Boards and political funding

Elections are expensive and need to be funded. The Election Commission spent Rs 3.43 billion in 2014. Add the cost of the EVM’s, also costs that are not directly incurred by the Election Commission including that of deploying security personnel, their movement, communication and training, this number is estimated at a further Rs 325 billion. The expenses for the conduct of the election is paid for directly by the citizens, through the taxes collected. This sum no-doubt is high, but an equally large amount — Rs 350 billion, is said to have been spent by candidates and parties during 2014 elections. To put it in relative context, the US elections that elected Trump, the house and the senate in 2016 was Rs 455 billion. And note, State elections need to be tallied separately.

Those contesting elections are expected to spend Rs 600 billion in the coming national elections. This is why we now see many more millionaire candidates. Data from the Association for Democratic Reforms shows that 1,249 out of the 7,810 candidates (15 per cent) who contested the 2004 national elections were crorepatis. Their number jumped to 2,207 out of 8,163 candidates (27 per cent) by 2014. That the 2014 Parliament had 443 crorepati MPs (83 per cent), suggests their winnability is higher. Are the rich intrinsically more winnable? I believe political parties go for more well-heeled candidates because they can spend their way to the victory stand — creating a bias for their selection. 

 

How campaigns are funded is crucial for a well-functioning democracy. A nexus between corporates, a perennial money-tap, and politicians can be toxic. It is in this context that there is a need for more transparency with regard to corporate funding of elections.

There was a brief period after 1969 when corporates were banned from political donations. But since elections still needed to be funded, corporates used this ban to justify creation of black money. This was reversed in 1985, capping donations to 5 per cent of the previous three-year average profit. Today political funding is covered under Section 182 of the Companies Act, 2013, with no caps, subject to board approval and disclosure in the annual report.

The 2017 Budget limited cash donations to Rs 2,000 per person, down from Rs 20,000 earlier, to contain the use of black money. It also introduced electoral bonds akin to bearer instrument in nature of promissory note. It’s too early to judge the efficacy of electoral bonds, but rather than encouraging transparency, the opacity adds to the murkiness.

We have also seen the creation of electoral trusts. Under this, business groups contribute to a trust and the trust in-turn passes on the money to a political party. This helps in a few ways. More than one company or business group can contribute to an electoral trust — and if many do, there is some distance between the companies and the political parties. Two, the trusts put in place principles or guidelines that determine how the money gets passed on — contributions are non-discretionary. Further, companies do not have to report whom they donated too, saving them blushes if the party they back, does not win. 

How should managements and boards deal with political contributions (or demands)? 

First, boards must take a call on the amount they wish to donate. Note that CSR spend is put at 2 per cent and each candidate’s campaign-spending is currently capped at Rs 7 million and there is a compelling reason to increase this. Putting these numbers together even 7.5 per cent of three-year profits — the earlier cap which has conveniently been done away — appears far too high. An absolute number should be preferred to a percentage of profits.

Second, once the amount is decided, it should be put to shareholders to vote. The shareholder resolution should have a validity period and renewed periodically. This helps to bring an ex-ante cap on the number. Importantly, the board approved limit can be changed in a hurriedly called board meeting; a limit approved in a shareholder meeting has its own timeline. And greater scrutiny implies the number is less flexible.

Three, boards should maintain oversight and not leave it unattended. Putting in place a framework to report to the board will help. Four, have guidelines regarding how this money will be disbursed. If the money is passed on to an electoral trust, the board should familiarise itself with the trustees, what their role is, as well as the gifting principles. Whether directly or through the trust route, keeping discretion to the minimum should be a core principle. The Progressive Electoral Trust donates all the funds on the basis of the performance in the outgoing Lok Sabha. There is a case for a percentage on the basis of past and the balance on the basis of the performance in the incoming Parliament — assuming that many of the expenses get settled after then elections, but for this regulation need change. Five, disclose all donations. Six, move to a system of annual contributions. This means the amounts can be smaller. Companies will then be able to fund one party in the Centre and a regional party in the state. And from a shareholder perspective, annual contributions help smoothen cash flows. 

In a perfect world, business and political parties need to maintain a respectful distance. But given the influence policy has on the fortunes of a business, it is naïve to expect this. Nor should one expect the political class to throw its weight behind electoral finance reforms. Nevertheless, it is easy to imagine a scenario where each business gives more, thereby nullifying any advantage each hopes to gain, and in the process choking our democracy. It is in this context that boards need to redefine the underlying purpose their political donations serve.

Political donations by companies should be made to help a larger cause — not merely to get policy tweaked in their favour. Such contributions must come with strings attached, that is, push for greater transparency in political funding or political parties filing better quality accounts tax returns in a timely manner or nominating candidates who don’t face criminal charges. I realise this last bit is a tall ask given the equation is weighted in favour of the legislature. But a decade ago, funds were shy of asking companies to change. Today, these investors acknowledge their responsibilities and are far more engaged and demanding of companies. Similarly, corporates, through their collective donations are in a far better position to be a force of good: they must push for a healthier polity.

The author is with Institutional Investor Advisory Services. Twitter: @amittandon_in