POLITICAL SURRENDER OF THE COMPANIES LAW COMMITTEE

On 1^st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In 7^th post on this report, we will discuss political surrender and failure to deliberate up to its mandate by the committee. Indian Investors need immediate public discussion and required to make their suggestion to government for better disclosures based regime in political contributions by companies.

Before reading further, I would like to disclose that I was part of two groups; “Task Force on Companies Law” and “Research Group on Companies Law” constituted by the Institute of Company Secretaries of India. All view here are personal and not of these groups or ICSI.

The committee in Para 12.12 related to prohibitions and restrictions regarding political contribution run away from its mandate.

The Committee deliberated on the recommendations made by Law Commission of India in its 255th Report for amending section 182 of the Act (Prohibitions and restrictions regarding political Contributions) to empower a larger group of people, such as the company’s shareholders, in deciding how to use the funds of a company for political purposes.

There is no doubt, Law Commission discusses and draft principles to keep pace with the changing time. Sometime, society may not have kept pace with the theoretical developments. However, society needs to deliberate upon such discussion. The Companies Law Committee had representatives of corporate, governments, and professional bodies. There should have been some deliberation to reflect in the report. Unfortunately, the committee just made a passing comment:

The Committee felt that a wider consultation with industry chambers, political parties and other stakeholders should be taken up by the Ministry before taking a final decision on changes recommended in the 255th Report.

 Any recommendation report of this committee is not binding on government and may not reflect legislative wisdom. This Para unfortunately, drafted in a manner to show that recommendations of the committee are binding on the ministry.

This recommendation, unfortunately, reflects nexus of industry, executive and professional with political powers. This recommendation reflects failure on corporate governance regime. It may be noted that political pressure for donation usually result hardship on “ease of doing business” and “make in India”. Recently, some companies shifted their plants to different states just to avoid donation demands.

As the committee failed to initiate a public dialog, this blog here will discuss relevant portion of 255^th Report of Law Commission.

Section 29B of the RPA makes it clear that there is no limit on political parties accepting contributions from corporations, so long as the donor is not a government company, or the donation is not a foreign contribution prohibited under Section 3 of the Foreign Contribution (Regulation) Act, 2010.

Section 182(3) of the Companies Act, 2013 regulates the disclosure of donations made by companies, requiring every company to disclose the total amount of its contribution, and the name of the party receiving the said contribution, in every financial year in its profit and loss account.

In exercise of its plenary powers under Article 324 of the Constitution, the ECI issued a scheme relating to “Electoral Trust Companies” on 10th December 2013 to fill in the vacuum in respect of disclosure requirements of contributions by electoral trusts in 2014. Although companies contributing to Electoral Trust Companies (for further contribution to political parties) are not required to make any disclosures pursuant to Section 182(3) of the Companies Act, 2013, they are required to disclose the amount released to an Electoral Trust Company. In turn, the Electoral Trust Company is required to disclose all amounts received from other companies or sources in its books of account and the amount contributed by it to a party pursuant to Section 182(3). 44 Further, Electoral Trusts are required to submit Annual Reports of contributions to the ECI containing details of the name and addresses of the donors and the amount of donation given to each political party.  The ECI has released a list of approved Electoral Trusts.

The authorisation of corporate contribution requires a resolution passed at the meeting of the Board of Directors under Section 182(1) of the Companies Act, 2013. The empowerment of a small group to decide how to use the funds of a company for political purposes, instead of involving the vast numbers of shareholders, being the actual owners of the company is unfair.

In a company, shareholders are not humongous group supporting one or two parties. There is possibility that some shareholders may even support a lesser known political party. Presently, political ideology of promoter directors decides political contribution. There are allegations that political pressure of parties in power also affects decision of political donations.

Britain follows a shareholder approach where British companies require shareholder approval before they can make any political contribution or incur any political expenditure.105

Law Commission in its 255^th report recommends that Section 182(1) of the Companies Act, 2013 should be amended to require the passing of the resolution authorising the contribution of the company’s funds at the company’s Annual General Meeting (AGM) instead of its Board of Directors.  Thus, the words “a meeting of the Board of Directors” in sub – section (1) of section 182 should be replaced by the words “the annual general meeting”.

There is a need of sufficient disclosures and protection for the interests of investors. I have some recommendations. No company should make political contribution if —

1. It has not declared dividend to its members continuously in last 3 financial years;
2. It has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more;
3. It has not filed financial statements or annual returns up to last financial years;
4. its director or key managerial personnel has not made declaration about their past or present political affiliation, membership of any political party, and holding of any electoral office like member of parliament, member of legislative assembly, or any local bodies;
5. it has not obtain declaration form political parties that in case, any present director or key managerial personnel join them during next 3 financial years, they will refund the contribution; and
6. it has not obtained from political parties certified copies of their election manifestos issue during last 10 years and action taken report on promises made therein.

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.