New Companies Bill & Corporate Funding of Political Parties

When India is reeling under corruption and political parties are taking people for a ride, the government has come up with a Companies Bill which, if passed, will open the gates for corporate funding of political parties. This will monetise Indian politics more than ever.

The Companies Bill, 2009, was introduced in the Lok Sabha on 3 August 2009. The Bill gives a greater role to shareholders. The Bill allows for certain types of companies to be subjected to a less stringent regulatory framework. It has new provisions related to independent directors and auditors in the name of corporate governance. The Bill allows certain financial relationships between independent directors and the company, which can lead to conflicts of interest. The Bill provides for a number of issues to be specified by the government in the rules. The government has not issued draft rules for the Bill so the impact of any possible change cannot be estimated. This Bill will replace the Companies Act, 1956, which provided the legal framework within which companies function.

The Bill was referred to the Yashwant Sinha headed Parliamentary Standing Committee on Finance on 9 September 2009. The Committee submitted its 375 page report on 31 August 2010. While commenting on clause 161, the report says on page 225, ‘This clause seeks to provide the manner and limits up to which a company shall be able to contribute the amount to any political party or to any person for a political purpose. The clause further provides the manner in which every company shall disclose in its profit and loss account any amount so contributed by it during any financial year.’ The report reveals that ‘During evidence, the Committee raised the issue regarding political contribution by corporates to political parties. In response, the Secretary, Ministry of Corporate Affairs during evidence stated that, ‘Whatever is there in the Act, which is there from 1956, the same provisions are there and there was no discussion. You can take a view. I have nothing to say on that.’
On page 226, the report reads, ‘The Committee desire that sub-clause 1(a) of Clause 161 may be modified so as to make it clear that “any political party” would mean and read as, a political party registered with the Election Commission.’ Similarly, sub-clause 1(b), which reads as ‘to any person for a political purpose’ may be deleted, as it may leaves scope for ambiguity and misuse. In this context, the Committee also recommends that the prescribed maximum percentage for contributions to political parties in a financial year may be raised to 7.5 per cent from the existing 5 per cent of the average net profits during the three immediately preceding financial years, keeping in view the fact that the number of political parties in the country has increased and such donations are not made every financial year’.

It reads, ‘The Committee further recommends that the Ministry should also stipulate a cap on contribution to charitable and other funds as donation as proposed in sub-clause 160(1) (e). Any contribution under this sub-clause, regardless of percentage, should be required to be made only with the consent of the shareholders of the company by a special resolution. It also needs to be stipulated in the sub-clause that the contribution should be made only to “bonafide” charitable institutions, that is, those institutions which have neither attracted any restraints from any regulatory authorities, including the Revenue Department of Government, in the past nor have defaulted in filing the requisite annual returns and statements with the Government.’

On page 226, the report reads, ‘The Committee further sought to know during evidence as to why the provision for contributions made to the National Defence Fund which was in clause 293 (b) of the existing Act has been omitted from the present Bill.’ In response, the Secretary, Ministry of Corporate Affairs replied during evidence that he will abide by the decision of the Committee on this issue. The committee sought restoration of the existing provision in the present law regarding contributions made to the National Defence Fund. It has been omitted without any justification, the committee underlined.
Did the government intend to facilitate private territorial armies by omitting the provision for contributions to the National Defence Fund?

There are other provisions of the Bill like National Company Law Tribunal (NCLT) and Appellate Company Law Tribunal to administer provisions with respect to company law. The composition and powers of the tribunal under the Bill are similar to those of the NCLT as established by the 2002 Amendment to the Companies Act. Appeals from the Appellate Tribunal lie with the Supreme Court (and not High Courts).
The constitutional validity of the relevant Amendment faces a challenge on the issue of barring appeals to the High Court. A three-judge bench of the Supreme Court said in May 2007 that the question to be determined was ‘whether such “wholesale transfer of powers” as contemplated by the Companies (Second Amendment) Act, 2002 would offend the constitutional scheme of separation of powers and independence of judiciary, so as to aggrandise one branch over the other.’ The matter is pending before a constitutional bench of the Supreme Court. The experience with Tribunals has not been encouraging so far.

There is reference to the ‘Role of Independent Directors to be distinguished from other Directors in terms of appointment, duties and liabilities; maintenance of a panel recommended for their appointment; independence criteria to be clearly delineated; the institution to be allowed time to evolve’ on page 17 of the report by the Parliamentary Committee. ‘Independent Directors are expected to act as whistle blowers’. The Committee heard the views of the representatives of the Federation of Indian Chamber of Commerce and Industries (FICCI) and the Confederation of Indian Industries (CII) at their sitting held on 21 January 2010. On page 363, it reveals that the committee discussed rise in ‘corporate delinquency’ and the ‘role and responsibilities of independent directors etc’ with FICCI.

The Committee observes, ‘The role and responsibilities of Independent Directors, which has been under debate, has now come into sharp focus after the failure of many high profile corporations around the world and especially in the Indian context.’

The Companies Bill provides excessive rule-making powers to the executive for subordinate legislation. This is not advisable given the poor state of our national governance. The Bill makes provision for only one person to make a company – One Person Company Limited. The India Economic Census 2005 revealed that the country has 4.2 million non-farm enterprises and less than 3 lakhs active companies. This appears to be an exercise in the corporatisation of all non-farm enterprises. It seems to be an engineered act of legislative corruption that merits more consideration than the Lokpal Bill.

Clause 129 contained in the Companies Bill, 2009, regarding the definition of an independent director, is flawed. The independent director in law should not have any pecuniary interests with the company or its associates other than his/her entitlement for remuneration in law. The independent director should not be a relative of the promoter. The appointment of an independent director should be through a transparent process.

No immunity should be available to any independent director against arrests and prosecution as has been demanded by CII, mild sentencing of Keshub Mahindra, a former Non-Executive Director of the Union Carbide India Limited (UCIL) in the Bhopal Gas tragedy case ‘to treat non-executive members of the Board including Non-Executive Chairmen, differently when it comes to Directors’ liabilities’. The liability against Mahindra who used to chair the board meetings of the UCIL company is quite valid and the pre-existing provisions must not be fiddled with as such an exercise might appear to be an act of quid pro quo.

Even as in practice this legislation legitimises corporate funding of political parties. It is explicable as to how Yashwant Sinha forgot that he was a member of the Group of Ministers (GoM), headed by the Union Home Minister, L.K. Advani, to consider recommendations of the Indrajit Gupta Committee on State Funding of Elections during the Bhartiya Janata Party led National Democratic Alliance (NDA) Government. The GoM was decided on 17 August 2001 by the Union Cabinet, presided over by the then Prime Minister, Atal Bihari Vajpayee. The Committee on State Funding of Elections, headed by the former Union Home Minister and veteran Communist Party of India (CPI) leader, Indrajit Gupta, had submitted its report to the Government on 14 January 1999. The Indrajit Gupta Panel had favoured State funding of elections, saying it was justified constitutionally and legally. It had recommended State funding in kind and not in cash.
In theory, a Press Information Bureau (PIB) release dated 14 September 2011 reveals that theGovernment has accepted the recommendations made by the GoM on Corruption in its First Reporton 6 September 2011. The Union Government had constituted a GoM on 6 January 2011 to consider measures that can be taken by the Government to tackle corruption, under the Chairmanship of the Union Finance Minister, Pranab Mukherjee. Its terms of reference were ‘State Funding of Elections’.

The GoM has called upon the Ministry of Law to formulate concrete proposals on Constitutional and statutory Amendments which are required for introducing reforms relating to State Funding of Elections as per a PIB release dated 15 October 2011. The GoM had, in its meeting held on 6 September 2011, asked the Ministry of Law to report progress in the consultative process already initiated by it. In the 30 September 2011 meeting of the GoM, after the Law Ministry made a presentation on the subject, the GoM directed the Law Ministry to formulate specific proposals for consideration and decision of the GoM, excluding such areas where consultation with political parties was required.

Salman Khurshid, Union Minister for Law & Justice, informed the Lok Sabha on 28 November 2011 that ‘Group of Ministers constituted by the Central Government is considering measures that can be taken by the Government to tackle corruption which inter alia include the introduction of state funding of elections. The Group of Ministers has discussed certain formulations that could be adopted to address this issue but no final decision has yet been taken’ in a written reply to a question.

The Companies Bill provides for excessive rule-making powers to the executive for subordinate legislation. This is not advisable given the poor state of our national governance. The Bill makes provision for only one person to make a company – One Person Company Limited. The India Economic Census 2005 revealed that the country has 4.2 million non-farm enterprises and less than 3 lakhs active companies. This appears to be an exercise in the corporatisation of all non-farm enterprises. It seems to be an engineered act of legislative corruption that merits more consideration than the Lokpal Bill before it is passed by the Parliament given the fact that Veerappa Moily, the new Minister of Corporate Affairs, has stated that its passage is his priority.

Against such a backdrop, why does the Union Law Ministry pretend forgetfulness while approving the Companies Bill that provides for corporate funding of political parties and about GoM’s decision asking it ‘to formulate concrete proposals on Constitutional and statutory Amendments which are required for introducing reforms relating to State Funding of Elections’? It is clear that the Union Law Ministry is expected to undertake two contradictory legislative works by the Union Cabinet.

Is it not the case that both the Congress led UPA and the BJP led NDA are preaching one thing and practicing just the contrary? Is it any wonder that Dow Chemicals Company cites the opinion of two senior officer bearers of the BJP and the Congress in their ‘Q and A with respect of the Government of India’s request for a Curative Petition’ in the matter of Bhopal’s industrial disaster?

The provision of corporate funding of political parties in the Companies Bill must be looked at against the backdrop of the decision of the Supreme Court of USA on 21 January 2010 in the Citizens United case, which was denounced by the US President, Barack Obama, for the sake of record. The US Court considered whether there could be a ban on corporations using their general treasury funds for elections-related expenditure. A majority (5–4) of the Court ruled that such a ban was violative of the right to free speech. Essentially, the US Court struck down certain campaign-finance limits as a violation. The impact of this ruling is that corporate entities in the USA are free to use their general treasury funds to incur election-related expenditure, in a departure from past precedents.

It also raised a question: do corporations have free-speech rights, just as do individuals? If this is the path of corporations very soon, indeed ‘We The People’ will be excluded from even representative government because of Corporate Personhood. It was said in the US papers that it would turn the political class into prostitutes.

In that case the Companies Bill is all set to turn most political parties into brothels.

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