FOREIGN DONATIONS TO POLITICAL PARTIES


Association for Democratic Reforms and another vs. Union of India

and others is a very important decision not only because it came at the eve of Indian General Elections, not only because two powerful parties Indian National Congress and Bhartiya Janata Party are accused; but also because it comes on the eve of Indian transition on companies law. The decision is a result of a writ Petition and we can find original decision here. Before going to the decision, I refer relevant legal provisions here.

Section 4 of the Foreign Contribution (Regulation) Act, 1976 imposes prohibition on certain classes of persons from accepting foreign contribution. It reads as under:-

“(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,

(d) member of any Legislature,

(e) political party or office-bearer thereof.

Explanation: In clause (c) and in section 9, “corporation” means a corporation owned or controlled by government and includes a government company as defined in section 617 of the Companies Act, 1956 (1 of 1956).”

The term “Foreign Contribution” has been defined under Section 2(c) of the Act as under:-

“2. (c) “foreign contribution” means the donation, delivery or transfer made by any foreign source-

(i) of any article, not being an article given to a person as a gift for his personal use, if the market value, in India, of such article, on the date of such gift, does not exceed one thousand rupees,

(ii) of any currency, whether Indian or foreign;

(iii) of any foreign security as defined in clause (i) of section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973).

Explanation: A donation, delivery or transfer of any article, currency or foreign security referred to in this clause by any person who has received it from any foreign source, either directly or through one or more persons, shall also be deemed to be foreign contribution within the meaning of this clause.”

Section 2(e) of the Act defines “Foreign Source” as under:-

“2. (1) (e) “foreign source” includes

(i) the government of any foreign country or territory and any agency of such government,

(ii) any international agency, not being the United Nations or any of its specialized agencies, the World Bank, International Monetary Fund or such other agency as the Central Government may, by notification in the Official Gazette, specify in this behalf,

(iii) a foreign company within the meaning of section 591 of the Companies Act, 1956 (1 of 1956), and also includes

(a) a company which is a subsidiary of a foreign company, and

(b) a multi-national corporation within the meaning of this Act.

(iv) a corporation, not being a foreign company, incorporated in a foreign country or territory,

(v) a multi-national corporation within the meaning of this Act,

(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely,-

(a) government of a foreign country or territory,

(b) citizens of a foreign country or territory,

(c) corporations incorporated in a foreign country or territory,

(d) trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory,

(vii) a trade union in any foreign country or territory, whether or not registered in such foreign country or territory,

(viii) a foreign trust by whatever name called, or a foreign foundation which is either in the nature of trust or is mainly financed by a foreign country or territory,

(ix) a society, club or other association of individuals formed or registers outside India,

(x) a citizen of a foreign country, but does not include any foreign institution which has been permitted by the Central Government, by notification in the Official Gazette, to carry on its activities in India.”

The interpretation of the term “Foreign Source” as defined under Section 2(e) of the Act lies at the heart of the present controversy and begs for judicial consideration. It would be relevant to note that the term “Foreign Source” is not exhaustively defined under the Act and it assumes significance that the legislature has chosen to employ the word- “includes”, which signifies that the entries contained in the said provision are only illustrative of what could constitute a “Foreign Source”. It is evident that Section 2(e)(iii) of the Foreign Contribution (Regulation) Act, 1976 treats “Foreign Company” within the meaning of Section 591 of the Companies Act, 1956, its subsidiaries and multi-national corporations as a “Foreign Source” for the purpose of the Act.

Part XI of the Companies Act, 1956 under the caption “Companies Incorporated outside India‟ has Sections 591 to 608 as a part of the Chapter. Section 591 reads as under:-

“(1) Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:—

(a) companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and

(b) companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act.

(2) Notwithstanding anything contained in sub-section (1), where not less than fifty per cent of the paid up share capital (whether equity or preference or partly equity and partly preference) of a company incorporated outside India and having an established place of business in India, is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.”

The recently enacted Companies Act, 2013 distinctly defines “Foreign Company” under section 2(42) in the following terms-

(42) “foreign company” means any company or body corporate incorporated outside India which—

(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

(b ) conducts any business activity in India in any other manner.”

In light of the legislative mandate flowing from clause (1) of Section 591 of the Companies Act, 1956, Vedanta is unquestionably a “Foreign Company” by virtue of the fact that Vedanta is incorporated outside India i.e. in the United Kingdom and has established its place of business in India, as it operates in the territory of India through its subsidiary companies like Sterlite and Sesa.

A careful analysis of Section 591(2) reveals that if more than one-half of the share-capital of a company incorporated outside India and having an established place of business in India (A “Foreign Company‟ within the meaning of section 591(1) of Companies Act, 1956) is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.

Therefore, by virtue of the fulfilment of the conditions prescribed in clause (2) of Section 591 of the Companies Act, 1956, a fiction of law operates, and even a “Foreign Company” as defined is clause (1) is obliged to scrupulously comply with all the provisions of the Companies Act, 1956 as if it were a company incorporated in India and not merely comply with sections 592 to 602 of the said Act.

The purport and intent of clause (2) of Section 591 of the Companies Act, 1956 does not seem to qualify or whittle down the meaning of “Foreign Company” which is laid down under clause (1) of the said provision. The litmus-test for determining whether a company is a “Foreign Company” is contained in clause (1) alone viz. incorporation outside the territory of India. The effect of clause (2) is rather to impose a greater burden of compliance on “Foreign Companies” having place of business in India, which are essentially held by citizens of India. The said burden is equivalent to the burden cast upon a company incorporated in India.

The nationality of a company is determined exclusively on the touchstone of the situs of its incorporation and there exists a profusion of judicial authorities to this effect. The nationality of its shareholders or directors has no bearing upon the nationality of a company, the company being a distinct jural entity having an existence independent of its constituents.

Thus, in ultimate analysis, we are of the considered view that Vedanta is a “Foreign Company” within the meaning of Section 591 of the Companies Act, 1956 and therefore, Vedanta and its subsidiaries – Sterlite and Sesa are a “Foreign Source” as contemplated under Section 2(e)(iii) of the Foreign Contribution (Regulation) Act, 1976. However, in view of the operation of clause (2) of the Section 591 of the Companies Act, 1956, Vedanta would be required to comply with the provisions of the Companies Act, 1956 like a company incorporated in India.

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One response to “FOREIGN DONATIONS TO POLITICAL PARTIES

  1. Pingback: Reflection of Political Brotherhood in Law | AishMGhrana

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