Companies' Donation To Political Parties: What Today's Verdict Changes

Striking down the electoral bonds scheme, the Supreme Court today also flagged "unlimited political funding" by corporates and said it violated the fundamental right to free and fair elections. The historic verdict effectively put the clock back on crucial amendments made to company laws when the Narendra Modi government brought this scheme.

What Was The Law? What Changed?

The Section 182 of Companies Act, 2013 governs an Indian company's right to contribute to a political party. Prior to the amendments, this was governed by a set of conditions - the donation should be authorised by the Board; (ii) the donation cannot be made in cash, (iii) the donation must be disclosed in the Company's profit and loss account (iv) the company cannot donate more than 7.5 per cent of its average profits for three years and (v) the company must disclose the name of the party it had donated to.

The 2017 amendments removed the cap on the amount a company can donate and also with the requirement of disclosing the name of the party it had donated to.

What Government Argued

During the arguments, Solicitor General of India Tushar Mehta had argued that anonymity ensures that the donor does not face retribution or victimisation. "What the donor wants is that the other party should not know. Suppose, as a contractor, I donate to the Congress Party. I do not want the Bharatiya Janata Party (BJP) to know because it might form a government," he had said.

He had told the court that the earlier cap on donations did not work because shell companies were created for the purpose of political donations. The scheme, he said, was aimed at disincentivising the creation of such shell companies.

"With the view to discourage creation of shell companies, we did this... If companies want to donate more than 7.5% of their net profit, let the discretion remain with them," he had said.

He had also said that in the case of a cap, companies would switch to cash donations, bringing black money into the system.

What Court Said Today

Striking down the scheme, the court said the amendment to the Companies Act now becomes otiose - meaning redundant. A company, Chief Justice of India DY Chandrachud said, has graver influence on the political process than contributions by individuals. "Contributions by companies are purely business transactions. Amendment to Section 182 Companies Act is manifestly arbitrary for treating companies and individuals alike," he added.

The Chief Justice of India said that before the amendments, loss-making companies were not able to contribute. But the amendment potentially enabled a quid pro quo arrangement between a company running into losses and a political party. "The amendment does not recognise the harm of allowing loss-making companies to contribute due to quid pro quo. The amendment to Section 182 Companies Act is manifestly arbitrary for not making a distinction between loss making and profit making companies," he said, holding the amendments to Companies Act unconstitutional.

"The disclosure requirements in Section 182(3) were included to ensure that corporate interests do not have an undue influence in electoral democracy, and if they do, the electorate must be made aware of it," the order states. "Unlimited contribution by companies to political parties is antithetical to free and fair elections because it allows certain persons/companies to wield their clout and resources to influence policy making," it adds.