[By Vaibhav Mishra]
The author is a student of Hidayatullah National Law University.
INTRODUCTION
In the Union Budget session of 2017-18, Parliament passed the Finance Act 2017 [Act] to lay down the legal framework for the ‘Electoral Bonds Scheme (EBS)’. The scheme sought to create a new model of electoral financing in the country. The Act carried out inter-related amendments to company law, income-tax law, and electoral laws to legally operationalize this scheme. The most crucial characteristics of the scheme were brought through amendments in Section 182 of the Company Act 2013 (Section 182). The implications of the amendment were two-fold, viz, first, removal of the upper-cap limit on the corporate funding, second, information disclosure requirement. The scheme raised various concerns like voters’ right to information, transparency, corporate influence on elections, etc. Therefore, amidst such concerns, the scheme was challenged in the Supreme Court as being violative of the Constitution.
Recently, the Supreme Court in its judgment has declared the EBS scheme as violative of the constitution. The Supreme Court invoked two principles – the principle of manifest arbitrariness to test the vires of unlimited corporate funding and the principle of double proportionality for the removal of information disclosure requirements in the context of voter’s right to information.
In light of the above, the article analyses the judgment with a focus on the two most crucial aspects of this financing model viz, unlimited corporate funding and removal of disclosure requirements along with their implications. It also highlights the importance of addressing both issues for creating any viable electoral financing model in the future. Furthermore, it also delves into the UK’s model to suggest possible changes in the Indian model of electoral financing.
ANALYSING SECTION 182: EXAMINING EFFECTS POST-2017 AMENDMENT
Section 154 of the Act amended Section 182 which regulated corporate funding to political parties. In the pre-amendment position, Section 182 gave a three-fold requirement to regulate corporate funding – 1) upper-cap of 7.5% of the average net profit of three preceding financial years; 2) authorization of the board of directors; and 3) information disclosure requirements. In this framework, the upper limit on corporate donations was supposed to keep a check on any undue influence of big corporations on elections. Furthermore, transparency and accountability were promoted through obligations of information disclosure and consent of the board of directors.
However, the 2017 amendment to Section 182 for laying the legal framework of EBS, removed the upper limit on corporate funding and disclosure mandates. Therefore, as a result of amendment, EBS was characterized by two key elements viz, 1) anonymity of the donor company & recipient 2) unlimited corporate funding.
Therefore, the new electoral financing model created by EBS as noted above, was now plagued with a lack of transparency & accountability having several implications, as discussed below.
VIRES OF UNLIMITED CORPORATE FUNDING & POTENTIAL IMPLICATIONS
In this case, Section 154 of the Act which amended Section 182, was challenged as violative of Article 14. There was uncertainty concerning the applicability of the principle of manifest arbitrariness under Article 14 in deciding the constitutionality of unlimited corporate funding. The court analysed the complex jurisprudence that evolved over this principle to decide its applicability in the present context. The majority opinion of Justice Faiz Nariman in Shayara Bano v Union of India proved to be a deciding factor [Para 187]. He had opined that vires of legislation could be challenged solely on the grounds of the principle of manifest arbitrariness as it is a constitutional infirmity in itself. Therefore, the court invoking this principle, held the scheme as violative of Article 14.
The unlimited corporate funding in elections strikes at the heart of the democratic process by violating the principle of free & fair elections. Therefore, its presence in the electoral financing model could have several implications. The wording of the provision in clause (1) of Section 182 after the 2017 amendment, i.e., the deletion of the proviso stipulating donation limits based on net profits, suggests that the provision fails to create a distinction between profit and loss-making companies. If we consider the possibility of a loss-making company giving donations, the purpose could not be other than having quid-pro-quo arrangements with the government which could unduly influence the electoral process. Furthermore, this structure creates the possibility of the creation of a shell company solely to make donations.
Therefore, the potential consequences of omitting an upper cap for corporate donations in any future model can’t be ignored. An analysis of recent data released by ADR, an electoral watchdog in India, suggests that corporate donations in India have increased by 974% between FY 2012-13 and FY 2018-19. A similar trend had been observed in the US after the Supreme Court’s decision in Citizens United v FEC in 2010. The judgment held the upper cap limit on independent corporate expenditure as violative of the First Amendment – which protects free speech. However, the judgment failed to anticipate the potential influence of big corporations in elections as a consequence. The data suggests a 900 % increase in corporate donations in American elections between 2008-2016. Therefore, any future financing model in the Indian scenario should address the issue of unlimited corporate funding.
IMPLICATIONS OF SECTION 182(3): REMOVAL OF INFORMATION DISCLOSURE REQUIREMENT
The presence of information disclosure mandates from donors is crucial in a democratic electoral financing model. However, EBS eliminated such disclosure mandates for companies and political parties. Therefore, EBS was challenged as being violative of Article 19(1) (a) of the Indian Constitution, i.e., voter’s right to information. In this context, Section 182(3) of the Company Act, 2013 was also challenged as it changed the pre-amendment position that mandated a donor company to reveal particulars of its donation in a P&L account. The information disclosure was instrumental in identifying any potential quid pro quo arrangements or corruption in the transactions [Para 172]. The removal of such a mandate impeded a citizen’s right to exercise an informed vote. Furthermore, the amendment also altered the original purpose of the provision which was to promote transparency in electoral funding. The court, on these considerations, held the amendment to section 182(3) as unconstitutional. The other issue, though unaddressed by the court was the removal of such a mandate for Section 136 of the Companies Act [Para 174]. It gives members i.e. shareholders, rights to access the company’s financial statements including P&L accounts. However, the removal of disclosure mandates in the P&L account violates this right by undermining shareholders’ ability to access information concerning the company’s political contributions. It also infringes on their right to sell the shares in case they don’t support the political ideology of the party to whom contributions are made.
The importance of such disclosure mechanisms could also be traced to the jurisprudence that evolved in the US. The US Supreme Court has shown less stringent scrutiny in dealing with disclosure mandates despite its potential impact on the First Amendment, protection of political speech. For example, in Buckley v Valeo, expenditure limits on campaign & disclosure requirements were challenged as violating the First Amendment. The court termed campaign spending limits as a ‘ceiling’ on free speech. However, adopting a different attitude, the court found the information disclosure requirement instrumental in deterring corruption, data gathering, publicizing illegal spending, etc. This position was strengthened by United Citizens v FEC, where the court opined that mandated information disclosure mechanisms should be a preferred model for regulating electoral financing. Similarly, the UN Convention against Corruption [Article 7(3)] also highlights the importance of transparency in funding political parties. Therefore, as the country moves toward a future electoral financing model, policymakers also need to address the issue of information disclosure along with the issue of unlimited corporate funding, as discussed above.
REFORMING ELECTORAL FINANCING MODEL: INTERNATIONAL BEST PRACTICES
The regulatory framework governing electoral financing varies across countries. In this context, the UK’s model is worth examining. In the UK, funding to political parties is regulated by PPERA, 2000. The funding received by political parties encompasses a spectrum of sources like donations, loans, public funding, etc. However, for our analysis, the focus lies on ‘donations’, as a source of funding. When it comes to donations, the UK has regulated donations above £500. The Electoral Commission of the UK is the regulatory agency for compliance related to political funding. The electoral commission maintains a list of permissible donors on the UK electoral register. All donations above the limit are recorded with details like the donor’s name & address, nature of donations, amount, etc. Similarly, those receiving donations are ‘regulated donees’ who have to report any donations from permissible donors within 30 days of receiving donations. Furthermore, along with limits on the donations, there are limits on the spending from political parties on a seat. Hence, such a robust regulatory mechanism with regulation of both donations to political parties and expenditure of political parties sets the ideal standard for any democratic country’s electoral financing model.
In the Indian context, any future regulation could learn from the UK’s model by inculcating the practice of maintaining a list of permissible donors and donees which could help to tackle the problem of corruption, deter the formation of shell companies for influencing the electoral process, preventing donations from loss-making companies, foreign-owned companies, etc. Apart from donations, expenditures could also be regulated, as though we have a cap on candidates’ expenditures but not on political parties. The upper cap on the expenditure of political parties could curtail the influence of money in the elections. Furthermore, an independent regulatory agency needs to be formed to deal with compliance related to such a regulation. Therefore, the implementation of the aforementioned measures aided by regulatory models in other nations could address the issues of transparency and accountability in the Indian electoral financing landscape.
CONCLUSION
The Supreme Court’s decision on electoral bonds is a welcome step as it protects fundamental principles of democracy like free & fair elections, the right to voter’s information, etc. The aforementioned analysis demonstrates the potential implications of the unconstitutionality of Section 182 of the Companies Act. It underscores the importance of addressing the two primary shortcomings of EBS: unlimited corporate funding & information disclosure mechanisms. It also draws from the UK’s stringent financing model. The learnings include embracing a model that regulates corporate funding beyond a threshold through strict information disclosure mandates. This could pave the way for an electoral financing landscape conducive to democracy and good governance.