New Companies Bill, State Funding & Corporate Funding of Political Parties

New Companies Bill, State Funding & Corporate Funding of Political Parties

Amidst Judicial & Corporate Engineering of Democracy in USA

The Companies Bill 2009 is listed for introduction in the winter session as Companies Bill, 2011. The text of the updated Bill is not available in public domain. It remains to be seen as what recommendations of the Parliamentary Committee has been incorporated in the Bill. “The Cabinet has cleared Companies Bill, 2011. It is likely to be tabled (for consideration and passage) in the ongoing winter session,” a corporate affairs ministry official said after the Cabinet meeting on November 24, 2011.

The 261 page Companies Bill, 2009 was introduced in the Lok Sabha on 3rd August, 2009.  The Bill gives greater role to shareholders.  The Bill allows for certain types of companies to be subject 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 currently specified in the Act, to be specified by the government in the rules. The government has not issued draft rules to the Bill so the impact of any possible change cannot be estimated.

This Bill will replace Companies Act, 1956 that provided the legal framework within which companies function. It defined the relationship between the management of a company, the shareholders who own the company, other stakeholders, and the government. It was amended 24 times since 1956. This is in pursuance of the concept paper issued in 2004 by the Ministry of Corporate Affairs on a new company law. The Ministry had constituted an Expert Committee under the Chairmanship of Dr J J Irani to suggest a framework for such a law to replace the existing Act. The Committee submitted its report in May, 2005. The history of laws creating companies which are least understood is quite old and goes further back in the past that will be dealt with on some other occasion.

Clause 161 of Companies Bill 2009 deals with prohibitions and restrictions regarding political contributions. This clause corresponds to section 293A of the Companies Act, 1956. It 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.

It reads as follows: (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—

(a) to any political party, or

(b) to any person for a political purpose:

Provided that the amount 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 five per cent 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 authorising 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 authorised by it.

(2) Without prejudice to the generality of the provisions of sub-section (1),—(a) a donation or subscription or payment caused to be given by a company on its behalf or on its account to a person who, to its knowledge, is carrying on any activity which, at the time at which such donation or subscription or payment was given or made, can reasonably be regarded as likely to affect public support for a political party shall also be deemed to be contribution of the amount of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like, shall also be deemed,—

(i) where such publication is by or on behalf of a political party, to be a contribution of such amount to such political party, and

(ii) where such publication is not by or on behalf of, but for the advantage of a political party, to be a contribution for a political purpose.

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

(4) Where a company makes any contribution in contravention of the provisions of this section, the company shall be punishable with fine which may extend to five times the amount so contributed and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months and with fine which may extend to five times the amount so contributed.

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 Bill was referred to Yashwant Sinha headed Parliamentary Standing Committee on Finance on September 9, 2009. The Committee submitted its 375 page report on August 31, 2010.

On page 225 of its report while commenting on clause 161, it says, “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 recommend that the prescribed maximum percentage for contributions to political parties in a financial year may be raised to 7.5% from the existing 5% 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 recommend 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 aggrandize one branch over the other.”4 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 Parliamentary Committee. “Independent Directors are expected to act as whistle blower”. The Committee heard the views of the representatives of Federation of Indian Chamber of Commerce and Industries (FICCI) and 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 off many high profile corporations around the world and specially in the Indian context.”  

The 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 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 Confederation of Indian Industry (CII) mild sentencing of Keshub Mahindra, a former non- executive director of the Union Carbide India Limited 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 exercise might appear to be an act of quid pro quo.

Even as in practice this legislation legitimizes 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 August 17, 2001 by the Union Cabinet, presided over by the then Prime Minister, Atal Behari Vajpayee. The Committee on State Funding of Election was headed by the former Union Home Minister and veteran CPI leader, Indrajit Gupta, had submitted its report to the Government on January 14, 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 PIB release dated September 14, 2011 reveals that Government has accepted the recommendations made by the Group of Ministers (GoM) on Corruption in its First Report on September 6, 2011. The Union Government had constituted a Group of Ministers (GoM) on 6th January. 2011 to consider measures that can be taken by the Government to tackle corruption, under the chairmanship of Union Finance Minister, Shri Pranab Mukherjee. Its terms of reference “State funding of elections”.

The Group of Ministers 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 October 15, 2011. The Group of Ministers had, in its meeting held on 6th September, 2011, asked the Ministry of Law to report progress in the consultative process already initiated by it. In the 30th September, 2011 meeting of the GoM, after the Law Ministry made a presentation on the subject, the Group of Ministers 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.

In the recently concluded Convention of Indian Youth Congress on November 29, 2011, Sonia Gandhi, Chairman, Indian National Congress led United Progressive Alliance (UPA) reiterated the need for state financing of elections as a measure against corruption in the electoral process. Earlier, she had demanded it at the Congress plenary in December 2010. Salman Khurshid, Union Minister for Law & Justice informed the Lok Sabha on November 28, 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 those 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 lakh active companies. This appears to be an exercise in the corportisation of the whole of non-farm enterprises. It seems to be an engineered act of legislative corruption that merits more consideration than Lokpal Bill before it is passed by the Parliament given the fact that Verappa Moily, the new Minister of Corporate Affairs has stated that its passage is his priority.

In such a backdrop, why does Union Law Ministry pretend forgetfulness while approving the Companies Bill that provides for corporate funding of political parties about Group of Ministers 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 Union Law Ministry is expected to do undertake two contradictory legislative works by the Union Cabinet.

Is it not the case that both Congress led UPA and BJP led NDA is preaching one thing and practicing just the contrary?  Is it any wonder that Dow Chemicals Company cites the opinion of two senior officer bears of BJP and 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?. Dow says, “according to the formal legal opinions of two respected Indian jurists, Senior Counsel, Dr. Abhishek Manu Singhvi and Mr. Arun Jaitely, Dow cannot be found liable under the laws of India. (See the full opinions at: Mr. Arun_Jaitley_Opinion_EXPARTE.pdf;Dr.Abhishek_Manu_Singhvi.pdf)”. Dr Singhvi gave his 10 page opinion on the letterhead of National Spokesperson of Indian National Congress. Jaitely gave his 15 page opinion on the letter head of the Senior Advocate having phone numbers which is used by him as Member of Parliament. Corporate funding manifests itself in myriad disguises.  

The provision of corporate funding of political parties in the Companies Bill must be looked at in the backdrop of the decision of Supreme Court of USA on January 21, 2010 in the Citizens United case, which was denounced by 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 Companies Bill is all set to turn most political parties into brothels wherein made-to-order legislations will have a field day if it is not the case already. How about approving Foreign Direct Investment (FDI) to facilitate setting up of legislation manufacturing factories?     

Gopal Krishna, ToxicsWatch Alliance (TWA), E-mail: krishna1715@gmail.com

Note: The root of rampant corporate crimes committed with impunity, environmental destruction, poisoning of food chain and human rights violations by security forces has been traced to corporate funding of political parties.