“The reason for political contributions by companies is as open as daylight. Even the learned Solicitor General did not deny during the course of the hearings that corporate donations are made to receive favors through quid pro quo arrangements.” 
∼ Supreme Court judgment on electoral bonds

The Supreme Court did not mince words as it unequivocally declared anonymous electoral bonds to be illegal and unconstitutional. The element of “quid pro quo”, embedded in the unlimited and anonymous donations by companies, can play out in several insidious ways.

Here is one self-evident manner in which the “quid pro quo” might have worked after the electoral bonds scheme was launched in 2017.

The many gifts to big business

It may be recalled that the scheme was launched mid 2017, just after the economy was delivered the twin shocks of demonetisation and the launch of a messy Goods and Services Tax. There is enough literature available to suggest that these events broke the back of micro, medium and small scale industry and helped the big corporates further consolidate their market share at the cost of small industry. In subsequent years, many large companies openly admitted – indeed touted – as their achievement that they had taken away substantial chunks of market share from the players in the small and unorganised sector who could not recover from these twin shocks.

As big companies further consolidated their market share through 2018, Prime Minister Narendra Modi delivered another unprecedented advantage to corporate India in September 2019. He slashed the base corporate tax rate dramatically from 30% to 22% for existing companies. The government also reduced the tax rate from 25% to 15% for new companies that launched fresh capital investments projects. The finance ministry sacrificed about Rs 1,45,000 crore by giving this concession to companies.

The finance ministry gave this massive incentive because new capital investments were not forthcoming from large companies.

What happens next is most interesting. By and large the corporate world did not fulfil the original intent of using the tax incentive to make big investments and generate employment. Instead most large companies use the big corporate tax cut of 2019 to just add to their profitability without necessarily making any fresh investments in capacity expansion. In the subsequent four years, corporates would have roughly benefited by about Rs 6 lakh crore from the tax cut. Well, after such a huge bonanza, buying electoral bonds, largely in favour of the ruling regime, should only be a logical next step!

You get a profit, and you get a profit

This is evident from the fact that the top 50 to 100 companies listed on the stock exchange experienced a big boom in their profitability after 2019. There is data to suggest that the NIFTY 50 companies’ combined profitability grew by under 5% annually for many years before 2019.

But post 2019, after the big corporate tax break, their profitability started growing 15% annually. By 2022-23 the aggregate net profits of the top ten profitable companies listed on Nifty had grown beyond Rs 3 lakh crore. The jump in profitability can be traced directly to the big corporate tax cut.

From 2019 onwards, the NIFTy 50 companies started to sparkle even in the stock markets, in anticipation of growing profits. Their turnover growth, however, largely stagnated in the absence of robust demand in the economy.

Then came Covid in 2020 and the government/RBI came up with a slew of concessions , especially big cuts in interest rates. This again disproportionately benefited the large companies which retired more expensive debt with cheaper alternatives and managed to reduce interest costs substantially, again adding to their growing profits. The debt to equity ratio of large companies came down quite sharply during this period even as their stock prices continued to rise.

The larger point is government policies directly added to profitability of the top 100 plus companies. And during this period these companies may have generously bought into the electoral bonds.

This is also a kind of quid pro quo that the Supreme Court has referred to while declaring the electoral bonds illegal and unconstitutional. Allowing companies to contribute unlimited amounts and yet affording them anonymity can hardly escape the charge of quid pro quo. Earlier there was a limit on how much companies could contribute to political parties from their profits and this was mandatorily declared in the annual report. But the electoral bonds scheme did away with both.

Washing away black money

Worse, some of the profits made by these companies may not even be directly used for buying electoral bonds. What if many of these companies have used benami route or shell companies to buy electoral bonds? During the arguments, the chief justice did ask this pertinent question: “How do we know that loss-making companies are not buying electoral bonds?”

Many shell companies are not meant to make profits and are used merely as vehicles to launder money. How do we know such companies have not been used to buy electoral bonds? Besides, promoters of companies which have defaulted on bank loans and have benefited from huge write offs (Rs 14 lakh crore under this regime) are still quite wealthy personally and may have bought electoral bonds through benami shell companies. How do we know this hasn’t happened on a significant scale?

There are too many questions – none answered – in the pernicious electoral bonds scheme. Once the list of corporate donors is released, there will be some clarity.

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