FUNDINGS TO THE POLITICAL PARTIES VIS--VIS POLITICAL

FINANCE & ELECTION LAWS: A NEED TO REFORM

Ankita Ranawat

5th Year IPR (Hons.) Student [12BLL040], Institute of Law, Nirma University

Abstract-

Every nation must has competitive political parties as well as good election campaigns because
they are crucial to the health of flourishing democracies. It cannot be denied that Political Parties
and campaigns need substantial resources to conduct elections but at the same time use of illegal
means and black money often find their way into the conduct of elections. A good governed and
well performing democracy requires vibrant political groups and a very competitive election.

The author through this paper would study in detail the fundings to the political parties keeping in
mind the political finance and election laws and further need for reformation in such laws. The
author would start the discussion by delving into the evolution of party and election financing
regulations along with the changes in companies act which will include the era starting from 1950s
to the present time. Further the author would talk about corporate funding which will include the
concept of electoral trusts. Next, the author would discuss about the rise of black money in funding
the political party with reference to the effects of demonetization on the same. At last, the author
would conclude the article by giving some suggestions regarding the reformation.

Keywords: Election Campaigns, Democracy, Political Party, Reformation, Companies Act,

Corporate Funding, Electoral Trusts, Black Money, Demonetization
INTRODUCTION

As we know, Indias economy got liberalized in 1991 by reducing the various tax rates and an in
depth control on the micro-economic activity. At the same moment, the sectors that were initially
meant for the public sector operations were then opened up for the private sector as well. It also
marked the entry of foreign players in the economy. All the above measures were done in order to
control and reduce corruption that was damaging the nation since 1970s.

However, in the year 2011, twenty years after the economy opened up, India faced a huge crisis of
governance. The 2G Scam, the Coalgate Scam etc. dominated the headlines back then. Ministers
were sent to jail on charges of corruption. In addition to the ministers, key managerial persons of
some big corporate house were also sent to jail on charges of aiding the politicians misdeeds.

The matter of utmost importance was that, what was the reason for growing corruption even after
the economic liberalization in 1991. The answer to this is first, the liberalization of economy did
not end the governments discretionary power over resource allocation in numerous domains and
second, the political funding and expenditure on election laws that empowers the party and the
politicians with discretionary powers on resource allocation which is then misused by the parties
and the politicians.

The author through this article would analyze various methods of funding and would come up with
suggestions on reforming the system.

THE EVOLUTION OF PARTY AND ELECTION FINANCING REGULATIONS ALONG

WITH THE CHANGES IN COMPANIES ACT

A good governed and well performing democracy requires vibrant political groups and a very
competitive election. It is evident enough that any political party does the following basic work.
They are first, they integrate and mobilize the citizens. Second, they work on aggregation of public
interest. Third, they formulate the public policy. Fourth, they hire political leaders for achieving
the goals. Fifth, they work on organizing Parliament and government.1

1
Bartolini, S. and Mair, P. (2001). Challenges to Contemporary Political Parties. In Diamond, L. and Gunther, R.
(eds.), Political Parties and Democracy (pp. 327344). Baltimore: Johns Hopkins University Press
1950s

Now, in order to operate properly and to meet the expectations of the roles, to run and also to win
the seat, or to serve as an effective opposition, all political parties as well as their nominated
candidates needs huge amount of financial assistance. Traditionally, these parties used to finance
themselves by way of donations and membership amount.2 Contribution from Corporate Houses
in way of Political Contribution was made legal through Companies Act 1956 but has certain
restrictions to it. The Representation of the People Act (RPA) of 1951 introduced new limits on
money that can be spent on any election campaign.3

1960s

Came 1960s and with its advent, grew the concerns of any nexus between black money and
political party fund raising. Subsequently, the Santhanam Committee report on Prevention of
Corruption (1964), and the Wanchoo Direct Tax Enquiry Committee (1971) threw light on the
major issue of black money that was being infiltrated into the political parties.

Corporate Houses and Individual Businessmen generated black money by evading Corporate Tax
or Income Tax. This was done because of high tax rates prevalent in the economy. A part of the
black money so generated was being pushed back to the political party and the candidates in order
to return more profits through the policy decision that was made in their favor.

Years passed on and in 1968, the then Prime Minister Indira Gandhi imposed a ban on political
contribution by Corporate Houses to parties. It was done keeping in mind the undue influence the
Corporates were having on the parties and to stop that influence on politics.4

1970s

In the year 1974, in a landmark case in the history of Politics was witnessed. It was the Kanwar
Lal Gupta v. Amar Nath Chawla. In this case, the Supreme Court held that the expenditure that a

2
E. Sridharan, Electoral Finance Reform: The Relevance of International Experience. In V. K. Chand (ed.),
Reinventing Public Service Delivery in India: Selected Case Studies (pp. 3715). New Delhi: Sage.
3
Ramadevi, V. S. and Mendiratta, S. K. (2000). How India Votes: Election Laws, Practice and Procedure (pp.378
80, 39195). New Delhi: Butterworths India
4
Refer to actual paper
party does on any candidate should be included in the candidates expenditure in order to calculate
to the election expenditure limit.

In response to the same, the Parliament amended the Representation of the People Act to nullify
the Supreme Courts judgement. The parliament especially amended the Explanation 1 of the
Section 77(1) of the Act in such a way that from that time onwards any expenditure that is done
on the Candidate or any supporter without the candidates authorization would not be counted as
his expenditure in order to escape the liability put on by the Election Expenditure Limits.

Further, in the year 1979, the political parties got themselves exempted from any kind of tax
liability be it the Income tax or the Wealth tax. All they were required to do is to file an annual
return including the audited accounts and listed donations.

1980s

In the 1980s, a few major developments were seen with the amendment of the Companies Act in
the year 1985 which again allowed the political contribution through the corporates empowered
by the Section 293A of the then Companies Act. The section stated that companies can donate not
more than five percent of the average net profit of the past three years after approval of the Board
of Directors. The same should have to be mentioned in the Profit and Loss Statements of the
companies.

1990s

In the year 1990, the government setup Dinesh Goswami Committee on Electoral Reforms. The
Committee Report suggested State Funding in elections by way of Fuels for Vehicle used in
Campaigning, rental of microphones and other equipment for campaigning etc. It also
recommended penal actions on supporter and candidates for unauthorized spending above the
expenditure limits. It also supported the ban on the Corporate Funding but at the same time they
did not provide any good alternative to the corporate funding.

In the year 1993, the Confederation of Indian Industry became concerned about the political
funding for the very first time and subsequently setup a Task Force which recommended that all
the Corporate Contributions should be made tax free and made it mandatory for board approval
for political contributions.5

In the year 1996, major developments were witnessed. A non-government organization filed a PIL
against the party funding and the as a result, the Supreme Court in the Common Cause Judgment
issued notices to almost all the political parties to file its returns by February 20, 1996 as per the
rules of Income Tax and Wealth Tax.6 Almost all parties refrained from responding to the Income
Tax notices that was served to them by the Income Tax. The Supreme Court also interpreted the
amended Explanation 1 of Section 77(1) of the RPA Act in such a way that the party expenditure
on the candidate and supporter would not be counted in the expenses of the candidate if done
without his authorization but this was only so when the party has their income and expenditure
audited which at that point of time none of the political parties were having their audited accounts.
This judgement brought all the political parties under the tax scanners and forced the parties to
declare their annual income ultimately brining in transparency in political contributions.

2000s

In November 2000, Delhi High Court in response of the PIL filed by a NGO Association for
Democratic Reforms issued direction to the Election Commission to gather data on criminal
records of all the candidates and make this information public along with the details of educational
qualification of the candidates so that the public can make an informed decision. Along with such
declarations, assets and liabilities of all candidates were also to be made public.7 Inspite of various
issues pertaining to the judgment, the same was reaffirmed on March 13, 2003 subsequently the
Election Commission issued orders following the courts orders ultimately making declarations
mandatory.8

Major turns came in light when the NDA Government passed the Election and Other Related Laws
(Amendment) Act in September 2003. This Act made all political contributions from Corporates
and Individual 100 percent tax deductible under Section 80 GGB and GGC of the Income Tax Act.

5
Interview with R. C. Bhargava, then chief executive officer of one of Indias largest companies, Maruti Udyog, and
chairman of CIIs Task Force, 8 December 1995
6
All India Reporter 1996, Supreme Court 3081
7
Jagdeep S. Chhokar, Reforming the Electoral System, Seminar, No. 521, January 2003, pp. 6164
8
Department of Legislative Affairs, Ministry of Law and Justice, Govt. of India (co-sponsored by Election
Commission of India), Background Paper on Electoral Reforms, December 2010, p. 38
This act, however, did not have any effect on the Section 293A of the Companies Act. Also, under
Section 29-C of the RPA Act, it was made mandatory for the political parties to submit a list of
donations received above Rs. 20,000 to the Election Commission.9

2010s

Above all these developments, it is noteworthy that in February 2011, the expenditure cap was
increased to Rs. 4 million from Rs. 2.5 million (as on October 2003) for the elections of Lok Sabha
and to Rs. 1.6 million from Rs. 1 million (as on October 2003) for any assembly election.

The Union Budget 2017 has put a limit of any funding above Rs. 2000 to be mandatorily disclosed
by the political Party. This is a sharp fall from the earlier fixed limit of Rs. 20 000.

POLITICAL CONTRIBUTION FROM CORPORATE TO PARTIES

Corporate Houses and Businessmen provides approximately 90 percent of the funding to the
political parties. Sec 182 of Companies Act, 2013 provides that whichever company is making any
contribution, it should be in existence since past 3 years. Also, they should donate not more than
7.5 percent of the Average Net Profit of past 3 years.

The government in order to streamline the funding process and to make sure that is transparent in
regards to Corporate Funding for Election Expenses, enacted the Electoral Trust Scheme, 2013.
Under this scheme, the electoral trust companies were promised to be provided with tax incentives
in lieu of the funding they made to the political parties.

The Corporate Affairs Ministry modified the Name Availability Guidelines for the corporates in
order to enable them to make registrations for the NGO. It also mandated that the companies
registering as electoral trusts must have the name prefix as Electoral Trusts in order to identify
the difference between normal companies and them. It was also required by the law that these
companies shall only be for the purpose of the companys registration under the CBDT and the
Electoral Trusts.

9
International IDEA, Funding of Political Parties and Election Campaigns, Stockholm: International IDEA, 2003,
p. 147
Present status of political funding

Under the present legal system, there are numerous amount of donations that are unaccounted for
want of a transparent system. In a report of Association for Democratic Reforms (hereinafter
referred as ADR), it is found that Political parties get funded primarily by the Electoral Trusts that
helps in the Election Campaigning. It is also found that the local or regional political parties prefer
taking donations from individuals of amount less than INR 20,000 so that they should refrain from
declaring the names of the donors while on the other hand the major political parties such as they
Congress and the BJP require huge amount of funds that are funded through the Electoral Trusts
where the Corporate Houses put funds invariably with the view to maintain transparency in the
process of disbursement of funds.10

Why do Corporates & Politicians prefer Electoral Trusts?

As per the report of The Hindus Business Line, when the corporate houses such as Tata, Birla,
Reliance contributes to the Electoral Trusts, the law does not makes it mandatory on the companies
to disclose in which partys favor the funds will go. This transparency is done in order to safeguard
the interest of the corporate from landing themselves in trouble especially if they are supporting
and funding a party that does not win the election.11

Aditya Birla Group General Electoral Trust

"No group wants to be seen to be aligned with any political party for fear, if it has backed the
wrong one, of getting the short end of the stick," said Haribhakti, formerly a trustee of General
Electoral Trust.12

It is very well known that the Aditya Birla Group has interest in various industries and were second
in coming up with an electoral trust after the Tatas and is presently the biggest electoral trust in
this country which funds two of the major political parties that are the BJP and the Congress.13

10
Why Tatas, Birlas use electoral trusts to fund politics, First Post available on
http://www.firstpost.com/politics/why-tatas-birlas-prefer-electoral-trusts-to-fund-political-parties-450251.html (last
visited on 3 March 2017)
11
Anonymity conferred by electoral trusts, The Business Line by The Hindu available at
http://www.thehindubusinessline.com/todays-paper/tp-opinion/article1057081.ece (last visited on 3 March 2017)
12
Ibid
13
Ibid
As per the ADR reports, the Aditya Birla Groups Trust contributed around INR 36 Crores to the
Congress and approx. INR 26 crores to the Bhartiya Janta Party.

Tata Sons Electoral Trust

Tata Group run trust is not the biggest but when it comes to the funding, the Tata Sons trust enjoys
reputation of being funded through the all the Tata Group companies.14

The trust is also said to have contributions from other corporate bodies as well as individuals apart
from the Tata group companies. The funds so received are disbursed in a very organized method
that is in two installments of 50 percent where the first 50 percent is provided to the political party
based on its strength in the Lok Sabha much before the Election is conducted. The other 50 percent
is disbursed based on the partys performance in the said Election.15

Furthermore, the group selects parties on the basis of the seats they have in the Lok Sabha with a
minimum threshold of 16 seats out of the total of 543 seats.

Bharti Groups Electoral Trust

A trust funded by the Airtels holding body Birla Group is seen to have interest in the telecom
sector as well as new business sectors where the company is planning to expand. It is also the
major contributor to the national parties Congress and BJP.16

Since 2003 to 2011, this trust was known to be the major financer of the Congress Party by funding
INR 11 Crores.

RISE OF BLACK MONEY UNDER THE JACKET OF POLITICAL CONTRIBUTION

It has been reported on The Quint that, Major national level parties have cumulatively collected
funds in excess of INR 1130 Crores in the year 2014-15. Also, the ruling government did not levy

14
Supra note 10
15
Supra note 10
16
Supra note 11
any kind of tax on the same and the most interesting part is that the source remains a secret till
date.17

Vinod Rai, Former Comptroller and Auditor General of India along with D Subbarao, Former
Reserve Bank of India Governor alleged the political funding as a major source of rise in Black
Money in the nations economy.18

Demonetization

As we have all seen, as soon as the demonetization of the old Rs.500 and Rs.1000 was announced
by the Prime Minister on 8th November, the opposition parties started protesting the move and few
of them went on to ask for an immediate rollback.

It is felt that the political funding is not as transparent as it is said to be. They are very opaque.
There are many uncertainty about the funding of the parties in India. In the Background Paper on
Political Finance and Law Commission Recommendations19 published by Election Commission
of India, it was stated that in order to contest an election, either the political party will raise the
fund or the candidate on his own though either state funding which is made in terms of bank
transfer or by providing resources as fuel, equipment, conveyance etc.20

The report further states that the political funding and corruption goes on the same hand. They do
not get tracked as the parties are only required to disclose the names of the donors in case the
donations crosses the mark of Rs. 20,000. If it is less than the said amount, the parties are not
bound to maintain the records or even to reveal the same. The so called Big Money comes
through the same route in form of higher denominations yet under Rs. 20,000 so as to avoid the
records.21

17
What War on Black Money? BJP, Congress Unite to Hide Fund Sources, The Quint, available on
https://www.thequint.com/india/2016/12/05/demonetisation-bjp-congress-unite-to-hide-fund-sources-political-
funding-rti-black-money-corruption-election (last visited on 4th March, 2017)
18
Ibid
19
Published on Election Commission of India Wesbite. Available at
http://eci.nic.in/eci_main1/Current/BackgroundPaper23032015.pdf [last visited on 3rd March, 2017]
20
Ibid
21
Ibid
Impact of the demonetization on political funding

Notwithstanding the impact of demonetization in the public arena, it would definitely impact the
cash flow in the political funding area. According to the Reuters, Opposition political parties in
the state of Uttar Pradesh has already revised their election campaign for the 2017 elections. By
the demonetization, parties were coerced to do change the schedule of their few campaigns and
even restricted freebies to the voters. Apart from this, the move has clearly affected business
houses and also their ability to fund political parties.

REMEDIES

The author would like to divide the suggested remedies into two phased approach. They are

1. Campaign financing

The Union Budget 2017 regarding the cap on election funding is a welcome change. Further, all
the details of the funding should be shared with the Income Tax Department for monitoring
purpose.

Also, the corporates shall welcome the concept of Electoral Trusts and the laws shall accordingly
be amended to mandate the concept of Electoral Trusts to get away with the problem of Black
Money and also it would make the corporates to freely participate in the process of funding without
being threatened by the impact of such donations.

The Law Commission Suggestions

The law commission has also made some remarkable suggestions such as -

a. Amend Section 182(1) of the Companies Act 2013 so that the decision to fund a political
party be vested on the Shareholder Meeting at AGM rather than on the Board of Directors.22
b. Amend RPA by adding Section 77A making it mandatory for candidates to maintain and
disclose the particulars of the donors (such as the names, complete addresses and PAN card
numbers of the donors and the amounts contributed).23

22
Law Commission of India Submits its Report on Electoral Reforms to the Ministry of Law & Justice, Para
2.31(a)2
23
Ibid, Para 2.31(b)3
 c. All Political Parties to maintain an annual accounts that should be audited by a practicing
CA notified by the CAG of India and then disclose the same to the Election Commission
of India each year.24

2. Election administration

The Election Commission of India should make sure that there is no crime committed on the
Voting Location. They shall make sure all the EVMs are functioning properly and they should be
centrally controlled from the HQ so that no one can peep into the internal system of the EVM and
hack the same.

Furthermore, the security should be increased and vigilance should be made on the political party
members as well as their close associates. It should be made sure that no freebies or any kind of
consideration is made to any of the voter. Also, during the election period the money flow shall be
strictly monitored by the Income Tax Department.

24
Ibid, Para 2.31(b)6