Contributions from companies with more than 50% “foreign” holding prohibited
The Delhi High Court decision in the case of Association for Democratic Reforms vs. UOI ([2014] 43 Taxmann.com 443 (Del.)) is both a reminder and an eye opener, of certain very widely framed provisions of law originally of FERA times that continue to have impact. It is very timely too in this election season when many companies have given electoral contributions. Even more so considering the fact that the new section 182 of the Companies Act, 2013, has permitted a higher electoral contribution of 7.50% of profits as compared to 5% under the 1956 Act.
The Court has held that political parties/election candidates cannot accept foreign contributions – i.e., electoral contributions from an Indian company with more than 50% foreign holding, as so defined. The definition of what constitutes “foreign contribution” is so wide that it may bring numerous Indian listed and unlisted companies in its net. In short, acceptance of political contributions from certain Indian companies, whose number could be quite large, has been confirmed to be in violation of the law.
The decision deals with several issues, some of which arise out of defense offered by the political parties/Central Government who were the respondents. However, this article focusses on the core and important issue, which is, whether electoral contributions can be accepted by political parties from companies registered and operating in India but which have more than 50% foreign holding.
Misleading reports about the nature of decision and contribution from “foreign sources”
It is important to go into some details of certain facts of this case because several newspaper reports gave either incorrect facts or were misleading. The impression created was that contributions from “foreign sources” were received and these were held to be prohibited, without explaining how wide the term foreign sources was under the law. Foreign sources, as will be seen later, is defined in a wider manner than the literal meaning of the term suggests.
Some reports even said that a foreign company – Vedanta – gave the contributions. This, apart from being factually incorrect, again conveys that the decision has limited application. The impression conveyed is that it applies only to the rare situation when a political party accepts contributions from a foreign company.
Facts of the case
Here are, summarised and simplified, the facts as stated and the law as per the decision. Vedanta Resources plc is a company incorporated in England and Wales. It held majority/controlling stake in two companies registered in India – Sterlite Industries Limited and Sesa Goa Limited. Sterlite and Sesa Goa made electoral contributions to certain political parties. The question before the Court was whether the parties that accepted contributions violated the Foreign Contribution (Regulation) Act, 1976 (FCRA).
FCRA 1976 vs. FCRA 2010
At this juncture, it is important to note the law that the Court was concerned with was the FCRA 1976. The Court emphasised this and noted that the FCRA 1976 was replaced by the FCRA 2010. However, it can be seen that, on this aspect, the FCRA 2010 provisions are substantially similar to the FCRA 1976. Hence, I submit that the ratio of the Court’s decision ought to apply for the FCRA 2010 too.
What is “foreign contributions”?
The FCRA prohibits acceptance of “foreign contributions” by political parties/candidates. However, as was common with the laws introduced in the late 60s and mid 70s, they were very broadly framed and this led to a fairly complex definition, with one definition leading one to refer to another. The term “foreign contribution” is defined to mean receipt of certain things such as money, etc. from a “foreign source”. The term “foreign source” is defined to mean several entities including a “foreign company” and certain specified Indian companies. It is the definition of these two terms and, for the purposes of this article, the latter one with which we are concerned.
Contributions received from the following companies are also treated as contribution from “foreign sources”:-
“(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely,
(a) the government of a foreign country or territory,
(b) the citizens of a foreign country or territory,
(c) the corporations incorporated in a foreign country or territory,
(d) the trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory,”
It can be seen from the definition given above that the foreign sources includes a company registered in India in which more than 50% shares are held by certain specified foreign parties such as foreign corporations, foreign citizens, foreign trusts/societies, etc.
It was an undisputed fact that Sterlite and Sesa Goa were both (i) companies under the Companies Act, 1956 and (ii) more than one-half of their capital was held by Vedanta, a corporation incorporated in a foreign country. Hence, the inevitable conclusion was that the contributions received from Sterlite/ Sesa Goa was a contribution from a foreign source. The FCRA specifically prohibited the acceptance of foreign contributions.
Curiously, it was also noted that Anil Aggarwal, an Indian citizen, held more than 50% capital in Vedanta. Thus, in a sense, the ultimate holder was an Indian citizen. However, since the FCRA did not make any relaxation for such companies, the Court held that the FCRA prohibition applied.
Decision of court
The Court held that there was a violation of the FCRA. It finally observed, summarising the facts, law and ratio:
“72. It is not disputed by the respondents that more than one-half of the nominal value of the share-capital of Sterlite and Sesa is held by Vedanta. It has already been held by us in the preceding paragraph that Vedanta is a corporation incorporated in a foreign country or territory within the meaning of Section 2(e) (vi)(c) of the Foreign Contribution (Regulation) Act, 1976. Therefore, this leads to the irresistible conclusion that the present case is also squarely covered under Section 2(e)(vi)(c) of the Foreign Contribution (Regulation) Act, 1976.
73. For the reasons extensively highlighted in the preceding paragraphs, we have no hesitation in arriving at the view that prima-facie the acts of the respondents inter-se, as highlighted in the present petition, clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act, 1976 as the donations accepted by the political parties from Sterlite and Sesa accrue from “Foreign Sources” within the meaning of law.”
The Court also directed the Central Government to inquire whether contributions from other similar placed companies have been received and take necessary action within six months. It stated:
“The second direction would concern the donations made to political parties by not only Sterlite and Sesa but other similarly situated companies/corporations. Respondents No.1 and 2 would relook and re- appraise the receipts of the political parties and would identify foreign contributions received by foreign sources as per law declared by us hereinabove and would take action as contemplated by law. The two directions shall be complied within a period of six months from date of receipt of certified copy of the present decision.”
FCRA 2010
The provisions of the FCRA 2010 are substantially similar to those of the FCRA 1976, even though the phrasing and structure is a little different. Political parties continue to face total prohibition from ac- cepting “foreign contribution”. Foreign contribution continues to mean receipt of specified things from “foreign sources”. And, “foreign sources” continue to include companies in which the specified foreign entities hold more than 50% of the capital. These specified foreign entities include foreign corporations, foreign citizens, foreign trusts, etc. Thus, acceptance of such foreign contributions by political parties/candidates will continue to be a violation of law, as the Delhi High Court has confirmed.
Companies in which specified foreign persons hold more than 50%
The implications of these provisions/decisions are very wide. There are numerous companies in India that have such foreign holding of more than 50% of their capital. There are subsidiaries of foreign companies in India. There are also companies that have more than 50% FDI. So are companies that have more than 50% holdings by FII/PE/non-citizens. All such companies, private, public as well as listed companies with a wide public shareholding would be thus covered. The contributions accepted from them in the past and future would be under a cloud.
Contribution through Electoral Trusts
A recent variant of making electoral contribution is through Electoral Trusts. One advantage of such trusts is that such Trusts can pool donations from various sources/entities. Thereafter, the Electoral Trust, run usually by public spirited individuals, decide which party/candidate should get and how much of the amount collected. In such a case, the receiving political party may not know who is the ultimate donor from the pool and whether it is a foreign source or not. It is submitted that the wide definitions of terms used will result in the law being still violated if the contributors are such companies. In such a situation, the responsibility would lie on the Electoral Trust to ensure that the contributions received by it are not from a foreign source.
Responsibility of the contributing Company
The FCRA places the primary responsibility of complying with the law on the receiving political party/election candidate. As is apparent, it may be difficult for it to verify whether the contributing company has more than 50% foreign holding and they may ask the company to confirm/certify. Even otherwise, the question is whether the contributing company would be violating the law if they gave such contributions. While the law principally applies to the receiving entity and certain intermediaries in the process, the way the law has been broadly framed, it is possible that depending on the facts, the officers of the company may be held liable. For example, the law also holds that anyone “assisting” any political party in accepting such foreign contribution as liable to punishment.
Conclusion
The fear of the foreign hand – the driving force behind this law as originally framed – is relevant today too. However, in these changed times, con- tinuing such a blanket prohibition does not seem to make sense.
