Corporate funding

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Why in news?

Parliament recently approved the government’s proposal to relax conditions for contributions made by corporate entities.

What is the current move?

• Till now, corporate entities could contribute only 7.5% of average net profit in the past three financial years.
• The ceiling has now been dropped, paving the way for a firm to deploy unlimited capital irrespective of its own financial and operational health.
• It was proposed as part of the amendments to the Finance Bill, 2017, by the government.
• Provisions of the Companies Act will be amended as part of the Finance Bill.
• Also provision in the Companies Act to disclose the names of beneficiary political parties in companies’ profit and loss statements is proposed to be removed.
• But, the amount of donation still needs to be disclosed.

What is its significance?

• The move is aimed to curb unaccounted money flowing into the political system.
• It will enable companies to make donations without any limitations, like it is in case of developed countries.
• The expenditure incurred, directly or indirectly, by a company in publication, a souvenir, journal, or a pamphlet on behalf of a political party would be construed as a contribution.   
• Violating the provisions attracts a fine of less than five times the amount contributed.
• And every officer in default is liable to up to six months’ imprisonment and a fine of five times of the amount contributed.
• But doing away with the limit makes firms susceptible to funding ‘requests’ from local, regional or national political formations while taking away excuses — such as it being a loss-making unit, or breaching the funding cap.
• This would also open up new opportunities in crony capitalism. Pressure could be exerted on a company awaiting government clearances, or a loan restructuring from public or cooperative sector financiers.
• Even a publicly listed company can set up subsidiaries just to fund parties. This removes any pretence of transparency in the process as the donor will not have to disclose who he paid; the recipient has no such obligation either.

What are the budget proposals?

• Union Finance Minister had in the Budget, announced a 90 per cent cut in the limit for cash donations to Rs 2,000 from Rs 20,000 earlier.
• Political parties would now have to disclose the identity of the donor in case of any donation above Rs 2,000 in cash.
• The parties were so far allowed to receive anonymous donations up to Rs 20,000.
• The move was in response to the Election Commission asking the government to bring down this limit of anonymous donation.
• Through the Finance Bill, the government also announced the concept of electoral bonds, where a donor could purchase bonds from authorised banks against cheque and digital payments only.
• These will be redeemable only in the designated account of a registered political party.

Source: Business Standard & The Hindu