Political Contributions in India: A Guide for Foreign Companies

July 29, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – While laws governing political contributions in the United States and Europe are relatively straightforward, restrictions in India are slightly more complex and effectively prohibit political parties and candidates from accepting contributions from foreign individuals and firms.

Initially governed by the Foreign Contribution Regulation Act, 1976 and Prevention of Money Laundering Act, 2002, foreign political contributions are now principally governed by the Foreign Contribution Regulation Act, 2010 (FCRA 2010).

The Legality of Contributions

Under Section 182 of the Companies Act, 2013, private companies are permitted to contribute funds to political parties and candidates:

(1) Notwithstanding anything contained in any other provision of this Act, a company, other than a Government company and a company which has been in existence for less than three financial years, may contribute any amount directly or indirectly to any political party.

Provided that the amount referred to in sub-section (1) or, as the case may be, the aggregate of the amount which may be so contributed by the company in any financial year shall not exceed seven and a half percent of its average net profits during the three immediately preceding financial years:

Provided further that no such contribution shall be made by a company unless a resolution authorizing the making of such contribution is passed at a meeting of the Board of Directors and such resolution shall, subject to the other provisions of this section, be deemed to be justification in law for the making and the acceptance of the contribution authorized by it.

Explanation – For the purposes of this section, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951.

The Companies Act also stipulates that companies must disclose these contributions on a yearly basis:

(3) Every company shall disclose in its profit and loss account any amount or amounts contributed by it to any political party during the financial year to which that account relates, giving particulars of the total amount contributed and the name of the party to which such amount has been contributed.

However, FCRA 2010 clarifies this by specifically prohibiting the acceptance and utilization of foreign contributions by candidates for election, judges, legislators, political parties and media companies. According to FCRA 2010, Chapter II:

(1) No foreign contribution shall be accepted by any-

(a) candidate for election;

(b) correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper;

(c) Judge, Government servant or employee of any corporation or any other body controlled or owned by the Government;

(d) member of any Legislature;

(e) political party or office-bearer thereof;

(f) organization of a political nature as may be specified under sub-section (I) of section 5 by the Central Government;

(g) association or company engaged in the production or broadcast of audio news or audio visual news or current affairs programs through any electronic mode, or any other electronic form as defined in clause (r) of sub-section (I) of section 2 of the Information Technology Act, 2000 or any other mode of mass communication;

(h) correspondent or columnist, cartoonist, editor, owner of the association or company referred to in clause (g).

Under FCRA 2010, “foreign contributions” are the donation, delivery or transfer of currency, articles or securities by any foreign source including a “foreign company.”

The FCRA 2010 defines a “foreign company” broadly as:

(i) a foreign company within the meaning of section 591 of the Companies Act, 1956;

(ii) a company which is a subsidiary of a foreign company;

(iii) the registered office or principal place of business of a foreign company referred to in sub-clause (i) or company referred to in sub-clause (ii);

(iv) a multi-national corporation.

Explanation- For the purposes of this sub-clause, a corporation incorporated in a foreign country or territory shall be deemed to be a multi-national corporation if such corporation,-

(a) has a subsidiary or a branch or a place of business in two or more countries or territories; or

(b) carries on business, or otherwise operates, in two or more countries or territories.

Pragmatically, however, there has been relatively poor and sporadic enforcement of the current ban on foreign contributions to political entities and candidates.

Enforcement

Association for Democratic Reforms v. Union of India (March 2014) provides an interesting look at the prosecution of foreign firms and political entities that violate foreign contribution restrictions.

In Association for Democratic Reforms v. Union of India, both the BJP and Congress Party were found to have broken foreign contribution laws by accepting money from British mining group Vedanta Resources Plc and its subsidiaries Sterlite Industries, Sesa Goa and Malco between 2004 and 2012.

The outcome of the case, however, resulted in the Delhi High Court asking the Election Commission and Home Ministry to further investigate the donations rather than jailing involved parties for up to three years as was within its power under the FCRA.

In other words, while contributions to political parties by foreign companies and investors are normatively prohibited, it is by most accounts pragmatically common as political contribution restrictions are seldom enforced.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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