower than Rs 20,000 rupees or routing the same through shell companies.
How they would make political contributions to serve their business needs, only the future would tell.
The companies, however, have to deal with the after-effects of retrospective revocation of the information immunity, not disclosing which political parties they funded and the fall-out of retrospective violation of the law of the land, which they actually did not commit.
The government might have to consider filing a review petition before the SC to take back the directions to the SBI and the ECI to disclose the information relating to the EBs purchased by companies and clarify that the striking down of amendments in the Companies Act would have only a prospective effect.
Alternatively, the government should consider amending the Companies Act to take out the retrospective effect of the judgment.
(The author is a former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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