Electoral Bonds | Companies Act | Supreme Court Order

Section 182 of the Companies Act, 2013 is in focus due to the recent Supreme Court judgement in the matter of Association for Democratic Reforms & Anr vs. Union of India & Ors passed on 15th February 2024 [access here]. The matter relates to funding to political parties by way of subscribing/ purchasing electoral bonds – in the context of section 182, such fundings by companies.

Enabling issue of and subscription to electoral bonds, four Acts were amended by the Finance Act 2017 notified on 31st March 2017 (access here). It amended the section 182 of the Companies Act, 2013 (effective 1st April 2017) and three others

(a)?? section 13A of the Income Tax Act, 1962 effective from 1st April 2018

(b)?? Representation of the People Act, 1951 effective from 1st April 2017 and

(c)?? Reserve Bank of India Act, 1934 effective from 1st April 2017

The Companies Act was amended by the Finance Act 2017 (one of those rare modes of amending another Act by way of a Money Bill) which brought three changes:

(a)?? It removed the erstwhile limit of 7.5% of three years average net profit on political contributions, thereby permitting unlimited contribution. The first proviso to section 182(1) prescribed the cap on corporate funding.

(b)?? Excluded the requirement to disclose the particulars of the amount contributed to each political party. Post-amendment, it required only a disclosure of the total amount contributed to political parties by a company in a financial year

(c)?? Sub-section 3A was introduced, by which a company could contribute to a political party only by a cheque, bank draft, or electronic clearing system. The proviso to the sub-section states that a company may also contribute through any instrument issued pursuant to any scheme notified under any law for the time being in force for contribution to political parties.

Now by this Order, the Supreme Court has struck down the deletion of the proviso to section 182(1) which in its amended form permitted unlimited contribution. Other amendments of the Companies Act remain intact. The text of the Order [para 79(iii)] holds as below:

“deletion of proviso to Section 182(1) to the Companies Act of 2013, thereby permitting unlimited contributions to political parties is unconstitutional, and is struck down”

By this Order, only one of the three amendments is struck down. In effect now, the cap of 7.5% has come back but party-wise disclosure will still not be required.

Will the change (consequent to the Supreme Court Order) take automatic effect or will a formal amendment be brought in the Companies Act, 2013?