Trust In The Law
An investigation into how electoral trusts have been used to dodge disclosure norms for political funding in India
Over the first week of January 2009, residents of the small, poll-bound town of Thirumangalam in Tamil Nadu, woke up to newspapers. Even households that had never subscribed, or were illiterate, found a crisp copy at their porch, each of them stuffed with currency notes and a party symbol. “I have five votes in my family,” a leaked American diplomatic cable quotes a voter as saying. “So I should get Rs 25,000, which will pay for my daughter’s marriage.”
Cash for votes is a way of political life in India. Former Prime Minister Atal Bihari Vajpayee once said in Parliament, “Every legislator starts his career with the lie of the false election return he files,” acknowledging the constant violation of campaign expenditure ceilings by political parties.
While the law specifies an upper limit on how much a candidate can spend, it does not regulate the spending of political parties on the candidate’s behalf. This loophole leads to inflated campaign bills. One estimate pegs the cost of the India’s last General Elections in 2014 at close to Rs 30,000 crore, about 10 times what it was in 1996.
Most of the money spent by parties on their campaigns is untraceable as they claim to receive close to 75 per cent of their funding in the form of cash donations of up to Rs 20,000 that do not need to be disclosed. And even if there is a sliver of accountable funding, regulatory loopholes ensure that the money trail can be obfuscated.
One such avenue is an electoral trust, a supposedly independent and transparent entity through which an individual or a company can donate to political parties. But an investigation by BusinessLine over three months showed that the trusts have ended up as a conduit for political donations and channelling money, often untraceable, from companies to parties.
According to the Ministry of Corporate Affairs, there are 25 such electoral trusts operating in India at the moment. Only 18 of them are present on the list of trusts published by the Election Commission (EC). None of them has a website or publicly listed contact details. BusinessLine reached out to most of them, but just one responded.
During the 2014 elections, six national political parties declared Rs 622 crore as donations. About 40 per cent of that, about Rs 250 crore, came from two sources — Satya Electoral Trust and General Electoral Trust.
The Satya Electoral Trust has received donations from multiple companies such as the Bharti Group, DLF and Hero MotoCorp. Though registered, the Trust has disclosed little. BusinessLine wrote to Mukul Goyal, a director at the Trust, and called at his office, but got no response.
General Electoral Trust (GET), on the other hand, is untraceable. The trust has never filed a report detailing the contributors and recipients of its funds, and neither is it registered with the Election Commission. Set up in 1998, General Electoral Trust is virtually a ghost in the system. Though media reports have associated the Trust with the Aditya Birla Group, the latter’s spokesperson insisted that the GET operates independently, outside of the Group’s purview.
According to a senior bureaucrat who previously served on the EC,“Trusts were created to introduce an additional layer between political parties and companies so that people cannot know who has given money to whom.”
Close a leak and another sprouts
The electoral trust system can be traced back to a public interest litigation filed by activist HD Shourie on behalf of the NGO Common Cause in 1995. On New Year’s Eve that year, the Supreme Court issued notices to political parties in the country, asking them to account for their income and expenditure in accordance with the Income Tax Act. Though the law has required such filings for over a decade and a half, few had complied.
Within a fortnight of the order, the finances of political parties became a matter of public record. The case concluded with a landmark judgement that coerced parties into regular disclosures by linking them to their campaign ceiling and income tax exemptions. Simply put, the parties could continue to avoid being taxed and spend as they saw fit on behalf of their candidates, as long as the spending could be accounted for.
Two months after the Common Cause judgement, the Tata Group pioneered a new method of political contribution. They set up the Electoral Trust, an independent entity that would channel funds from Tata Group companies to political parties without any mention of the original donor company’s name on the balance sheets of the parties. The trust also sheltered companies from the scrutiny of their shareholders. Though their annual reports include details on political contributions, the beneficiary column now just had the name of the trust, instead that of political parties.
Over the next decade, according to data compiled by the Association for Democratic Reforms (ADR), a NGO, several other leading corporate houses set up electoral trusts. ADR’s analysis of data released by the EC shows that between 2004–05 and 2011–12, six of these trusts — functioning without any regulatory oversight — allowed companies to contribute more than Rs 100 crore to various political parties. Of this, nearly Rs 50 crore was donated in the run-up to the 2009 General Elections.
In July 2009, Pranab Mukherjee presented the first budget of the UPA’s second innings in office. Lost amidst the massive allocations to the food security and employment guarantee schemes, was a measure that proposed to make donations to electoral trusts tax-exempt. In 2013, the Central Board of Direct Taxes (CBDT) formally notified the electoral trust scheme.
While the tax exemptions granted to the trusts were enshrined in law, disclosure norms remained mere guidelines, with no penal provision. “India is one of the very few countries that provide 100 per cent tax exemption to corporate political donations. It should follow naturally that you also impose a penalty for non-disclosure which the law doesn’t provide for,” says Jayaprakash Narayan, a former MLA in Andhra Pradesh who campaigned extensively for electoral reforms.
Narayan points out that this “is a very corrupt system running on black money in which there is a lot of extortion of companies by political parties.” And that is why, adds Harsh Srivastava, a former consultant to the Planning Commission, “Everybody should have a trust.” The head of Corporate Affairs at Feedback INFRA says a trust “allows for systematic distribution of funds and shields the company from shareholder and political backlash generated by their donations.”
The year after the new regime was introduced, the number of corporate-backed electoral trusts doubled.
The trust and its incarnations
The Tatas’ Progressive Electoral Trust (which replaced the earlier Trust after the 2009 law) is probably the poster child of this approach towards campaign finance. It donates the funds it receives from group companies on the basis of a formula. “Before the election, one half of the distributable funds are disbursed to political parties on the basis of the seats held by them,” explains Dinesh Vyas, Trustee of Progressive Electoral Trust. “After the election, the remaining funds are distributed on the basis of percentage of seats won.” The trust’s adherence on its formula-based approach appears to be so stringent that it donated Rs 27 lakh to the Trinamool Congress on the basis of its performance in the 2009 Lok Sabha elections, barely a year after party supremo Mamata Banerjee led a high-profile campaign against the proposed Nano car factory in West Bengal.
But not all electoral trusts are made equal. Satya Electoral Trust, for example received donations from multiple corporate groups including DLF and Indiabulls. But it is impossible to ascertain which company’s money has ended up with which party — and whether the companies influenced that division of funds — based on the limited public disclosures the trust is required to make by law.
The Public and Political Awareness Trust, operated by the UK-based Vedanta Group, presents another example of how electoral trusts can be used to dodge regulatory norms. The trust donated Rs 35 crore to the Bharatiya Janata Party between 2003–04 and 2012–13 according to disclosures made by the party to the EC. It received its corpus from companies like Sesa Goa and Sterlite Industries — which have majority foreign stake-holding and are therefore ineligible to donate to Indian political parties.
In March, the Delhi High Court ruled that parties had violated the Foreign Contribution Regulatory Act in receiving these funds and ordered the Home Ministry to take action within six months. Though an appeal in the Supreme Court is pending, the Government has effectively nullified the verdict through Clause 233 of the 2016 Union Budget, which retrospectively legalised foreign contributions to political parties.
A ghost in the system
Mohandas Pai, former CFO of Infosys and investor, describes electoral trusts as being ‘less than the full measure’ required for clean political finance. “Companies should invest in the democratic process by giving to all parties. But instead they use means like electoral trusts to give to one party over another, which is morally and ethically wrong. A company cannot have politics.”
And yet if the functioning of the General Electoral Trust is any indication, the political compulsions of the company can be at odds with the independence of a trust. Despite the Trust’s claimed independence from the Aditya Birla Group, its address on several political parties’ donor reports is listed as the same Chruchgate Reclamation premises that houses the Group headquarters. Additionally, documents filed by the BJP with the EC reveal that the trust has made at least one donation under a PAN belonging to UltraTech Cement, an Aditya Birla company.
Ribeiro acknowledged that the Aditya Birla Group is aware that General Electoral Trust is not registered, insisting that they were told it was “not necessary.”
“Normally it is the company that decides who to donate to,” says Julio Ribeiro, former Commissioner of Mumbai Police, who has been a trustee at General since its inception. “There is a committee of the Birlas that makes a recommendation and the trustees sanction it.”
A Right To Information request filed by BusinessLine revealed that the Trust does not exist as far as the EC is concerned. A separate RTI filed by activist Venkatesh Nayak earlier this year also showed that the Trust hasn’t registered with the CBDT. Ribeiro acknowledged that the Aditya Birla Group is aware that General Electoral Trust is not registered, insisting that they were told it was “not necessary.” He also stated that, according to the Group, the EC’s disclosure requirements were for political parties and did not apply to electoral trusts. Ribeiro added that since the Trust did not claim tax exemptions, it was not required to disclose its contributions. BusinessLine was unable to verify whether General had paid tax on its contributions. When contacted, officials at the CBDT agreed to respond to queries, but hadn’t till the time of going to the press.
Who will guard the guards?
While some of the trusts may be violating the guidelines laid down by the EC and the CBDT, the real problem here is the toothless regulation. “The IT Act has been amended to provide for tax relief on donations to the electoral trusts. However, there is no disclosure provision under the Representation of People Act (RPA) corresponding to the changes in the income tax laws,” notes a March 2015 report of the Law Commission which was looking into the subject of electoral reforms. In effect, this means that while the rights of the trusts are enshrined in law, their responsibilities towards transparency are mere lines in the sand.
“Additionally, the only penalty prescribed for non-submission of an annual report of contributions to the ECI… is that ‘adverse notice shall be taken’ of the failure to comply with the instructions.” The report recommended amendments to the RPA that would ensure that errant trusts lost tax benefits and faced fines and prospect of a ban.
Like a vast majority of the other recommendations contained in the report, the proposals are nowhere close to implementation. “There is no penal action possible as of now,” says the former Election Commission official quoted earlier. “The politicians did not create such a provision knowing very well that this is a layer that has been created so that the opaqueness is increased and people don’t know who is giving to whom.”
However, the official also insists that the Election Commission’s hands aren’t entirely tied. “It depends on how proactive the EC is. Some former Commissioners have taken the view that Article 324 (which defines the powers of the EC) encompasses all the aspects where the law is not there so it can be applied wherever there is a vacancy.” The Election Commission declined to comment on this issue and simply referred to a copy of the official guidelines instead.
Speaking to a news magazine at the height of the Common Cause case, petitioner HD Shourie said that he had initiated the litigation simply because “he wanted to know why political parties weren’t following the rules.”
As he would have realised, when rules are framed by those they are meant to regulate, there will always be ways to get around them.
Originally published in The Hindu Business Line on August 15, 2016.