Allowing Unlimited Corporate Donations Through Electoral Bonds Violates Free & Fair Elections : Supreme Court Voids Companies Act Amendment

This decision comes after a constitution bench, comprising Chief Justice DY Chandrachud and Justices Sanjiv Khanna, BR Gavai, JB Pardiwala, and Manoj Misra, heard a series of petitions challenging the scheme. Chief Justice Chandrachud, delivering the lead judgment, underscored the fundamental importance of transparency in political funding. Justice Khanna penned a separate opinion, concurring with the chief justice's view but applying a slightly different rationale. The court's ruling addressed concerns about the electoral bonds' potential to facilitate quid pro quo arrangements, highlighting the need for open governance and access to information for voters.

In addition to striking down the electoral bonds scheme, the court also made crucial observations regarding Section 182 of the Companies Act and the issue of political contributions by companies.

Section 182 of the Companies Act, 2013 allows Indian companies to make financial contributions to political parties under specific conditions. These conditions necessitated that such contributions be authorised by the company's Board of Directors, not be made in cash, and be transparently disclosed in the company's Profit and Loss (P&L) account. However, through the 2017 Finance Act, certain key changes were introduced which includes the removal of the previous cap on the amount that companies can donate to political parties, set at 7.5 percent of the average profits of the preceding three fiscal years. Additionally, requirement for companies to disclose the names of the political parties to which contributions were made in their P&L accounts was also eliminated.

In this highly-awaited judgment, the apex court observed -

"Section 182(3) of the Companies Act and Section 29C of the Representation of the People Act, as amended by the 2017 Finance Act, must be read together. Section 29C exempts political parties from disclosing information of contributions received through electoral bonds. However, Section 182(3) not only applies to contributions made through electoral bonds but through all modes of transfers. In terms of the provisions of the RP Act, if a company makes contributions to political parties through cheque or electronic clearing system, the political party has to disclose the details in its report. Thus, the information about contributions by the company would be in the public domain. The only purpose of amending Section 182(3) was to bring the provision in tune with the amendment under the RP Act, exempting the contributions through electoral bonds from disclosure requirements. The amendment to Section 182(3) of the Companies Act becomes otiose in terms of our holding that the electoral bonds scheme and relevant amendments to the RP Act and the Income Tax Act mandating non-disclosure of political contributions' particulars through electoral bonds is unconstitutional."

The court found the amendment to Section 182, permitting unlimited political contributions by companies, to be manifestly arbitrary for several reasons. First, it noted the disproportionate influence wielded by companies in the electoral process compared to individuals, emphasising the potential for transactions made with the intent of securing benefits in return. Treating individuals and companies at par made the scheme manifestly arbitrary, the court held. Chief Justice Chandrachud explained –

“The ability of a company to influence the electoral process through political contributions is much higher when compared to that of an individual. A company has a much graver influence in the political process, both in terms of the quantum of money contributed to political parties and the purpose of making such contributions. Contributions made by individuals have a degree of support or affiliation to a political association. However, contributions made by companies are purely business transactions made with the intent of securing benefits in return. The amendment to Section 182 is manifestly arbitrary for treating political contributions by companies and individuals alike.”

Second, the court highlighted the failure of the amendment to distinguish between profit-making and loss-making companies, thereby overlooking the heightened risk of quid pro quo transactions by the latter.

“Companies before the amendment to Section 182 could only contribute a certain percentage of their net aggregate profits. The provision classify between loss-making companies and profit-making companies for the purpose of political contributions and for good reason. The underlying principle of this distinction is that it is more plausible that loss-making companies will contribute to political parties with a quid pro quo, and not for the purpose of income tax benefits. The provision, as amended by the Finance Act 2017, does not recognise that the harm of contribution by loss-making contributions in the form of quid pro quo is much higher. Thus, the amendment to Section 182 is manifestly arbitrary for not making a distinction between profit-making and loss-making companies for the purposes of political contributions.”

Finally, the court emphasised the amendment's authorisation of unrestrained corporate influence in elections, which contravenes the principles of free and fair elections and political equality, saying –

“The purpose of Section 182 is to curb corruption and electoral financing. For instance, the purpose of banning a government company from contributing is to prevent such companies from entering the political fray by making contributions to political parties. The amendment to Section 182 by permitting unlimited corporate contributions authorises unrestrained influence of companies in the electoral process, which is violative of the principles of free and fair elections and political equality captured in the value of 'one person, one vote'.”

The challenge to the electoral bond scheme was brought to the court by Association for Democratic Reforms (ADR), the Communist Party of India (Marxist), Congress leader Jaya Thakur and others, arguing that the anonymity associated with electoral bonds undermines transparency in political funding and encroaches upon voters' right to information. They also contended that the scheme facilitates contributions through shell companies, raising concerns about accountability and integrity in electoral finance.

In defence of the scheme, the union government asserted its role in promoting the use of legitimate funds in political financing, ensuring transactions occur through regulated banking channels. Additionally, the government cited the need for donor anonymity to shield contributors from potential retribution by political entities.

After a three-day-long hearing, the constitution bench reserved its verdict in the matter last November. The court also notably ordered the Election Commission of India to furnish details of political party contributions via electoral bonds up to September 30.

Other reports about the judgment can be read here.

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