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This article is written by Anisha Bhandari, pursuing B.A LL.B (Hons.) from Institute of Law, Nirma University. The article discusses major sections of foreign investment that happen to be in the election.

Introduction

In India, elections to the Houses of Parliament and the State legislatures are largely controlled by the 1951 Representation of the People’s Act. Section 29B of the 1951 Act forbids all political parties associated with the Election Commission from accepting any donation from a “foreign source.” In addition, Section 3 of the Foreign Contribution (Regulation) Act 2010 prohibits representatives, leaders of the legislature, political groups, and party officials from receiving foreign donations. 

In reaction to the 2014 ruling of the High Court of Delhi considering a violation of the 1976 Foreign Contribution Act (Regulation Act) in which political parties admitted donations from local corporations, which were the majority controlled by a foreign company, the governing BJP Govt passed a retroactive provision that was introduced by the 2016 Finance Act, which removes local firms from the concept of “foreign-sourced” investments, even if a foreign corporation holds more than half of the assets, including by direct owners.

Foreign Contributions

In India, elections to the Houses of Parliament and State assemblies are largely controlled by the 1951 Representation of the People Act.[1] Section 29B of the 1951 Act forbids all political parties registered with the Election Commission from accepting any donation from an international source:

  • Section 29B. Political parties entitled to receive a contribution.—Subject to the provisions of the Companies Act, 1956 (1 of 1956), any political party may accept any amount of contribution voluntarily offered to it by any person or company other than a government company:

Provided that no political party is entitled to receive any contribution from any foreign source as defined in paragraph (e) of Section 2 of the Foreign Contribution (Regulation) Act, 1976 (49 of 1976).

The Foreign Contribution (Regulation) Act of 1976 has been replaced by the Foreign Contribution (Regulation) Act of 2010, which has been adopted to ‘regulate the acceptance and use of foreign contribution or foreign hospitality by certain individuals or associations or companies, and to prohibit the acceptance and use of foreign contribution or foreign hospitality for any activity that would be detrimental to that activity.

Section 3(1) of the 2010 Act defines individuals and organizations barred from accepting foreign donations, including candidates for office, representatives of the government, political parties or party leaders, political groups and alliances or businesses engaging in the creation or transmission of audio content, audiovisual content or current affairs programs. No person or resident of India and no citizen of India residing outside the country shall be allowed to receive any foreign contribution or to acquire or agree to receive any foreign currency on behalf of any political party, any person referred to in Section 3(1), or both.

Offenses and penalties shall be laid down in Chapter VIII of the Act. Section 35 of the Act provides that “anyone who accepts or assists any person, political party or organization in accepting any foreign contribution or currency or security from a foreign source, in contravention of any provision of this Act or of any rule or order made thereunder, shall be punished with imprisonment for a term of up to five years, or with a fine, or both of them. “Of the provisions of this Act, Section35 of the Act provides that” anyone who accepts or assists any person, political party or organization in accepting any foreign contribution or security from a foreign source shall be punished with imprisonment for a term of up to five years, or fine, or both.

Foreign corporate contributions to elections 

In 2014, the High Court of Delhi released a decision holding that India’s two major political parties, the Bharatiya Janata Party (BJP) and the Indian Congress Party, were in breach of the foreign donation prohibition in the 1976 Foreign Contribution (Regulation) Act by taking cash from two local firms controlled by the London-listed Vedanta Resources Plc mining company between 2004 and 2012:

  • For the reasons set out extensively in the preceding paragraphs, we have no hesitation while arriving at the view that acts of the respondents, as highlighted in the present petition, clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act of 1976 on donations accepted by the political parties of Sterlite and Sesa stem from ‘Foreign Source’.

Under the 1976 Act, a foreign entity is partially identified as a “foreign source” if “a business under the scope of the 1956 Company Act (1 of 1956) owns more than one-half of the nominal value of its equity capital, either individually or in aggregate, through one or more of the following” namely “corporations formed in a foreign nation or jurisdiction.” Under that interpretation, the High Court of Delhi ruled that “many contributions from the London-based Vedanta Natural Resources Giant (among others) given to both parties went out of the Books Act.” Because more than one-half of their share capital was owned under a foreign corporation, “gifts in support of the political parties are to be viewed as coming from the ‘Foreign Source’ and coming within the ambit of the prohibition imposed by the act.

In reaction to the move, the BJP, as part of the 2016 Finance Bill, introduced a retroactive amendment to the Foreign Contribution (Regulation) Act,  2010 with a view to redefining the word “foreign source” to include:

  • Given that if the nominal value of the share capital is below the limits laid down for foreign expenditure under the Foreign Exchange Management Act,  1999 or the laws or regulations thereunder, that entity shall not be a foreign source, except that the nominal value of the share capital of a business is more than one-half of that value at the time of the donation.

As a consequence of the amendment introduced in 2016, foreign funds obtained by the political parties after 26 September  2010 are approved while contributions could also be checked before that point. As a consequence, the Government enacted another extension to the 2018 Finance Act to encompass “the duration starting on 5 August 1976—the date on which the first FCRA law came into effect.” 

Changes to other laws under the 2017 Act have impacted the disclosure of donations obtained from political parties:

Similarly, Section 13A of the Income Tax Act 1961 allows for the exemption from payment of income tax on any charitable donations earned by the political party. Nevertheless, such an exception is conditional on the beneficiary party keeping certain records of accounts and other documentation that will require I-T officers to accurately deduct the money they have earned and also to keep a database of these donations and the names and addresses of the contributors, as well as sums over 20,000. This provision further states that if a group fails to file a report as provided for in Section 29C of the RPI Act,  1951, it would not be given a tax exemption. The Finance Act, 2017 revised all these Laws and included electoral bonds under Section 29 C of the RP Act, 1951 and Section 13 A of the IT Act, 1961. This means that the income received by way of electoral bonds is not required to be disclosed in the report to the Election Commission. Furthermore, the political parties are not required to keep any record of the same or of the names and addresses of the donors of those bonds. This is the essence of the bond scheme.

The letters 

In its submission, the EC also sent two letters (reproduced in full below) to the Modi Government at the beginning of 2017. The first letter, dated 15 March 2017, came one month after finance minister Arun Jaitley announced the electoral bond scheme and discussed how various amendments to the Income Tax Act, 1961, and the People’s Representation Act, 1951, should be made. The second letter, dated 26 May 2017, states that the efforts of the Modi government to clean up the corporate financing of the elections will actually have a serious and negative impact on transparency.

On the question of electoral bonds, the Commission observed that “any contribution obtained by a political party by an electoral bond was taken out of the field of coverage under the Contribution Report as specified by Section 29C of the Representation of the People Act, 1951.” With regard to changes to the Companies Act, which abolish limits on corporate finance, the EC cautioned that this will open up the risk of ‘shell firms being set up for the sole purpose of making contributions to political parties, with no other company having the intention of generating disposable income.’ 

In its affidavit to the Supreme Court, the electoral body found the contentious changes to the Foreign Contribution Regulation Act – reforms that the detractors believed have been introduced to retroactively allow contributions approved by the BJP and the Congress. The respondent submits that, in so far as the changes introduced to the Foreign Regulation Contribution Act, 2010 by the Finance Act, 2016 are concerned, the aforementioned amendment requires contributions to be obtained from foreign firms with a majority interest in Indian businesses, given that they obey the FEMA guidelines on foreign involvement in the sector in which they work.

This is a reform from the current law barring contributions from all international sources as specified in the Foreign Contribution Regulation Act. This would allow uncontrolled foreign financing of political parties in India, which could lead to Indian policies being influenced by foreign companies.

Criticism

The Election Commission (EC) opposed the Narendra Modi government’s electoral bond scheme and its proposal to offer international support to Indian political parties in a step that paves the way for a legal fight against global interference in the country’s polls.

In an affidavit filed before the Supreme Court on Wednesday, the Commission stated that the electoral bond project and the removal of caps on the extent of corporate financing would have “serious repercussions/impacts on the transparency of political finance/funding of political parties.” On the decision of the Center to amend the Foreign Contribution Regulation Act, the EC noted that it would allow “uncontrolled foreign financing of political parties in India” and that this could lead to “Indian policies being influenced by foreign companies.”

The Supreme Court is currently hearing a number of petitions filed by non-governmental organizations and the Communist Party of India (Marxist) challenging the constitutional validity of a number of legislative changes that have changed the landscape of campaign financing in India.

As part of the proceedings of the supreme court, the Election Commission submitted its own affidavit reiterating its resistance to the electoral bond system, while stating that, for the last 15 years, it has informed the Indian Government of the need for further accountability.

In its application, though, the electoral body states that, as a “constitutional authority,” it does not wish to take sides in the latest case before the Supreme Court. “The respondent [Election Commission] does not propose to take any contentious issues or to join any substantive submissions, etc., as these are matters between the parties to the dispute.

Conclusion 

India is the fastest-growing global economy in the country, and it is no wonder that international investors and multinationals are closely following the electoral contest that will determine which party or alliance of parties – will shape the next government in New Delhi. India is fiscally constrained; its direct and indirect tax revenue is around half the OECD level of GDP (34%) for both the federal and state governments. 

The aggregate budget debt of federal and state governments is around 6-7% of GDP — and this doesn’t involve a variety of off-balance-sheet deficits and economic restructuring that may add about 2-3 percent of GDP to the country ‘s revenue-expenditure difference. Further policy spending to fund welfare programs, such as income security, would drive up interest rates at a period when the country’s banking and financial system continues to burst from the pressure of bad loans and liquidity crunch. 

Higher real interest rates would also deter capex projects for private-sector firms, although higher government dividend payments would result in smaller spending surpluses for public-sector businesses. This will reduce overall investment in the country, with adverse consequences for economic growth.


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