Election finance reforms in India

Major issues concerned with the Election finance reforms include – Limits on political contributions and party and candidate expenditure; disclosure norms and requirements; and State funding of elections.  These issues are governed by RoPA, the Conduct of Election Rules, 1961; Companies Act, 2013; Income Tax Act, 1961; Foreign Contribution (Regulation) Act etc.

Existing regulations

Limits on Expenditure

• Between Rs. 54-70 lakhs for Parliamentary constituencies and Rs. 20-28 lakhs for Assembly constituencies
• Includes party and supporter spending towards a candidate’s campaign
• Excludes expenditure incurred by “leaders of a political party” for travel for propagating the party’s programme
• Excludes expenditure by parties or their supporters incurred for generally propagating the party’s program as long as no specific candidate is mentioned.

Disclosure of Expenditure

• True copy of account of election expenses of every contesting candidate to be lodged with the District Election Commissioner within thirty days of election of returned candidate. Returned candidate is one who has been declared elected by the returning officer.

Limits on Contribution

• As of now there are no limits on individual contributions
• No limits on political party accepting contribution
• Corporate contributions to political parties are allowed as long as the company (non-government) is three years old; its aggregate contribution in every financial year is below 7.5% of its average net profits during the three immediately preceding financial years; and it is authorized by a Board of Directors’ resolution
• Corporate contributions to parties or electoral trusts entitled to deduction from total income
• Ban on foreign contribution to candidates or political parties.   The ban on foreign contributions is no longer in place after the 2016 amendment of FCRA via Finance Act 2016. Read here. 

Section 29B of the RoPA makes it very clear that there is no limit on political parties accepting contributions from individuals or corporations, so long as the donor is not a government company, or the donation is not a foreign contribution (since it is prohibited under Section 3 of the Foreign Contribution (Regulation) Act, 2010). A significant source of political donations is through corporate funding, which is explicitly permitted under Section 182(1) of the Companies Act of 2013, dealing with prohibitions and restrictions regarding political contributions to political parties.

Disclosure of Contribution

• By party: Report detailing all contributions above Rs. 20,000 received from any person or company to be submitted in each financial year to the Election Commission
• By company: Profit and Loss account with detail of the total amount contributed and the name of the party to which contribution made in every financial year

Public Funding of Election Campaigns

• No direct State subsidy
• Partial in kind subsidy in the form of free allocated air time on state owned electronic media since 1996 to parties based on their past performance
• Free supply of copies of electoral rolls and identity slips of electors to candidates

Penalties

Penalties are of both civil and criminal in nature and affect:

• The candidate: disqualification from being a voter or standing in elections if convicted of corrupt practices or failure to lodge election expenses
• The party: loses IT exemptions
• Company: Fines and imprisonment

Need for election finance reform

It is a well established fact that money plays a crucial role in politics. ECI, Guidelines on Transparency and Accountability in Party Funds and Election Expenditure recognizes the need for finance reform by stating:

“concerns have been expressed in various quarters that money power is disturbing the level playing field and vitiating the purity of elections.”

The Supreme Court also has emphasized the influence of money power in its various judgments such as KanwarLal Gupta v Amar Nath Chawla, 1975 and Ashok Shankarrao Chavan v Madhavrao Kinhalkar, 2014.

It is an undeniable fact that financial superiority translates into electoral advantage, and hence richer candidates and parties have a greater chance of winning elections.

Money, often from illegitimate sources, is used to buy muscle power, weapons, or to unduly influence voters through liquor, cash, and gifts. The sources of some of the election funds are believed to be unaccounted criminal money in return for protection, unaccounted funds from business groups who expect a favor or high return on this investment.

Of the candidates of Lok Sabha 2014 elections:

• 27% (2208 candidates) of all the candidates were “crorepati candidates,” and the average asset of each of the 8163 candidates was Rs. 3.16 crores.
• The percentage of crorepati candidates increased from 16% in 2009 Lok Sabha elections.

There is widespread prevalence of black money, bribery, and corruption which in turn helps candidates fund their campaigns. The limits of expenditure prescribed are meaningless and almost never adhered to. As a result, it becomes difficult for the good and the honest to enter legislatures. It also creates a high degree of compulsion for corruption in the political arena. This has progressively polluted the entire system.

• Lobbying gives undue importance to big donors and certain interest groups at the expense of the ordinary citizen and violates what the Supreme Court terms, “the right of equal participation [of each citizen in the polity]”as pronounced in the KanwarLal Gupta v Amar Nath Chawla, 1975
• Institutional corruption: Instead of direct exchange of money or favours, candidates alter their views and convictions in a way that attracts most funding. This change of perception leads to an erosion of public trust, which in turn affects the quality of democratic engagement.

ECI’s Transparency Guidelines

The ECI issued transparency guidelines under Article 324 of the Constitution on October 2014 after consultation with all the recognized political parties, and including the following:

On election expenses by parties

The payment of any election expenditure over Rs. 20,000 should be made by the political parties via cheque or draft, and not by cash, unless there are no banking facilities or the payment is made to a party functionary in lieu of salary or reimbursement.

On election expenses by unrecognised parties

Although not required by law to submit their election expenditures to the ECI, unrecognised parties are required under these guideless to file their expenditure statements with the Chief Electoral Officer of the State in which the party headquarters are located.

On giving money to candidates

Although there is no cap on expenditure by political parties for propagating their program, parties are required to adhere to the cap prescribed in section 77(3), RPA and Rule 90, Election Rules while providing “financial assistance” to candidates in their election campaigns. These amounts should be paid only by a crossed account payee cheque or draft or bank transfer, and not by cash.

On accounts and audit

All parties are required to maintain books of accounts (section 13A, IT Act) based on the guidance note issued by the Institute of Chartered Accountants of India to enable the calculation of their party income. These books need to be audited and certified by qualified, practicing Chartered Accountants, and are to be submitted annually to the ECI.

Although there are legal provisions limiting election expenditure for candidates and governing the disclosure of contributions by companies to political parties, the same is not properly regulated, either due to loopholes in the law, or improper enforcement.

Criticisms and loopholes

• Despite the Election and Other Related Laws (Amendment) Act 2003, the subject of regulation under Section 77 of the RoPA only covers individual “candidates”, and not on political parties.
• Clever accounting can allow parties to attribute large amounts of expenditure to their “leaders” and hence, avail of the exception under Section 77. For instance, the ECI states that when leaders of a political party travel to and from their constituency to other constituencies as star campaigners, the expenditure on their travel would fall within the exempted category.
• The scope of Section 77(1) is very narrow and applies only from the date of nomination to the date of declaration and thus any expenditure incurred in the remaining period is exempt from any limit or regulation.
• Regarding political contribution, the Rs. 20,000 disclosure limit can be easily evaded by writing multiple cheques below Rs. 20,000 each, or giving the money in cash. Nor is the profit-linked contribution limit of 7.5% a significant restriction for large companies.
• The authorization of corporate contribution requires a resolution to be passed to such effect at the meeting of the Board of Directors under Section 182(1) of the Companies Act, 2013. The empowerment of a small group to decide how to use the funds of a company for political purposes, instead of involving the vast numbers of shareholders (being the actual owners of the company) has also been widely criticized.
• Disclosure norms need to be strengthened. The ECI’s transparency guidelines do not have statutory authority and there is no legal consequence for non-compliance. Moreover, in many cases such as compliance with section 29C of the RPA (regulating political party disclosure) the only penalty for noncompliance is losing the income tax exemption. This is not a significant enough deterrent to parties.

Suggestions and way forward

They key notable suggestions towards election finance reforms are as follows:

• Extending the period in which ECI’s regulation on election expenditure applies on candidates.

• Amendment of the Companies Act so that their contribution to political parties are authorized in Annual General Meetings rather than by Board of Directors.
• Extending the scope of disclosure obligations of individual candidates.
• Political parties should compulsorily maintain and submit annual audited accounts. There should be additional Disclosure provisions governing political parties.
• The period for disqualification of a candidate for a failure to lodge an account of election expenses should be extended.
• The Regulation of Electoral Trusts should be given statutory backing by amending RoPA.
• Efforts towards state funding of elections.

The above suggestions are input from Law Commission of India report of March 2015 on electoral reforms. Below excerpts from the same report explain each of the above suggestions:

Extending the period in which ECI’s regulation on election expenditure applies on candidates.

Currently, the Section 77 of the RoPA, regulating the election expenses incurred or authorized by candidates extends from the date of nomination to the date of declaration of results. This period should be extended so that it applies from date of notification of the elections to the date of declaration of results.

Amendment of the Companies Act

The Companies Act should be amended to require the passing of the resolution authorizing the contribution from the company’s funds to a political party at the company’s Annual General Meeting (AGM) instead of its Board of Directors.

Extending the scope of disclosure obligations of individual candidates.

The existing disclosure obligations of individual candidates are limited to maintaining an account of electoral expenses under sections 77 and 78, RPA. This is sought to be amended by inserting a new section to require candidates to maintain an account and disclose the particulars of

• any individual contribution received by them from any person or company, not being a Government company and
• any contribution by the political party from the date of notification of elections.

Further, a new provision should be inserted requiring the district election officer to make publicly available, on his website for public inspection on payment of prescribed fee, the expenditure reports submitted by every contesting candidate under section 78.

Mandatory maintenance of audited accounts by Political parties

Political parties should be required to maintain and submit annual accounts, duly audited by a qualified and practicing chartered accountant from a panel of such accountants maintained for the purpose by the Comptroller and Auditor General, to the ECI every financial year. These accounts will fully and clearly disclose all the amounts received by the party and the expenditure incurred by it. The ECI will then upload these accounts online or keep them on file for public inspection on payment of fee.

Disclosure provisions governing political parties should require all parties to:

• mandatorily disclose all contributions in excess of Rs. 20,000;
• include aggregate contributions from a single donor amounting to Rs. 20,000 within its scope;
• disclose the names, addresses and PAN card numbers of these donors along with the amount of each donation above Rs. 20,000;
• disclose such particulars even for contributions less than Rs. 20,000 if such contributions exceed Rs. 20 crore or 20 % of the party’s total contributions, whichever is less. Consequential amendments will need to be made to the Election Rules and the IT Act.

A new section to be inserted in the RPA requiring the ECI to make publicly available, on its website or on file for public inspection on payment of prescribed fee, all the contribution reports submitted by all political parties under section 29D.

ECI’s transparency guidelines prescribing, first, a “statement of election expenditure” to be filed with it, by every party contesting an election within 75 days of the Assembly elections and 90 days of the General elections election; and second, expenses incurred by political parties to be usually in the form of cheque or draft, unless banking facilities are not easily available or the payment is made to a party functionary in lieu of salary or reimbursement, should be given a statutory basis.

Express penalties, apart from losing tax benefits, should be imposed on political parties for the non-compliance with the disclosure provisions of the RPA. This should include a daily fine for non-compliance, with the possibility of de-registration if the default continues beyond 90 days. Further, ECI may levy a fine if its finds any particulars in the party’s statements as having been falsified.

A new section should be inserted penalizing parties for accepting contributions from impermissible donors, by levying a penalty.

The period for disqualification of a candidate for a failure to lodge an account of election expenses should be extended.

The disqualification of a candidate for a failure to lodge an account of election expenses and contributions reports under section 77 and proposed 77A should be extended from the current three period up to a five year period, so that a defaulting candidate may be ineligible to contest at least the next elections.

Regulation of Electoral Trusts

RoPA should be amended dealing with the “Regulation of Electoral Trusts”, and detailing provisions pertaining to their entitlement to accept contributions, disclosure obligations, and penal provisions (apart from losing income tax exemptions) in line with the changes already made to the IT Act and the ECI guidelines on “Electoral Trust Companies” of 2013.

Partial State Funding of Elections

A system of complete state funding of elections or matching grants may not be feasible, given the current conditions of the country. Instead, the existing system of indirect in-kind subsidies, with section 78B of the RPA being possibly amended in the future to expand these subsidies.