SC on Electoral bonds: Impact for donor companies

In a recent ruling by the Supreme Court of India in the case of Association for Democratic Reforms & Anr. v/s Union of India, the Electoral Bond Scheme (EBS) was declared unconstitutional, along with certain amendments to section 182 of the Companies Act, 2013.

?This ruling has raised several questions regarding the implications for donor companies.

Background: The Electoral Bond Scheme, introduced in 2018, allowed individuals and corporations to anonymously fund political parties. The amendments to the Companies Act, 2013, made through the Finance Act, 2017, permitted unlimited and anonymous contributions to political parties.

?Key Points:

• Unconstitutionality of the Scheme: The Supreme Court held that the Scheme and the amendments to the Companies Act were arbitrary and violative of the Constitution, specifically Article 19(1)(a) which guarantees the right to information.
• Disclosure Requirements: Companies were required to disclose the names of political parties to which they made contributions. However, the amendments allowed for non-disclosure of this information, which was deemed essential for the exercise of voting rights.
• Impact on Donor Companies: While the ruling does not declare political donations per se as unconstitutional, it invalidates the Electoral Bond Scheme and the related amendments. The Supreme Court has directed the State Bank of India (SBI) and the Election Commission of India (ECI) to disclose details of contributions received through electoral bonds and refund non-encashed amounts to donors.
• No Adverse Implications for Donor Companies: The burden of disclosure has been placed on the SBI and the ECI, not on donor companies. Donor companies are not expected to face any adverse implications for complying with a law that was valid until it was declared unconstitutional.
• Corporate Duty: Companies that have made political contributions in the past may consider disclosing this information in their forthcoming annual reports as a corporate duty, even though it is not legally required.
• Manifest Arbitrariness: The Supreme Court applied the doctrine of "manifest arbitrariness" (means?something must be done by the legislature capriciously, irrationally or without any adequate determining principle) to strike down the amendments. It noted that the amendments failed to recognize the degrees of harm in removing the classification between different types of donors, such as individuals and companies, or profit-making and loss-making companies.

?Provisions of the Companies Act, 2013 that have been affected by the Supreme Court’s Ruling?has struck down the amendments made in Section 182(3) of the Companies Act, 2013 by the Finance Act 2017. It has also struck down the deletion of proviso to section 182(1) of the Companies Act, 2013 which means:

·???????? The limit of 7.5% of the average net profits during the three immediately preceding financial years as provided in the proviso to subsection (1) of section 182 stands reinstated.

·???????? The requirement to disclose the specific amount contributed and the name of the parties stands reinstated.

?Key points for professionals to review and note:

·???????? The Companies need to check the earlier resolution passed by their respective board of directors.

·???????? The companies need to reveal the particulars of political contributions along with the names of political parties in their profit and loss account. Also, check on the disclosure made prior to the Supreme Court’s Ruling and how the same is to be presented.

?Conclusion: While political donations are not unconstitutional, donor companies must ensure transparency in disclosing such donations in their financial statements to uphold the right to information of shareholders, stakeholders, and the voter base.

?