Political Contribution and Its Role in Corporate

Corruption

Submitted By:
SHIVALIKA KUMARI
ROLL NO-2359
SEMESTER-05
B.A.LLB (HONS.)

Submitted To:
Mrs. NANDITA S JHA
(ASSISTANT
ASSISTANT PROFESSOR OF LAW
LAW)
This Final draft is submitted in fulfilment of the B.A. L.L.B course in ‘Company Law’ course

CHANAKYA NATIONAL LAW UNIVERSITY, PATNA-

PATNA
800001

Date of Submission of Final Draft:

19th September,2022
 DECLARATION BY THE CANDIDATE

I, hereby declare that the work reported in the B.A.,LL.B(Hons.) Project Report titled “Political
Contribution and Its Role in Corporate Corruption” submitted at CHANAKYA NATIONAL
LAW UNIVERSITY,PATNA is an authentic record of work carried out under the supervision of
Mrs. NANDITA S JHA.I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the contents of my project.

SIGNATURE OF CANDIDATE

Name: SHIVALIKA KUMARI

Roll no.: 2359

Course: B.A.,LL.B

Semester: 05

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 TABLE OF CONTENT

Chapter 1- Introduction

Chapter 2- History of Corporate Funding in India

Chapter 3- Amendments made in corporate funding.

Chapter 4- Corporate Funding analysis in recent election of 2019-2020

Chapter 5- White Collar Crimes in the recent past:

 2G Spectrum Scam (2008)

 Satyam Scam (2009)
 Coal Scam(2012)
 Misuse of Electoral bonds

Chapter 6- Steps taken to promote transparency in electoral Funding

Conclusion.

Bibliography

LIST OF ABBREVIATIONS

ABBREVIATION EXPANSION

& And

CFI Corporate Finance Institute

FY Financial Year

₹ Rupee

§ Section

SEC Securities and Exchange Commission

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GRAPHS

Corporate Donations recieved by Ntional Page no.-12

Parties (in ₹ crore) from financial year 2012-
13 to 2019-20

Corporate Donations recieved by Ntional Page no.-12

Parties (values are in ₹ crore)
Party-wise share

AIMS AND OBJECTIVE:

1. The researcher aims to illustrate about the past and present condition of political and
corporate relation.
2. The researcher aims to highlight how politics in corporate can drastically affect the
economic growth.
3. The researcher aims to spotlight the white collar crimes taking place due to corporate
corruption.
4. The researcher aims to elaborate the various mechanisms and provisions available to
check corruption in corporate world by indulgence of politics.

RESEARCH METHODOLOGY

The researcher through this methodology will be able to get a crystal clear information regarding
the topic, in other words, the researcher through this methodology will be able to get bird’s eye
view of the problem in question. The doctrinal method helps in doing a comparative study of the
topic. This methodology helps in going through not only the work of on eminent person but of
many other too including various data analysis. For smooth research work, the researcher would
comb through various articles and observations made by prominent authors to understand the
nitty-gritty nuances of the topic. The researcher plans to go through various case studies on
political and corporate behavior to understand the concept more explicitly.

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 INTRODUCTION

In order to ensure the financial fairness of a company, audit report is an instrument which can be
relied to view the conduct of the private and public corporations, this not only reflect whether a
company is functioning ethically or not but also boost the confidence of shareholders about the
company’s financial position.1

Government agencies, such as the Securities and Exchange Commission (SEC), require publicly
listed companies to conduct an independent audit to validate their annual financial reporting.
This audit provides shareholders and regulatory agencies with information on how money is
earned and spent throughout the fiscal year. For this purpose, every listed company2 and such
other class or classes of companies, as may be prescribed, shall constitute an Audit Committee
which will include a vigil mechanism3 for directors and employees to report genuine concerns in
such manner as may be prescribed.4

Scope of vigil mechanism:

1. Malpractices which have taken place/suspected to have taken place

2. Misuse or abuse of authority
3. Fraud or suspected fraud
4. Violation of company rules, policies as well as Regulatory laws
5. Manipulation in operations of business
6. Negligence causing danger to public health, wealth and safety
7. Violation of company rules, policies as well as Regulatory laws
8. Negligence causing danger to public health, wealth and safety
9. Any other matters or activities on account of which the interest of the Company is likely
to be affected.
Out of various spending that a company does one of them is political funding.

1
CFI,https://corporatefinanceinstitute.com/resources/knowledge/accounting/audit/(last visted on 25 th August,2022)
2
The Companies Act, 2013, § 2(51).
3
Vigil Mechanism, unimoni, https://www.unimoni.in/vigil-mechanism/ (last visted on 25 th August,2022)
4
The Companies Act, 2013, § 177(9)

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 Over the years there has been speculations that
elections in India are hugely funded by
Corporations and such a system has paved way
for corruption and favouritism which has had
an ill effect in the economic growth of the
country, therefore, activating the scope of vigil
mechanism as it has led
d to numerous scams in
the past and misuse of the instruments
facilitating electoral funding. Thus, this project
work is based on how corporate and politics have an impact on each other leading to positive and
negative consequences.

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 History of Corporate Funding in India

The Representation of the People Act (RPA) of 1951 introduced limits on the amount that could
be spent by candidates on election campaigns. Candidates who exceeded these limits faced the
prospect of disqualification and annulment of their election bids. The Companies Act was
amended in 1960 to provide a ceiling for donations to political parties. The ceiling was fixed at
Rs. 25,000 or five percent of the average net profit of the company for the three preceding
financial years, whichever amount was greater. The company making the contributions was
mandated by law to ensure that its accounts contained the particulars of both the amount of
donation and the names of the recipients. It made it necessary that contributions be authorised by
the Memorandum of Associations (MOAs) of the companies.

Usually these contributions were linked with illegal gains like obtaining permits, licenses and
quotas.The only opposition against these contributions during this period was the government-
commissioned Santhanam Committee Report in 1962 5 . It recommended a complete ban on
corporate funding of political parties because of public belief in the prevalence of corruption 6 at
high political levels, strengthened by the manner in which funds were collected by the 7 parties,
especially at the time of elections.

In 1969, donations from corporate houses were banned via deletion of Section 293A of the
Companies Act. The government headed by Prime Minister Indira Gandhi introduced the
amendment to curb the harmful influence of big business on politics. Following the ban on
corporate donations, the only legal channel available to big business for the purpose of
contribution was blocked. To beat the ban, political parties started raising funds by issuing
souvenirs, in which advertisements were placed by the business houses. Business in India
resorted to tax evasion, black-market operations and other illegal mechanisms due to political
compulsions and the threat of selective raids and nationalisation. This period also saw the rise of

5
Santhanam Committee on Prevention of Corruption (1962),
https://iasexamportal.com/study-kit/gist-of-national-administrative-committees-report/santhanam-committee-
1962( last visited on 15th September,2022)
6
The Representation of the People Act, 1951, §123
7
Sachar, Rajinder, “Clean Politics demands no corporate funding to Political Parties”, Mainstream Weekly,
http://www.mainstreamweekly.net/article1322.html, Vol XLVII, No 19, 1999.

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“briefcase politics” 8 which was the transfer of vast amounts of black money into the Congress
party. Businesses that contributed amounts to party funds often received concessions and
amassed wealth during this period. Those who refused to toe the line were often at the
investigation end of the Revenue Intelligence Department or the Enforcement Directorate.
Donations were more in the nature of extortions and clearly based on quid pro quo. This led to
an era of license permit raj, this arrangement also suited the businesses. To end this, Rajiv
Gandhi government, took a crucial decision of lifting the ban in 1985.

In Post Liberalization period the new pattern in politics i.e the Coalition politics formed a great
opportunity to both the political parties as well as to the Corporates that were interested to fuel
corporate funding into the politics. These efforts were majorly made through floating neutral
trust which is more commonly known as electoral trusts. 9

In the pre-liberalisation era, the focus was on seeking favours from the government for securing
licenses, permits and quotas; post-liberalisation the objective of political funding is to seek 13
protection from the entry of multinational corporations, besides other favours.

8
Kochanek, Stanley A., Briefcase Politics in India: The Congress Party and the Business Elite, Asian Survey, Vol.
27, No. 12, p. 1290.
9
Income Tax Rules1962,§17CA

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 Amendments Made in Corporate Funding.

According to provisions of the new Companies Act, 2013, funding from corporates shall not
exceed 7.5 percent (against the earlier 5 percent limit) of the net average profits earned in the
preceding three years. It further provides that the contribution should be authorised by a
resolution passed by the Board of Directors done by amending the Section 182 of Companies
Act 2013.

Criticism:

One of the criticisms levelled against the provision of a resolution is that only a minuscule
number of people can decide how to utilise the funds for political purposes as opposed to the
thousands of shareholders who are the real owners of the company. One way to counter this
criticism to some extent would be to require the resolution to be passed at the Annual General
Meeting (AGM) of the company, rather than merely by the Board of Directors.

In the United Kingdom for example, the shareholders of a company have a definite say over
how funds are spent for political purpose in what is commonly referred to as the “shareholder
approach”. British companies are required to disclose to their shareholders the political
contributions that are made in their name; without the consent of shareholders, political
donations are not allowed at all. If a company has made a political donation of over £2,000, then
the directors' annual report to the shareholders must include the name of who received the
donation and the amount. If shareholders in British companies do not approve a political
donation resolution, then the company cannot make political contributions during the relevant
period. Also, directors of British companies who make unauthorised political donations are
personally liable to the company for the amount spent plus interest, and must compensate the
company for any loss or damage as a result of the unauthorised donation or expenditure. The
Companies Act in its present form fails to recognise the demands of the shareholders in the
company to have a say in distribution of corporate funds, which the Supreme Court of India has
upheld.

Advertisements, brochures and souvenirs released by or on behalf of political parties, or if not

directly released by a political party or meant for a political purpose but financed through
corporate funding, will be considered as contributions by companies for a political purpose. The

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Act be mandatory has no provisions on the role of a regulator for listed corporations. Ideally, the
Securities and Exchange Board of India (SEBI) should be appointed as the regulator to which all
donations should be reported. SEBI should also have the authority to audit such donations.

The Election Commission and various members of civil society have argued that funding and
donations by companies to political parties should be made subject to audits and disclosures. All
the audited reports by independent auditors should be made public.

Thus, while the new Companies Act has brought major improvement with regard to transparency
in corporate funding, it has left many grey areas that have ample scope to make corporate
donations murkier.

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 Corporate Funding analysis in recent election of 2019-2020

In FY 2019-20, when the Lok Sabha elections were conducted, political parties received over
₹920 crore in the form of corporate donations, according to a report by the Association for
Democratic Reforms. The report analysed corporate donations to five national parties:
the Bharatiya Janata Party (BJP), Indian National Congress (INC), All India Trinamool Congress
(AITC), Nationalist Congress Party (NCP), and Communist Party of India (Marxist) (CPM). The
BJP was the biggest recipient of corporate donations made in FY20 followed by the INC and
NCP. Prudent Electoral Trust was the top contributor to the BJP and INC followed by Jankalyan
Electoral Trust and ITC Limited. It is to be noted that donations through electoral bonds still
constitute the lion’s share in the total income of the BJP and INC.

 Electoral bonds form the highest share in the total income of three national parties — the
BJP, the INC and the AITC

 Corporate donations formed a major chunk of the NCP’s total income

 The top donor for the two national parties (BJP and INC), Prudent Electoral Trust,
donated a total of ₹248 crore in FY 20

The chart shows the year-wise corporate donations (in ₹ crore) to five national parties.
National parties received over ₹920 crore from corporates in FY20, the highest in at least the
past eight years.

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 1000
900

recieved by Ntional Parties (in

Corporate Donations 800
700
600
500
₹ crore)

400
300
200
100
0
FY 2012- FY 2013- FY 2014- FY 2015- FY 2016- FY 2017- FY 2018- FY 2019-
13 14 15 16 17 18 19 20

Party-wise share

The chart shows the total corporate donations received by the five national parties in FY 20. The
amount donated to the BJP, the highest recipient of corporate donations, was ₹720 crore.

800
by Ntional Parties (values are in
Corporate Donations recieved

700

600

500
₹ crore)

400

300

200

100

0
BJP INC NCP CPM AITC
Series 1 720.41 133.04 57.09 6.92 4.5

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 White Collar Crimes in the Recent past

The connection between the political parties and the donors to their Corporate funding's have
resulted in a steady rise in the volume of Corporate Crimes in the Country. Over the period from
2008- present there has been a number of scams were in it was publicly seen that major
contributors to these corporate funding's have used their positions of authority and have initiated
scams for their benefits.

Another way in which these donors get benefits for their donations can been through policies
made by the government that are beneficial to the donors the most recent example of such a
policy can be said to be the passing of these ordinances The Farmers (Empowerment and
Protection) Agreement on Price Assurance and farm service Ordinance and The Essential
Commodities (Amendment) Ordinance 2020 even when farmers were in the streets protesting
against these ordinances.

2G Spectrum Scam (2008):

One of the biggest scams in India. The telecom minister A. Raja was charged for issuing 2G
licenses to private telecom players at very cheap rates in 2008. No rules and regulations were
followed while issuing the license to the Companies.

The scam cost Rs 1.76 lakh crore to the government.The government kept the entry fee for
spectrum license at 2001 prices. In this case licenses were also issued to the companies with no
prior experience in telecom industry. The mobile subscriber base in India touched 350 million in
2008 from 4 million in 2001.

Satyam Scam (2009):

Indian investors and shareholders were badly affected by the scam involving Satyam Computer
Services. The Satyam Scam involved Rs. 14,000 crore and was one of the biggest scams in the
corporate world. Former Chairman of the company Ramalinga Raju was involved in the scam,
who kept everything undercover.He later confessed of falsifying the company's accounts by US
$1.47 billion. The roles of few officers of the government are also of prime importance in this

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scam as they were the parties that had the duty to check the accounts of the company. But were
corrupt and failed to comply with their duties which eventually lead to such a huge scam. Later,
46% share of Satyam was bought by Tech Mahindra, who absorbed and revived the company.

Coal Scam (2012):

With the Coal Scam, the government bore a loss of Rs 1.86 lakh crore. The CAG presented a
report and stated the irregularities involved in the auctioning of 194 coal blocks. The government
decided not to auction coal blocks between 2004 and 2011.

The coal blocks were then sold to different parties and private companies. This decision led to
huge loss in terms of revenue. In this it was quiet evident that these decisions by the government
were made for the benefits of few individuals at the cost of revenue to the State.

The Modi Governments elected in the 2014 was also been the epicentre of a large number os
scams in which Corporates have been a major part.

However, it is to be noted that most of these Scams shown in the below picture are from different
states and the publicity that these scams received in the main stream media was also limited.
This is because the media has itself been victims of widespread corporatism and has fallen from
grace the media is no longer neutral media it has chosen sides and this is a very alarming
situation that our country is facing.This clearly shows that it was not just the UPA government
that has given their donors an influence over the policy maker. The Current government is also
guilty for providing its donors to have a equal influence in its policy making.

Apart from these scams what is prevalent in contemporary period is the misuse of electoral
bonds

Electoral bonds are an instrument through which anyone can donate money to political parties.
Such bonds, which are sold in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh, and Rs 1
crore, can be bought from authorised branches of the State Bank of India. As such, a donor is
required to pay the amount — say Rs 10 lakh — via a cheque or a digital mechanism (cash is not
allowed) to the authorised SBI branch. The donor can then give this bond (just one, if the
denomination chosen is Rs 10 lakh, or 10, if the denomination is Rs 1 lakh) to the party or parties

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of their choice. The political parties can choose to encash such bonds within 15 days of receiving
them and fund their electoral expenses. On the face of it, the process ensures that the name of the
donor remains anonymous.

The central idea behind the electoral bonds scheme was to bring about transparency in electoral
funding in India and ensure free and fair elections. However, electoral bonds scheme does the
exact opposite of what it was meant to do

For example, critics argue that the anonymity of electoral bonds is only for the broader public
and opposition parties. The fact that such bonds are sold via a government-owned bank (SBI)
leaves the door open for the government to know exactly who is funding its opponents. This, in
turn, allows the possibility for the government of the day to either extort money, especially from
the big companies, or victimise them for not funding the ruling party — either way providing an
unfair advantage to the party in power. Critics such as Anjali Bhardwaj, co-convenor of the
National Campaign for People’s Right to Information, have noted that more than 75 per cent of
all electoral bonds have gone to the BJP, which is in power at the Centre.

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 Steps taken to Promote Transparency in Electoral Funding

Deduction under section 80GGC was introduced under Finance Act 2009,mainly with an
objective of achieving transparency into the electoral funding system and also reducing
corruption to some extent. Section 80GGC provides deduction towards donations / contribution
made to a political party or an electoral trust. Under this section of Income tax any person is
eligible to claim deduction while contributing (not in cash) to any political party 10 or electoral
trust (section 8 company) but it bars the deduction claimed by any artificial juridical person and
company.

However, Section 80GGB of Income Tax allows Indian company or enterprise that donates to a
political party or an electoral trust registered in India can claim a deduction for the amount
contributed. There is no maximum applicable limit on the contributions made to political parties,
under Section 80 GGB of the Income Tax Act. But as per the Companies Act 2013, companies
can contribute up to 7.5% of their annual net profit (three years average). It is necessary that the
respective company discloses the amount contributed and the name of the political party in its
Profit and Loss account for the said financial year also it is necessary for a company to pay the
amount via an acceptable route and keep a documentary record of the same.

Under no circumstances are cash payments allowed under Section 80GGB. The only acceptable
modes of payment include cheques, demand draft, electronic transfer, or a pay order towards the
bank account of the political party. This is to ensure transparency in political funding and to keep
track of the money received and spent.

It is essential that a company keep a proper record of the amount being paid and comply with all
the regulations specified in the Income Tax Act 1961. If it fails to follow the set procedure,
company’s claim for deduction might be rejected by the competent authorities.

10
The Representation of the People Act, 1951, § 29A

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Apart from this section 37 of IT act also set provisions to promote transparency in electoral
funding.

Conclusion

Transparency in political funding is the key principle which needs to be followed for the
formation of a strong independent democracy. In India there were major laws and regulations
that governed the subject however it is quite evident from the kinds of amendments that were
made in this regard from the early 2013 that a more relaxed approach has been taken.

In the current scenario and in the current political structure were in the political party that has
been provided with the most corporate funds is governing the nation and most of its states it is
clear that the political parties are quite happy with the way they are given donations in the form
of corporate funding's that help them with the money they need for securing the win for their
candidate.

However this approach of the policy maker has taken India into a situation were in the policies
that should help the poor and less privileged has taken a different direction and it has started to
benefit the contributors or the donors.It is clear on how this change has effected the country both
in a social as well as in an economical way. This kind of policies may provide with a short term
benefit for the country’s economy in a small way but when tested in the long run these kinds of
policies has found to be of no use or has been rejected. Thus it is time that the policy makers
should avoid supporting their contributors and focus on making the right policies for the country.

Corporate funding despite being in existence for such a long time in Indian politics, it lacks two
basic principle that are important for the existence of a healthy democracy. Firstly, Transparency
i.e., it should be publicly disclosed and secondly the consent of the share holders i.e., unlike in
UK (United Kingdom) in India there are no regulations that require a company making a
political donation to ascertain the consent of the shareholders for it.

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In Germany, Corporate donations are not tax deductible. Furthermore, disclosure legislations are
restricted to the big donors–their names, addresses and the amount of donations starting from a
specified limit. The treasurer of a political party is responsible for the implementation of
disclosure provisions. Additionally, every political party appoints a certified accountancy firm to
audit their accounts. The financial report of every political party is submitted to the speaker of
the federal parliament and eventually published in a parliamentary paper.

Thus, for making corporate funding more acceptable into the Indian democracy and for the
existence of a health democracy i.e., never under any influence it is important that there be
regulations which brings these funds under RTI which could provide with public disclosure and
also there is need for regulations by which it is to be made compulsory on the part of the
company making these corporate donations that it take the consent of their shareholder for such a
political donation as in UK. A much publicized alternative to reduce the influence of the donor
over the government is said to be the ban on Corporate funding.

However, in the current scenario it is to be noted that such a ban could be counterproductive.
Thus taking into consideration the current scenario a much lighter approach needs to taken such
as introduction of limits on corporate donations, not providing tax exceptions for corporate
donations, implementing strict regulations that shareholders permission is required for
implementing such a donation and the most important is to create an independent effective
regulatory body or confer these regulatory powers onto the Election Commissions or SEBI
(Securities and Exchange Board of India).

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Bibliography:

Books:

Subramanian Swamy,Corruption and Corporate Governance in India 113( Ashok Gosain &
Ashish Gosain 2009).

Journal:

Gowda, M.V. Rajeev and E. Sridharan, Reforming India's Party Financing and Election
Expenditure Laws, Election Law Journal, Volume 11, Number 2, 2012, p. 228.

Websites:

1. Krishna, Gopal, Politics of Funding of Elections and Electoral Reform, Think India
Quarterly, http://www.thinkindiaquarterly.org/ArticleDetails.aspx?ArticleId=357&Id=44,
Volume 15, Number 1, 2012,
2. Standards on Political Funding and Favours, Transparency International Policy Position,
p.3,http://www.transparency.org/whatwedo/pub/policy_position_no._01_2009_standards
_ on_political_funding_and_favours

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