Wednesday, April 2, 2014

Electoral contributions by companies having more than 50% foreign holding – Delhi High Court decision

The Delhi High Court decision in case of Association for Democratic Reforms vs. UOI ([2014] 43 443 (Del.)) is a reminder of certain very widely framed provisions of law originally of FERA times that continue to have impact. It is very timely too in this election season when many companies have or may still be giving electoral contributions. Even more so considering that the new Section 182 of the Companies Act, 2013, has permitted a higher electoral contribution of 7.50% of profits as compared to 5% under the 1956 Act.

Essentially, the Court has held that political parties/election candidates cannot accept electoral contributions from an Indian company with more than 50% "foreign holding", defined as “foreign contribution”. The definition of what constitutes foreign contributions is so wide that it may bring numerous Indian listed and unlisted companies in its net.

Here are, summarised and simplified, the facts as stated and the law as per the decision. Vedanta Resources plc is a company incorporated in England and Wales. It held majority shares in two Indian companies - Sterlite Industries Limited and Sesa Goa Limited. Sterlite and Sesa Goa made electoral contributions to political parties. Question is whether the parties that accepted contributions violated the Foreign Contribution (Regulation) Act, 1976 (FCRA). It can be seen that, on this aspect, the FCRA 2010 is worded substantially similar to FCRA 1976. Hence, though the Court clarified that it was dealing with FCRA 1976, it ought to apply for FCRA 2010 too.

FCRA prohibits acceptance of electoral contributions by political parties/candidates from “foreign sources”. Foreign sources includes a company registered in India in which more than 50% shares are held by certain specified foreign parties such as foreign corporations, foreign citizens, foreign trusts/societies, etc. Violation of this provision entails fine/imprisonment. Since in Sterlite/Sesa Goa both, Vedanta held more than 50%, the Court held that this prohibition, was directly attracted. Curiously, it was also noted that Anil Aggarwal, an Indian citizen, held more than 50% capital in Vedanta. Thus, in a sense, the ultimate holder was an Indian citizen. However, since FCRA did not make any exception to such companies, the Court held that the FCRA prohibition applied.

The Delhi High Court accordingly held that the provisions of FCRA were violated. It also required the Central Government to inquire whether contributions from other similar placed companies have been received and take necessary action within six months.

There are numerous companies in India that have more than 50% foreign holding. There are subsidiaries of foreign companies in India. There are companies that have more than 50% FDI. So are companies that have more than 50% holdings by FII/PE/non-citizens. The definition of what constitutes foreign source is very wide in FCRA and it is very likely that most of these companies would be hit by the provision.

Companies are now permitted to contribute through electoral trusts and many companies have used this route. Since electoral trusts accept donations from numerous parties and the receiving political party may not know who is the ultimate donor from the pool. However, to me, it seems that FCRA prohibition would still apply. The widely framed provisions ensure that a person receiving donations from the company – the electoral trust in this case – would have responsibility.

The fear of the foreign hand – the driving force behind this law as originally framed – is relevant today too. However, in these changed times, continuing such a blanket prohibition does not seem to make sense. 

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