Corporate Updates – Saturday Case Law Special

CASE LAW

Whether clause (2) of Section 591 qualifies the meaning of “Foreign Company” and brings out alleged company from the conception of a “Foreign Company” within the meaning of Section 591 of the Companies Act, 1956?

The Delhi High Court in the matter of ASSOCIATION FOR DEMOCRATIC REFORMS AND ANR v.s UNION OF INDIA AND ORS on the writ petition draws attention towards donations made to political parties for the period up to the year 200 and its legal position with respect to the Foreign Contribution (Regulation) Act, 1976.

Grounds of PIL

1. Filed in public interest in January 2013, the petitioner (Association For Democratic Reforms And Anr), asserts that there is a blatant violation of the Foreign Contribution (Regulation) Act, 1976 by political parties.

2. Political parties have violated Section 29B of the Representation of People’s Act 1951, which categorically prohibits them to take donations from government companies and from any foreign source.

3. The donation of huge sums of money made by a foreign company to major political parties is in clear violation of the FCR Act of 1976 and the FCR Act of 2010.

4. The donation of huge sums of money by the public sector undertakings (who are also State within Article 12 of the Constitution) to the political parties is in violation of Section 293A of the Companies Act.

5. The petitioner relied upon the annual report of, a Foreign company within the meaning of Section 591 of the Companies Act, 1956, incorporated under the Companies Act, 1985 and registered in England and Wales and a company registered in India under Companies Act 1956, evidencing donation made by such Indian registered company to political parties in India the said company has also made donations to political parties. The petitioner brings home with reference to the annual report of foreign company registered in England and Wales that it owns 55.1% of the issued share capital of Indian Company.

6. The major concern would be the interpretation of FCRA keeping in view the admitted fact that such Indian company registered in India under the Companies Act, 1956 and more than 50% of their issued share capital is held by foreign Company.

7. In this regard it is profitable to take a note of the observations in V.K.R.V.Rao and Dharm Narain’s Foreign Aid and India’s Economic Development wherein it was pertinently observed that India’s policy of non-alignment with power blocs enabled it to receive foreign contributions from both the blocs. Eventually, with too much money coming in, with no self discipline, regulation, transparency or public accountability, and with some groups building empires in the name of contribution.

8. As per the enquiry conducted by the Intelligence Bureau it was found that the Political Parties in India were funded by Foreign Powers for the elections held in the year 1967.

9. The debates which took place on the floor of the two Houses of Parliament upon the introduction of the Foreign Contribution (Regulation) Bill, 1973 provide valuable insights into the turbulent state of affairs prevalent in our nascent democracy as shaped by the events across the globe.

It is the case of the petitioner that the donations made by Indian Company to the political parties during the period when Foreign Contribution (Regulation) Act, 1976 was in vogue would be foreign contributions because Indian Company are a “Foreign Source” within the meaning of Section 2(e)(vi) of the said FIRA Act. It has been argued that though the donors are companies registered in India under the Companies Act, 1956, however, significantly, more than one-half of their share capital is held by – a company incorporated in the England and Wales (United Kingdom). Therefore, in view of the mandate of clause (vi) of Section 2(e) the donations in favour of the political parties are to be construed as emanating from a “Foreign Source” and fall within the prohibition imposed by Section 4 of the Act, which bans acceptance of foreign contributions by Political Parties.

The respondents have unanimously planked their submissions on a conjoint reading of Section 2(e)(iii) of the Foreign Contribution (Regulation) Act, 1976 and Section 591(2) of the Companies Act, 1956 to contend that since a citizen of India holds more than one-half of share-capital of a company incorporated in the United Kingdom, the Company is not a “Foreign Company” within the meaning of Section 591 of the Companies Act, 1956 and neither Foreign Company nor its subsidiaries can be treated as a “Foreign Source” within the meaning of the Foreign Contribution (Regulation) Act, 1976.

Judgement

The court after analyzing the argument reproduced the relevant provisions of recently enacted Companies Act, 2013, which distinctly defines “Foreign Company” under section 2(42) in the following terms (42) “foreign company” means any company or body corporate incorporated outside India which— (a ) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b ) conducts any business activity in India in any other manner.” In light of the legislative mandate flowing from clause (1) of Section 591 of the Companies Act, 1956, Company incorporated outside India is unquestionably a “Foreign Company” by virtue of the fact that it is incorporated outside India i.e. in the United Kingdom and has established its place of business in India, as it operates in the territory of India through its subsidiary companies.

It would be relevant to note that Section 591 of the Companies Act,1956 in its original form did not contain clause (2) and in fact clause (2) was subsequently added to Section 591 of Companies Act,1956 vide a legislative amendment by Act 41 of 1974 with effect from February 01, 1975.

Therefore, interestingly, it would be pertinent to highlight that when the Foreign Contribution (Regulation) Bill, 1973 was prepared by its draftsmen and reference to Section 591 of Companies Act, 1956 was made, clause (2) of Section 591 was not even in existence in the statute book and therefore not within their contemplation. However, by the time the Foreign Contribution (Regulation) Bill, 1973 was actually passed by the parliament in the year 1976, clause (2) of Section 591 Companies Act, 1956 was in place.

A careful analysis of Section 591(2) reveals that if more than one-half of the share-capital of a company incorporated outside India and having an established place of business in India “Foreign Company” within the meaning of section 591(1) of Companies Act, 1956) is held by one or more citizens of India or by one or more bodies corporate incorporated in India, or by one or more citizens of India and one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.

For the reasons extensively laid down the court has no hesitation in arriving at the view that prima-facie the acts of the respondents inter-se as in the present petition, clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act, 1976 as the donations accepted by the political parties from Foreign Subsidiary accrue from “Foreign Sources” within the meaning of law.

Delhi High Court giving a landmark Judgement directed the Ministry of Home Affairs (MHA) and Election Commission of India (ECI) to take action against the two parties within six months.

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