Monday, March 16, 2015

Electoral Reforms: Political Contributions by Companies

In the past, we have had a chance to discuss various issues pertaining to election campaign financing by the corporate sector (here, here and here). Last week, the Law Commission of India issued its Report No. 255 on Electoral Reforms that, among other matters, touches upon reforms in the area of corporate financing of political parties. In this post, I briefly examine some of the key issues. Of course, the report is much wider than that and deals with all aspects of electoral reforms, but this post is limited to corporate funding.

The present law relating to corporate funding of political parties and election campaigns is contained in section 182 of the Companies Act, 2013. It allows a company (other than a government company) that has been in existence for at least 3 years to annually contribute up to 7.5% of its average net profits during the three immediately preceding financial years. Such spending must be authorized by a resolution of the board of directors, which shall constitute sufficient justification for such contribution. The statutory provision also deals with specific types of expenditures that would fall within the purview of the section. In addition, the Act imposes disclosure obligations whereby political contributions must be disclosed in the profit and loss account for each financial year giving particulars of the total amount contributed and the name of the political party to which such amount has been contributed.

After considering the legal regimes in various countries, the principal shortcoming of the Indian dispensation as exposed by the Law Commission report relates to the fact that political contributions can be determined solely by the board and does not require shareholder approval. This is arguably inadequate as political contributions constitute an important decision which must be made by the shareholders and not delegated to the board. This goes to the heart of the division of powers between the board and the shareholders.

As the report notes:

2.27.13 … the authorisation of corporate contribution requires a resolution to be passed to such effect at the meeting of the Board of Directors under Section 182(1) of the Companies Act, 2013. The empowerment of a small group to decide how to use the funds of a company for political purposes, instead of involving the vast numbers of shareholders (being the actual owners of the company) has also been criticised. Britain follows such a shareholder approach where British companies require shareholder approval before they can make any political contribution or incur any political expenditure.

The report also contains a brief discussion on the status of companies and their ability to espouse constitutional rights:

2.27.15 Despite the various legal lacunae, electoral reform is possible and will not be impeded by free speech claims as in the United States, evident in the Citizens United and McCutcheon decisions. In India, Article 19(1) of the Constitution only extends to citizens and natural persons, and corporations have not been considered citizens with free speech rights, can only be exercised by shareholders. Thus, corporations do not have a right to make a political contribution as part of their exercise of free speech rights, especially given the non-involvement of shareholders in this decision making process. Apart from that, countervailing interests of equality, anti-corruption, and public morality will provide a constitutional basis for any election finance reform.

The principal recommendation of the Law Commission is that section 182 must be amended to require shareholder approval for electoral spending. In other words, the decision must not be left only to the board, and that shareholders must have a veto power as well, given the importance of the subject-matter.

Separately, the report also raises some issues regarding the annual limit of 7.5% of average net profits (which was increased from 5% under the Companies Act, 1956). The anxiety of the Law Commission appears to arise from the fact that the 7.5% of net profits in big companies can be quite substantial thereby making the limit meaningless. Although the report is not explicit on the type of amendment sought, it is reasonable to assume that would relate to a sliding scale, whereby larger the company the lower the limit. However, it is not clear whether that would be necessary. From a corporate perspective, what matters is the outflow as a percentage of profits and not the magnitude of the absolute amounts.

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