Law forbids foreign companies from making political donations

The two major political parties the Congress and the BJP have filed affidavits claiming that a political donation is allowed if the majority shareholding in the foreign company registered abroad is of an Indian. The affidavits have been filed before the Delhi high court in response to a PIL filed by Association for Democratic Reforms (ADR) and retired civil servant EAS Sarma. The PIL alleged that Congress and BJP have been receiving tens of crores of donations from foreign firms through their Indian subsidiaries.

Indian law prohibits a “foreign company” from making any donation to political parties even if it has an Indian subsidiary.

What is the PIL about?

The PIL alleged that Congress and BJP have been receiving tens of crores of donations from foreign firms through their Indian subsidiaries. The petition cited one example against the government and the two parties is of UK-registered Vedanta Resources, in which Indian citizen Anil Agarwal holds at least 50% of the paid-up capital. Referring to the donations admittedly made by Vedanta through three of its Indian subsidiaries, Sterlite, Sesa Goa and MALCO, the petitioners alleged that the government had not taken any action against Congress and BJP because, among other reasons, finance minister P Chidambaram had been on the board of directors of the parent company. The PIL has sought a court-monitored investigation as foreign funding of political parties is forbidden by at least two laws.

 

Which are the main laws prohibiting foreign funding of political parties?

  • Section 29B of the Representation of the People Act: It stipulates that no political party be allowed to accept any donation from “any foreign source”.
  • Section 3(1)(e) of the Foreign Contribution Regulation Act (FCRA): It prohibits any financial contribution from any foreign company to a political party.
  • Section 2(1)(g)(ii) of FCRA:  It clarifies that a foreign company includes its Indian subsidiaries.
Response from Government and Political parties

The government and the two named political parties contended that contributions from the subsidiaries of a foreign company such as Vedanta were allowed by FCRA. Their defense is that one of definitions of a foreign company, spelt out in Section 2(1)(g)(i) of FCRA, is an entity “within the meaning of Section 591 of the Companies Act”. The implication of this reference, in their interpretation, is that a donation made by any foreign company through its Indian subsidiary will not be regarded as a foreign contribution so long as an Indian holds a majority stake in the parent company.

Counter-argument:

The petitioners challenged this interpretation by the two political parties and the government, which is controlled by one of them. The rejoinder pointed out that the purpose of Section 591 was merely to ensure that Indian subsidiaries of a foreign firm were accountable to Indian authorities. As per the petitioners, the particular clause in the Companies Act, as cited by the government in its defence, could by no means be cited to skirt the expressed prohibition on foreign contribution to political parties in the RP Act and FCRA and in any event, Section 2(1)(g) gives four different definitions of a foreign company and therefore one definition cannot be construed to neutralize another.

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