india

Updated: Apr 14, 2017 20:26 IST

An omitted proviso and a tweaked sub-section, buried deep in a money bill passed in Parliament’s recently concluded Budget Session, has fundamentally altered India’s democracy by letting corporations anonymously donate unlimited amounts of cash to the political party of their choice.

The 2017 Finance Bill prompted token resistance from opposition parties when it was passed late last month, but has attracted relatively little attention, analysts and activists say, for something so transformational.

Now, as the implications sink in, many are sounding the alarm.

“This is huge,” said Milan Vaishnav, a senior associate at the Carnegie Endowment for International Peace, who has written extensively on political funding in India. “Till recently, we could at least try to join the dots of corporate funding of political parties. With the new rules, we won’t even have any dots to join.”

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So far, a company could contribute up to 7.5% of a three-year average of its net profits, and had to disclose the name of the recipient party. This put a cap on donations by each company and made it harder to finance parties using shell companies - entities that exist only as a postal address.

The Finance Bill 2017, passed this session, removes the contribution cap and the corporate disclosure requirements, and enables the creation of a new financial instrument called an “electoral bond”, issued by the Reserve Bank of India, which can be anonymously bought and deposited in the account of the beneficiary political party.

The government claims these changes will make political funding more transparent -- a claim echoed by India’s corporate honchos, who insist anonymity is essential to guard against India’s “vindictive” political culture in which parties could penalise donors for funding rival political forces.

“Whilst the ultimate objective is to bring about transparency in political donations, it is only possible when our political system demonstrates maturity like developed countries,” said Sunil Alagh, former managing director and CEO of Britannia Industries. “This might take some time and currently, therefore, the bearer bonds are a step in that direction and should be welcomed.”

But critics say removing funding caps and disclosure norms will buy corporations -- both Indian and foreign -- disproportionate influence over regulatory policy, and offer a lucrative tax-free conduit to launder money through India’s 2,041 registered parties – most of whom have never fought an election and exist only in name.

“Donations to political parties are tax-free,” said Shahid Khan, former Member of the Central Board of Direct Taxes. “Now a company can donate any amount to a party, claim a tax rebate, and the party can show ‘cash expenses’ in its income tax return to cycle the money back to the company and charge a pass-through commission.”

“Every political party is against transparency,” said Jagdeep Chhokar, founder of the Association for Democratic Reform. The last such reform, Chhokar said, was in 2013, when the United Progressive Alliance regime passed a law allowing for Electoral Trust Companies: secretive entities that collect donations on behalf of India’s biggest corporates and disburse the money as per the whims of their trustees.

Electoral trusts have since emerged as a major source of funding for political parties. Between April 1, 2013, and March 31, 2016, donations from seven electoral trusts amounted to more than Rs 428 crore — about a third of all the funding disclosed by political parties in that time — according to parties’ contribution reports.

Satya Electoral Trust, the largest of the seven, distributed about Rs 256 crore — more than all the other electoral trusts combined — to national and state parties alike. Satya’s money, in turn, came from companies representing a broad swath of corporate India invested in highly regulated sectors where seemingly minor changes in policy can have a disproportionate impact on balance sheets. The trust’s contributors include Indiabulls Housing Finance, DLF, Hero Motocorp and Torrent – a Gujarat-based group with separate businesses in thermal power and pharmaceuticals.

While trusts must disclose their contributions to the Election Commission of India, trustees are loath to discuss the rationale behind their donations.

“We are a private company, we don’t have to answer such questions,” said Mukul Goyal, Satya’s director, who revealed that Satya was set up in 2013 by Bharti Enterprises, but has functioned independently with its own board since 2014. Mr. Goyal declined to name the board members.

HT reached out to several of India’s biggest political donors to understand the rationale behind their funding decisions. None replied save for Tata Sons Ltd, whose Progressive Electoral Trust disburses money on a predetermined formula: In national elections, parties must hold at least 3% of Lok Sabha’s seats to qualify for funding; while state parties must hold at least 10% of the total seats in their respective Vidhan Sabhas.

Fifty percent of the funds are disbursed on the basis of seats held prior to elections, and another 50% on the basis seats won in the election.

For corporations, electoral trusts give an impression of an arms-length transaction, creating a buffer that allows companies to give money to parties without appearing to favour one over the other.

But trusts have their downside, too. In 2013, Chhokar and ADR zeroed in on the Public and Political Awareness Trust – which turned out to be an electoral trust associated with the Vedanta Group, a global mining conglomerate registered in London.

“Vedanta is a foreign source of funding, because it is registered in the UK,” said Chhokar, noting that the trust structure allowed money from a foreign source to pass under the radar. At the time, political parties could not accept foreign funding under the Foreign Contribution Regulation Act of 1976 (FCRA).

But when ADR raised the issue, the government used the 2016 Finance Bill to amend the FCRA to allow parties to accept foreign contributions as long as they are routed through an Indian subsidiary.

Yet trusts, for all their drawbacks, are still required to file disclosures with the Election Commission India. The new election bonds, likely to be rolled out this year, are specifically designed to evade disclosure. As corporates switch to election bonds, trusts are likely to fall out of use.

Under the new regime, the darkness around election financing in India is likely to deepen.

“It’s introducing additional opacity in the finances of political parties,” said Lakshmi Sriram, a program officer at ADR. “It’s really bad.”