Political Contribution by Corporations – A Comparative Study (Part II)

Written by  //  September 1, 2010  //  Law & The Judiciary  //  6 Comments

To be honest, when I wrote the first post on this topic, with little more than a basic understanding of the Indian law on corporate citizenship, I expected some broad commonalities between the American and Indian legal positions, and the expression of some common concerns. What I did not expect was that the parallels between the Indian and the American jurisprudence would be so many and so striking. We observed, in the earlier post, three important themes that ran through the varied opinions in Citizens United – (i) the respect (or the lack thereof) given to the corporate form (Justice Scalia); (ii) the special treatment of media corporations (Justice Kennedy); and (iii) the discomfort with the concept of a corporation exercising the right to free speech independent of its shareholders (Justice Stevens). In the brief examination of the Indian law that follows; focussing on corporate citizenship and its implications for political speech by corporations; it is fascinating to note that these very themes recur, and are found to have governed the twists and turns that the law has taken.

The position on corporate citizenship in India is laid down by the decision of the Supreme Court in State Trading Corporation v. Commercial Tax Officer, and its subsequent interpretations in RC Cooper, TELCO and Bennett Coleman. The Court in State Trading Corporation rejected the possibility of corporations being treated as citizens for the purposes of Article 19. This position has not been challenged or doubted by any subsequent dicta and now forms a fairly settled proposition in Indian Constitutional Law. However, what is of interest is way this position has come about, and how Citizens United may become an important influence in India should the question of political speech of corporations arise in the future.

Before going any further, let me clarify why the ‘citizenship’ of a corporation assumes particular relevance in the case of Article 19. The Fundamental Rights conferred by Part III of the Indian Constitution, can be broadly categorised into those that confer rights on all persons and those that confer right on all citizens. Article 19, in clause (1)(a) of which the right to free speech is ensconced, belongs to the latter category. Thus, unlike in the United States, for claiming the right to free speech under the Indian Constitution, the petitioner must establish status as a citizen. Citizenship in India is governed by the Indian Constitution and the Citizenship Act, 1955, neither of which specifically provides for corporate citizenship. In fact, the Citizenship Act excludes juristic persons from its scope. However, in State Trading Corporation, it was argued that neither the Constitution nor the Act is exhaustive of the concept of citizenship, and that the common law concept of citizenship must continue under Article 372 of the Constitution. However, the Court (Justices Das Gupta and Shah dissenting) rejected these arguments- holding that the concept of citizenship is restricted to natural persons; atleast unless the Constitution or the Act is amended to include the concept of corporate citizenship.

There are three schools of thought that can be traced across the opinions of the judges in State Trading Corporation- (i) the majority with its emphasis on the independence of the corporate form, and the consequent deprivation of status as a citizen; (ii) Justice Das Gupta’s dissent, treating a corporation as little more than an association of persons, and allowing citizenship; and (iii) Justice Shah’s dissent, upholding independent corporate personality, and also confirming its status as a citizen. A closer look at these three views makes this case and Citizens United seem oddly similar.

In his opinion for majority, Justice Hidayatullah emphasises the significance of independent corporate personality, observing that,

Unlike an unincorporated company, which has no separate existence and which the law does not distinguish from its members an incorporated company has a separate existence and the law recognises it as a legal person separate and distinct from its members. This new legal personality emerges from the moment of incorporation and from that date the persons subscribing to the memorandum of association and other persons Joining as members are regarded as a body corporate or a corporation aggregate and the new person begins to function as an entity. But the members who form the incorporated company do not pool their status or their personality. If all of them are citizens of India the company does not become a citizen of India any more than if all are married the company would be a married person. The personality of the members has little to do with the persona of the incorporated company. The persona that comes into being is not the aggregate of the personae either in law or in metaphor.

A more coherent defence of independent corporate personality will be hard to find. Relying on the distinction between person and citizen, used in Chapter III, as also between the concepts of nationality and citizenship, the learned Judge held that a corporation may be a person, may have a nationality, but cannot be a citizen. Just like with Justice Stevens’ minority opinion in Citizens United, Justice Hidayatullah asks the petitioners to prove that the drafters intended that a corporation be treated as a citizen. Keeping in mind the context in which the term ‘citizen’ in used in many parts of the Constitution, he holds that the drafters must have intended not to treat corporations as citizens. Further, since it is independent from its members, the citizenship of its shareholders would also not confer that status on the corporation. On this basis, the petitioners claim was rejected.

Justice Das Gupta’s dissenting opinion is similar to Justice Scalia’s opinion in Citizens United, both in brevity and ideology, differing primarily (and I daresay expectedly), in the degree of vehemence and vitriol. Justice Das Gupta casts the question as “whether the framers of the Constitution when conferring some fundamental rights on citizens only intended-that citizens forming themselves into a corporation would cease to enjoy these rights”. Answering this is in the negative, he holds that irrespective of whether citizens are claiming in their individual capacity or as a corporation, their rights must be protected. This is almost identical to the opinion voiced by Justice Scalia- where the corporation is viewed as a vehicle through which citizens exercise their rights.

Justice Shah’s dissenting opinion serves as a rare example of upholding both independent corporate personality and corporate citizenship. In some ways, it provides an example of what could have been (but apparently was not) the basis of Justice Kennedy’s opinion for the Court in Citizens United. He proceeds on the assumption that corporations have the same competence as natural persons, except insofar as expressly limited by law, or by their artificial personality. He sees no issues with the fact that a corporation may not be able to exercise all the roles which are available to a natural person under the Indian Constitution. To the contrary, he observes a corporation is free to exercise its citizenship rights, albeit limited in scope. In so doing, he not only grants corporations citizenship, but also also upholds the sanctity of the corporate form, explicitly arguing against piercing the veil and basing citizenship of the corporation on that of its shareholders. In his words,

If the place of incorporation and the centre of management of its affairs do not confer right of citizenship upon the company, it would be impossible to project the citizenship of the shareholders upon the company so as to enable it to claim this reflected right and on that basis to claim relief for breach of fundamental rights.

Thus, after State Trading Corporation, the position of law settled in India was that corporations are not citizens, and that the veil cannot be lifted to grant them Constitutional rights on the basis that their shareholders are citizens. On the latter of these propositions, Justice Hidayatullah’s view is possibly obiter (for reasons explained by Krishnaprasad, the counsel for State Trading Corporation did not call upon the Court to lift the veil), but that point is merely academic, since in TELCO, the Court interpreted State Trading Corporation as authority against lifting the veil. The only way left for a shareholder was to establish that the State action deprived him/her of Fundamental Rights, independent of the corporation (RC Cooper).

The next step in the story comes with Bennett Coleman, where the Court seems to have departed from the latter of the propositions. The facts here involved restrictions on the printing and publishing of newspapers. Using past precedent in Sakal Papers and Express Newspapers, the Court drew a distinction in the case of media corporations. The Court, speaking through Justice Ray, observed that the right to free speech in Article 19(1)(a) includes the right to free press. By so emphasising, the Court seems to have carved an exception to the ‘no corporate citizenship’ rule in the case of media corporations. This is especially so, since the Court does not challenge the proposition that a corporation is not a citizen, contenting itself with distinguishing State Trading Corporation and TELCO on the basis that “There are however decisions of this Court where relief has been granted to the petitioners claiming fundamental rights as shareholders or editors of newspaper companies”. Thus, Bennett apparently left the apple-cart undisturbed, except for allowing media corporations and newspapers to claim the right to free speech.

Viewed in this light, the decision in Bennett Coleman again expresses the same views as those which influenced Justice Kennedy in Citizens United. There too, Justice Kennedy has made the protection of media corporations one of the primary bases of his decision. However, such a similarity between the two legal positions is at odds with the respective Constitutional frameworks. In the United States, the freedom of the press is expressly provided for by the First Amendment. In the Indian Constitution, there is no independent protection for the press, and it is traced only to the general protection of the freedom of speech and expression. As Seervai points out, while both Constitutions thus protect the freedom of the press, it enjoys a more exalted status in the American Constitution, and this is one situations in which this difference assumes significance. Given that the freedom of press derives from the right to free speech and expression and is not independent of it, any restrictions of the scope of the latter should also restrict the former. Thus, if State Trading Corporation holds that the freedom of speech and expression is not available to a corporation, there seems to be little authority for carving out an exception for media corporations. However, that is precisely what Justice Ray does in Bennett Coleman, apparently upsetting the apple-cart more than appears at first sight.

What then emerges from the above, more than slightly tedious discussion? And what significance, if any, does all of it have for the right of a corporation to political speech? No decision to my knowledge has specifically considered the Constitutionality of section 293A of the Companies Act (which regulates the political contribution by companies). However, the application of Bennett Coleman to political speech by corporations poses an interesting question. Will Bennett be interpreted as meaning that corporations can enjoy the right to freedom of speech, or will (as is more likely) Bennett’s ratio be restricted only to the freedom of the press?

Whatever the answer, if any, to the above questions, one can’t but help leave this discussion without a healthy degree of fascination at the similarities between the views expressed in Citizens United and the decisions that have shaped the Indian law. This is particularly fascinating since the Constitutional frameworks are anything but similar- there is no ‘citizenship’ restriction in the US Constitution, and there is no express mention of the freedom of press in the Indian Constitution. However, notwithstanding these differences, both jurisdictions have considered largely similar factors, and arrived at seemingly similar positions- the United States protection of political speech rests on Justice Scalia’s dilution of corporate personality; and the only way political speech of Indian corporations would be protected is by viewing it as speech by its members or shareholders. Only time will tell whether these commonalities assume more than mere academic significance, and whether Citizens United plays any role in shaping the Indian law on political speech.

*An excellent discussion on the decisions in State Trading Corporation and Bennett Coleman, and their implications for the concept of lifting the veil, is provided by Krishnaprasad KV, in the latest issue of the National Law School of India Review. Credit is due to that article for providing a very useful framework of the law, on which I have based parts of this discussion.

6 Comments on "Political Contribution by Corporations – A Comparative Study (Part II)"

  1. Shantanu September 3, 2010 at 5:37 am · Reply

    It is interesting to note that the Parliamentary Sub-Committee, as a part of its review of the Company Bill, 2009, has recommended that the cap on the amount companies may donate to political parties (which is regulated by section 293A of the Companies Act, 1956), should be increased from 5% to 7.5% of the average net profits in three immediate past financial years.

    A more detailed report is available here- http://www.taxguru.in/government-policy/panel-recommends-allow-companies-to-donate-more-to-political-parties.html

  2. pavan kumjar sai ni July 29, 2011 at 10:42 pm · Reply

    http://prasoonsmajumdar.blogspot.com/2011/07/business-of-donations.html

    In most of the cases, there are mutual understandings between parties to allow the corporate to convert their black money into party contributions. Such arrangement also gives a leeway to hawala, untraceable and undeclared money transfer. There are no laws in place that ask parties to file disclosures about the usage of money or rather there is no third-party independent audit about the deployment of such donations. Moreover, PAN Number filing for lower denomination is not even mandatory. And in case the PAN Number is filed, there are no cross-checks to verify the credibility.The matter gets worse in case of cash donations. The recent garland (worth a few hundred crores) gifted to Mayawati, is a case in point.

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