Jun 22, 2018

Political Contributions : Indian Legal Regime

Several businesses choose to stay away from making political contributions or engaging with the political process, probably because of a sense of cynicism. It is important to engage with the political process to choose good leaders, to enable a healthy opposition, to achieve economic stability, to ensure just policies and laws and, at the cost of stating a cliché, to develop and maintain a good society. Participation and engagement is also needed to maintain appropriate checks and balances within Government.

While cash-based donations have unfortunately been considered the norm, the need for creation of a transparent and legitimate funding mechanism has been recognized by the incumbent Government. Recent developments have made it easier for Indian citizens and corporates to fund political parties. It is expected that these will provide an added momentum to legitimate political funding. Recognition of political engagement is evidenced by the steep increase in voluntary contributions to the seven national parties from Rs.616 crores in 2015-16 to Rs.1169 crores in 2016-17.

That said, there is still some skepticism around political contributions and often a question regarding its legality does arise. This article summarizes the current Indian legal regime on political contributions by companies.

Companies Act, 2013

Section 182 of Companies Act, 2013 (Companies Act) enables an Indian company to contribute any amount to any political party. The conditions are that the contribution should (i) be authorized by the Board; (ii) not made in cash, and (iii) be disclosed in the Company’s P&L account. Recent amendments to this section removed the cap on the amount that a company can donate, which, prior to the amendment was set at 7.5% of average profits of previous three years. The amendments also did away with the previous requirement of disclosing the name of the political party to which the contribution has been made, in the P&L account. Thus, there is a robust regime under Companies Act to enable Indian companies make political contributions.


Under the Income Tax Act, 1961, political contributions to a recognised political party or an approved electoral trust, are allowable deductions.


Often a question arises whether a political contribution runs the risk of being seen as a ‘bribe’. The Prevention of Corruption Act, 1988 (“POCA”) criminalizes taking of gratification by a ‘public servant’ or by any person for inducing a ‘public servant’. Further, the public servant ought to have shown favour or dis-favour to such person. Hence, under POCA, one will need to establish a tangible nexus between the political contribution and the actions of one or more public servants in performing an act that is held to be capricious and against public interests, with a view to unfairly and arbitrarily benefit the contributor. In the absence of such nexus, an allegation under POCA cannot succeed.

Another question is whether the issuance of an industry wide Government policy around the time that the political contribution was made by an industry player who also benefits from such policy, will considered as violating POCA. Such an allegation can succeed only if the industry wide policy itself is held to be bad in law. A donor benefiting from a legitimate policy that applies industry wide does not equal to a wrong. A wrong may be alleged only when the policy itself is struck down as bad or if the donor has received a benefit under the policy which it would have otherwise been excluded from.

Foreign Contributions

While the Representation of People Act, 1951 and the Foreign Contributions (Regulations) Act, 2010 (FCRA) bar political parties from accepting donations from a ‘foreign source’ by an amendment in 2016, Indian companies with foreign investment up to the limits permitted under foreign exchange laws, even if more that 50%, are no longer treated as a ‘foreign source’. As a result such companies are now able to make political contributions under section 182 of Companies Act.

Donor Anonymity

While section 182 of the Companies Act dispensed with the requirement to disclose the recipient political party in the P&L account, there is an independent requirement by which political parties have to submit details of contributions received by them at the end of every financial year to the Election Commission of India (ECI). This submission is publicly available. Therefore, despite the dispensation under section 182 of the Companies Act, the amount and details of the contributor will subsequently be in the public domain along with the identity of the political parties to which contributions were made.

It is not uncommon to route political contributions through electoral trusts. While an electoral trust has to disclose to ECI at the end of a financial year, names of its donors and the amounts donated by its donors, there is no requirement to link the donated amounts to any specific political party. There is a separate requirement for the electoral trust to indicate the aggregate amount distributed to each political party without attributing amounts to specific donors.

Electoral Bonds

To address concerns regarding anonymity of donors and any other possible ramifications in the mind of the donor, the Electoral Bonds Scheme was notified by the Government on January 2, 2018. Electoral bonds are bearer bonds which can be purchased by an eligible donor paying for it through cheque/demand draft or electronic means. Electoral bonds do not specify the name of the purchaser and are valid for 15 days from its issuance. Once purchased, the bonds can be delivered to eligible political parties, being registered political parties which have secured at least one per cent of votes polled in the last Lok Sabha or legislative assembly elections. The political party can then encash them through a bank account with an authorized bank. Currently, State Bank of India is the sole authorized bank by the Government of India for the sale of electoral bonds.

Electoral bonds ensure anonymity of the donor since no correlation can be established between the instrument and the donor by the Government or the Authorized Bank or any other individual once it has been purchased and delivered. In light of a recent controversy concerning the traceability of the serial numbers on the bonds, the Ministry of Finance has issued a statement that the serial numbers on the bond instrument are not noted by the Government/issuing bank or shared and therefore, cannot be used to track the donation or the buyer.

According to reports, electoral bonds worth Rs.222 crores were sold within 10 days of launch of the Electoral Bond Scheme in March 2018. In comparison, the total amount of money routed to political parties through electoral trusts during the year 2016-17 was merely Rs.325 crores. This indicates a growing trust in legitimacy and validity of the electoral bonds as an instrument to engage with political process in India.

To conclude, there is a robust legal regime governing political contributions and Indian businesses need not shy away from bona fide political contributions to support political parties that they believe will provide the Nation with good leaders and sound governance.

Ajay Bahl, Founding Partner





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