Debating India

Chequered relations

Saturday 31 July 1999, by VENKATESAN*V.

Over the years the relationship between India’s industry and political parties has undergone several transformations, and the objectives of corporate funding of parties changed following liberalisation.

in New Delhi

THE relationship between India’s industry and political parties has been part symbiotic and part antagonistic. The industry, known for its heterogeneity and lack of cohesion, was to an extent supportive of the country’s struggle for political and economi c freedom during the first half of this century. The business class sought to fund the party of the freedom struggle, the Indian National Congress, and secured some leverage over the shaping of the Congress’ policy on state regulation of the economy afte r Independence was achieved.

Since the early years of Indian Independence, the private sector functioned under a system of comprehensive control and regulation. The system evolved over a period of three decades. The Nehruvian years saw greater emphasis on planned development and the mixed economy. The state erected a hegemonic public sector that dominated the basic industries. The private sector in turn was tightly controlled by a series of regulatory rules, orders and laws.

During this period, the business community contributed to the bulk of election funds, even as the cost of conducting and fighting elections showed a steep rise after the 1957 general elections. Party membership fees, contributions of candidates and their friends, and a levy on parliamentary income - these produced no more than a fraction of the funds needed.

Contributions were provided in several ways - through companies, individuals, and industry groups. Until 1969 a company in India was permitted, under Section 293A of the Companies Act, to contribute a certain amount of money to political parties provided its memorandum of association authorised such contributions. In the 1960s, the Congress and the Swatantra Party - the latter started by C. Rajagopalachari as a party of free enterprise advocacy - were the main beneficiaries of donations from big business groups, such as Tata and Birla, who together accounted for 34 per cent of total company contributions between 1962 and 1968.

In 1960, the Companies Act was amended to provide a ceiling for donations to political parties: the ceiling was fixed at Rs.25,000 or five per cent of the average net profit of the company for the three preceding financial years, whichever was greater. Under the law, the company that made such donations was required to give in its accounts particulars of the amount of donations and the names of recipients.

By and large, however, the bulk of the political contributions during this period were from individuals, rather than from big business groups. The contributions were given to ensure access for the purpose of obtaining an industrial licence, permit, or ot her such benefit. The small contributions from big business houses were duly accounted for and they were transparent, even though those who gave money did so with the clear expectation of reciprocal benefits. The objectives of political funding included obtaining permits, licences and quotas, insurance against opposition to private sector and building of effective rapport with senior party leaders, who also functioned as efficient fund raisers.

THE business-Congress relationship underwent a significant change after the Congress suffered severe reverses in the 1967 elections, largely at the hands of right-wing parties such as the Jan Sangh and the Swatantra Party. Sections of the business elite, determined to reduce Congress majorities in an effort to enhance their leverage over policy, had provided considerable financial support to these parties. This sparked off resentment within the Congress against the flow of money into Opposition party co ffers.

The Syndicate within the Congress, which brought Indira Gandhi to power in 1966, was viewed by the coterie close to her as being in a position to make policy deals with business in exchange for election funds. This helped the Syndicate cement the faction al loyalties within the party in its favour. The left-wing within the Congress viewed this with concern, as it undermined the party’s populist commitments. Indira Gandhi took the side of the left-wing in her fight with the Syndicate. The resultant split helped her to ban company donations to political parties. This accompanied a number of other populist measures such as the abolition of privy purses and the nationalisation of banks. The nationalisation of banks was, in particular, designed to cut at the financial clout that the big business houses enjoyed.

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THE HINDU PHOTO LIBRARY
J.R.D. Tata with Prime Minister Jawaharlal Nehru.

The ban on company donations removed the only legal channel that was available to big business to contribute to the political process. This prohibition was sought to be circumvented by placing advertisements in souvenirs issued by political parties. The souvenirs were used to raise huge funds for election campaigns. Political compulsions and the threats of selective raids and nationalisation forced business to take recourse to tax evasion, black-market operations, and a whole array of mechanisms to bypa ss and profit from controls. The period after 1969 was notable for "briefcase politics" - the transfer of vast amounts of black money in the form of cash into the coffers of the Congress.

The Janata Party’s brief reign at the Centre during 1977-79 was the result partly of the disenchantment of the business class with Indira Gandhi’s imposition of Emergency from 1975 to 1977, which was distinguished by massive extortion of corporate donati ons by the ruling party. Indira Gandhi’s return to power in 1980 made no difference to this trend. Her return was facilitated by the concern of the big business houses for political stability and a belief that only the Congress(I) could ensure this desir ed outcome.

SINCE 1980, the Congress(I) depended less on domestic businesses and more on huge kickbacks from foreign firms while striking significant deals in the defence and infrastructure sectors. The top leadership centralised fund-raising in the party and used c ertain businessmen as conduits for collecting funds and for parking these in secret bank accounts abroad. As a result, the Congress(I) had no use for its state and local party networks in raising election funds.

The election of Rajiv Gandhi as Prime Minister in 1984 led to the first preliminary effort to reverse the excesses of "briefcase politics". He not only lifted the ban on company donations to political parties, but followed it with a comprehensive effort at liberalisation of controls and reform of the tax laws as part of an effort to spur economic growth and reduce corruption. He restored the ceiling on political donations by companies, limiting it to five per cent of net profits.

The evidence indicates, however, that while seeking to bring about a degree of transparency in domestic political donations, Rajiv Gandhi was taking full pecuniary advantage of a number of large defence and infrastructure deals that were concluded during his tenure. Towards the middle of his five-year tenure, a number of payoff scandals - most notably the one involving the purchase of howitzer guns from Sweden for the Indian Army - erupted in Rajiv Gandhi’s face, compelling him to abort the experiments in transparency. In a sense, the attempt at liberalisation during early years of Rajiv Gandhi’s term was a response to the growing demand of industry, which had funded the Congress(I) in a big way.

E. Sridharan of the Centre for Policy Research, New Delhi, and the University of Pennsylvania Institute for the Advanced Study of India, New Delhi, says in a paper, to be published in Policy Reform that the system of collecting party funds during this period depended on an intricate web of personal connections and unwritten understandings. Until the 1990s the Congress raised and spent more money than all other parties put together, he says.

The National Front interlude (1989-91) and the return of the Congress(I) regime in 1991 showed that the business class preferred political stability more than anything else. The Narasimha Rao Government further advanced the liberalisation agenda, but, li ke Rajiv Gandhi, was enmeshed in a plethora of scandals, most notably the hawala scandal, which highlighted the unsavoury methods of political funding. The Congress(I)’s failure to secure a majority in the 1996 elections and the subsequent United Front e xperiment led the business class to believe that the era of coalition politics was here to stay. Since then, industry has felt the need to fund the dominant party in every State, be it regional or national, rather than funding only one or two parties at the national level.

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BY SPECIAL ARRANGEMENT
J.R.D. Tata with Indira Gandhi and Rajiv Gandhi. The Nehruvian years saw greater emphasis on planned development and the mixed economy, and the private sector in turn was tightly controlled by a regulatory framework.

FACED with the prospect of prolonged political instability and inconclusive electoral verdicts, industry has also expressed its inability to fund parties if elections are held at over-frequent intervals, that is, at intervals of less than five years. Whi le the big business groups may probably refuse to fund parties in a big way, as they had done earlier, the smaller groups, however, may have no option but to support the influential and stronger political parties in every State. In 1993, the Confederatio n of Indian Industry (CII) set up a Task Force which recommended that corporate contributions be made tax-deductible once decisions by the board of directors are ratified by the general body of shareholders.

The Indrajit Gupta committee on electoral reforms, in its report submitted to the Government in 1998, has pleaded that the overall limit of five per cent of the company’s average net profits over three preceding financial years may be continued for the p urpose of political donations. However, it has urged that such donations should be made only with the approval of the general membership of the company at its Annual General Meeting and not by a mere resolution of the Board of Directors, as currently req uired by the law. The Board of Directors of a company may not always be truly reflective of the political inclinations of its general members, the committee had warned. "Approval at the Annual General Meeting will ensure a decisive say of the general mem bers of the company in any contributions made by it for political purposes," it said. In the interests of transparency, it would be desirable if the members forming the Board of Directors are also made to disclose their affiliations, if any, to political parties, at the Annual General Meeting which considers the proposal for political contributions, the committee recommended.

Even though Rajiv Gandhi restored the legitimacy of corporate donations to political parties in 1985, the companies have been shy of ensuring a transparent process of donations. Sub-section 4 of Section 293A of the Companies Act requires the companies to name the party and give details of the amount contributed in their profit and loss accounts. Section 4 was inserted to the Act in 1985 with the stated objective of "permitting the corporate sector to play a legitimate role within the defined norms in th e functioning of our democracy." The prospect of shareholders raising a stink in the Annual General Meeting and getting the company bad publicity dissuaded the corporate sector from making contributions to the parties in accordance with the Act. Besides, the threat of victimisation by the winning party, if it is known that it received less funds than its rival, was reason enough for the companies not to make details of its contributions public.

Following the Supreme Court’s order in 1996, that parties should identify and acknowledge corporate donations in their book of accounts, as per section 13A of the Income Tax Act, both the Congress(I) and the BJP averred that they would prefer contributio ns from companies by cheques. The Supreme Court’s ruling came in the wake of its interpretation of Section 77 of the Representation of the People Act. In 1974, the Indira Gandhi Government contrived to take out of the purview of this Section all expenses incurred on behalf of a candidate by a political party or any association of individuals. The Supreme Court, without striking down this Explanation to Section 77, interpreted it to mean that a candidate may well exceed the ceiling on campaign expenses i f the political party which sponsored him or her accounted for the excess expenditure.

The BJP had announced, well before the 1996 Supreme Court ruling, that it would receive contributions amounting to more than Rs.10,000 only by cheque, and that all the contributors would be identified in its party organ, BJP Today. Called the ’Aaj iwan Sahyogis’, the donors who contribute lesser sums are identified by name, State-wise, in the last page of the organ. It is interesting, though, that the BJP does not release the full addresses of these donors; nor does it identify donors who contribu te Rs.10,000 or more.

The BJP’s treasurer, Ved Prakash Goel, admitted to Frontline that not all contributions to the party are by cheque. Contributions by big business groups constitute only a fraction of the BJP’s funding, Goel added; the bulk of the contributions com e from State units of the party, and from its workers, who have excellent rapport with local industrialists and traders. Thanks to its large organised network across the country, the BJP has never felt the pinch for funds and if Goel is to be believed, t he party had nothing to do with big business groups until it came to power.

LIBERALISATION of the economy and coalition politics have brought in their wake an increased need for industry to make its political contributions even-handed. Industry has tried to achieve this by floating neutral trusts to channel funds that could be d iverted for political purposes. On the eve of the 1998 Lok Sabha elections, the Tata group holding company, Tata Sons, floated an Electoral Trust to receive contributions up to the five per cent ceiling fixed by Section 293 of the Companies Act. Open to outsiders as well, the Trust was to fund political parties in proportion to their strength in the outgoing Parliament.

While half the collections are to be distributed before the elections under this norm, the remaining half would be doled out after the elections, in proportion to the strength of the parties in the new Parliament. Dinesh Vyas, chairman of the Trust, told Frontline that the Trust does not solicit funds - whatever it receives from companies is distributed to the political parties. Vyas was reluctant to release figures of last year’s contributions to the Trust’s fund and of the disbursement to the p olitical parties. He was sceptical about the response that the Trust would evoke from prospective donors in view of the economic recession and the frequency of elections.

Grasim Industries Limited, the flagship company of the Aditya Birla Group, set up a General Electoral Trust last year, following the example set by the Tatas. However, it is open to receiving donations only from companies of the Aditya Birla group. Among the factors which the group considers while disbursing funds among the political parties are suggestions from its Advisory Board, and the overall business interests of the contributing companies in each State. It follows then that the business interests of a company may result in the company financing one political party in a State and its rival in another State if the interests so demand.

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SHANKER CHAKRAVARTY
At an election meeting. The cost of conducting and fighting elections has risen steeply over the decades.

The Trust established by the Tata group appears to have achieved only limited success. The Trust is open to companies from outside the Tata group as well, but it is a moot question how many non-Tata companies have opted to contribute to the "neutral" Tru st. Observers point out that there is indeed no incentive for the non-Tata companies to contribute to the Trust; instead, companies are generally inclined to deal with the parties individually, in order to gain individual mileage. In any case, there are the industry associations, such as CII, the Federation of Indian Chambers of Commerce and Industry (FICCI), and the Associated Chambers of Commerce (Assocham), to fight for the collective rights of the industry. Tata’s Trust, therefore, may not have insp ired enough confidence among the non-Tata companies to contribute to the political process in a transparent manner.

If the objective is transparency, the reluctance on the part of the Tata group to share the details of the Trust’s 1998 funding of parties would seem curious. What the industry perhaps needs is an agreement among rival companies to make the political fun ding transparent, in accordance with the law. Who can ensure, for instance, that the entire funds raised and so disbursed among the parties are actually spent on elections? As Sridharan says, the reduction of election costs will not reduce corruption muc h or facilitate deregulation and transparency in government.

THE objectives of corporate funding of political parties underwent a transformation following the policy of liberalisation, actively pursued by successive governments at the Centre. The emphasis has clearly shifted from seeking favours from the governmen t for securing licences, permits and quotas, to seeking protection from the entry of multinational corporations. Emboldened by the perceived "irreversibility" of the economic reform process, which largely unshackled it from a regime of controls and permi ts, organised industry has been sending signals to the parties that its voice would have to be heard.

Business houses now have no compulsion to donate to political parties, although they may want to do so for varied individual benefits related to excise levies, sales and income-tax, and foreign exchange regulations. The efforts at collective funding, as shown by the establishment of trusts by a few companies, point to the companies’ desire to strike a hard bargain with the government to secure favourable policies, such as protection from external competition and changes in the Industrial Disputes Act.

Political parties with a realistic chance of making it to the ruling coalition promise quite a few economic reforms to attract big business collectively. Failure to make matching contributions to one of the two rival political formations may result in re sistance to the reform process and opposition to some key pieces of legislation. Coalition politics requires a broad consensus among political parties to enact key reforms. Therefore, the government and the political parties might use the threat of resis tance to key reforms that would open up the economy, or refuse to give adequate protection to the domestic industry against foreign competition, if the corporate houses are reluctant to fund evenly across the political parties.

Political parties might like to declare their support to key reforms in the party manifestoes in order to woo prospective donors. On the other hand, they could defer taking a stand on key reforms so as to use it as a bargaining chip with corporate donors . The demise of the permit-licence-quota raj has left a little residual discretionary powers in the hands of the political establishment, although the collective bargaining capacity of big business in relation to the political parties has also been bolst ered.

See online : Frontline

P.S.

Volume 16 - Issue 16, Jul. 31 - Aug. 13, 1999

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