Friday, March 4, 2016

Political contributions by foreign owned companies to be permitted – and with retrospective effect

It was earlier posted here that a proposed amendment through the Finance Bill 2016 will permit certain CSR contributions by companies with majority foreign holdings. There is a further implication to this that also needs consideration. This amendment will also permit political contributions by such companies.

The amendment is proposed to have retrospective effect from 26th September 2010. This will effectively neutralise the Delhi High Court's decision in Association for Democratic Reforms vs. UOI after such date. Thus, political contributions made in past from such date would also be legalised.

The decision of the Delhi High Court may be recollected. The question before the Court was about companies with more than 50% foreign holding. Were such companies a “foreign source” as defined in the Foreign Contribution (Regulation) Act 1973 (FCRA 1973)? FCRA 1973 prohibited political parties, etc. from accepting contributions from such companies. Certain companies were found to have more than 50% foreign holding and yet they had given contributions to political parties. Section 2(1)(e) of FCRA 1973 deemed companies with “more than one-half of the nominal value of its share capital” held by foreign citizens/corporations incorporated in a foreign country to be a “foreign source”. Thus, the Court held that such contributions were in violation of FCRA 1973.

FCRA 2010 and FCRA 1973 are, in this aspect, worded similarly. Thus, the ratio of the Delhi High Court’s decision should apply to FCRA 2010 too. The consequences under FCRA 2010 for accepting such contributions (including for those who assist in such acts) are quite stringent and include imprisonment.

The proposed amendment now seeks to neutralise this and that too retrospectively. Thus, companies having more than 50% foreign shareholding but within the limits specified under FEMA will not be treated as a “foreign source”. The political parties would thus be able to accept contributions from such companies without being in violation of FCRA 2010. 

Curiously, under the Companies Act, 2013, there are different limits for contribution for CSR, for charity and for contribution to political parties. The indicative limits for CSR expenditure is 2%, for contribution for charitable and other funds is 5% and for political contributions, it is 7.50% of profits.

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