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ELECTORAL BONDS: COMBATING ILLICIT FUNDING OR INSTITUTIONALISING EXTORTION?
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ELECTORAL BONDS: COMBATING ILLICIT FUNDING OR INSTITUTIONALISING EXTORTION?
AUTHORED BY - CHINMAYEE DESHMUKH,
LAKSH MULCHANDANEY & RAJAN N. SABOO
A political party needs funding to present its mission, goals and plans in order to secure votes. Electoral funding implies the methods
used by political parties to raise funds and finance their activities. Among the various sources of electoral
funding, the primary source is voluntary
contributions made by
individuals as well as corporates. In a
parliamentary democracy like India,
the principal reasons why political funding is essential include, the heavy cost of campaigning, which needs to
be incurred by political parties and the increased democratic participation that results from adequacy of funds.
Free and fair elections are the cornerstone of a democracy and in order for the election process to be free from undue influence, fair
and accountable, transparency in political funding is essential, the opacity in the funding process raises a number of
concerns such as possibility of quid pro quo arrangements. At the
same time the role of black money in electoral funding can weaken the social
fabric, ethical standards and the democratic institutions of the society.
In the year 2017, with the purpose of increasing transparency in
political funding and unmasking
illegal funds. The electoral
bond scheme was introduced in the Finance
Bill, 2017 The electoral bonds are interest free
bearer instruments which can be bought by individuals as well as companies
and can be used to donate funds to political parties
The Finance Act, 2017, introduced along with the electoral bond scheme, certain amendments to Reserve Bank of India Act,
1934, Representation of the People
Act, 1951, Companies Act, 2013 and Income
Tax Act, 1961. These amendments were challenged by Association For Democratic Reforms and Common Cause (A
registered society) by way of a public interest litigation under Article 32 of The Constitution of India, on the
issue of illicit funding of political parties and the lack of transparency in the accounts
of political parties.
By a judgment dated 15th of February 2024, a five-judge constitutional bench of the Supreme Court declared the electoral bond scheme
and the provisions of Finance Act, 2017, which
amended the Representation of the People Act, 1951 and Income Tax Act, 1961
unconstitutional, on the grounds of violation of the Citizens’ Right to
Information, provided under
Article 19(1)(a) of the constitution. The Supreme Court also held the amendments made to the Companies Act, 2013 arbitrary and violative
of Article 14 of Constitution. In order to better enforce the judgment, appropriate directions were issued
to the State Bank of India.
A Brief History
|
1 Feb 2016
|
A significant reform in
the electoral funding was introduced under the Finance Act, 2016, which
allowed foreign companies having a majority share in Indian
companies to donate to political parties
|
|
1 Feb 2017
|
The then finance
minister Arun Jaitely proposed the ‘Electoral bond scheme’ in the lower house of the parliament, in his union
budget speech for financial year 2017-18. He stated
that the objective behind the scheme
was evolving a transparent method of funding to political parties. This announcement of the scheme was followed by amendments to the Reserve Bank of India Act,
1934, Representation of the People Act, 1951,
Companies Act,
2013 and Income
Tax Act, 1961, introduced by the
union on 31st of March 2017.
|
|
2 Jan 2018
|
A notification was
issued by the union to introduce the electoral bond scheme, the notification outlined the attributes of the
scheme, such as denominations in
which the electoral bonds would be sold, the date on which they will be sold among others.
|
|
4 sept 2017
|
The Association for Democratic Reforms
approached the Supreme
Court, challenging the aforesaid amendments made under the Finance Act 2016 and Finance Act 2017,
contending that they were unlawfully enacted as money bills.
|
|
5 Mar 2019
|
The petitioners Association for Democratic Reforms
and Common Cause (a registered society), prior to
the 2019 Lok Sabha elections sought
a stay on the sale of electoral bonds, anticipating the receipt of enormous
|
|
|
amounts of corporate funding by political parties which would play a critical role in the elections.
|
|
29 Nov 2019
|
The petitioners requested for a stay
on the scheme based on the Right
to Information findings.
|
|
9 Mar 2021
|
Another request
for stay against
the scheme was
made by the petitioners owing
to state elections in West Bengal,
Tamil Nadu, Kerala,
Puducherry and Assam, however, the Supreme court denied
the interim stay on the
scheme, stating that the scheme was intended to ensure that everything happened only through
banking channels. It also said that the
State Bank of India had all the relevant information about the transactions.
|
|
7 Nov 2022
|
The Union
Finance Ministry amended
the scheme adding
another fifteen days to
the four, fifteen days windows for sale on account of general elections. In the same year an additional affidavit
was filed against the amendment by the
petitioners.
|
|
31 Jan 2023
|
In order to uncomplicate the hearings, the apex court trifurcated the case into three main issues, namely,
challenges to the scheme, plea to bring political parties under the purview of Right to Information Act,2005 and challenges to
the constitutional validity of amendments to Foreign Contribution (Regulation) Act,
2010 brought in 2016 and 2017.
|
|
16
Oct 2023
|
The case was referred
to a Division Bench, composed of the Chief
Justice of India Justice D. Y, Chandrachud, Justice Pardiwala and Justice
Manoj Mishra, where it was held that as per the provisions of Article 145(3) of the Constitution, the
petition should be referred to a five-judge
bench. Article 145(3) of the constitution provides that a minimum
five judge
|
|
|
bench must
assemble to decide
a case involving a substantial question of law or any reference made under section 143.
|
|
31
Oct 2023
|
This marked the
first day of the constitution bench hearing
|
The government put a cap on cash donations to political parties at rupees two thousand, which would lead to
declaration of assets by the political parties. The then finance minister Arun Jaitely claimed that the reform would enhance transparency and accountability in the political funding landscape and would also prevent creation
of illegal funds.
Jaitely justified the anonymity of the bonds by saying that it was meant
to protect donors’ privacy and
protect them from potential harassment. The government had characterized the scheme as an ‘Electoral reform’ in a
country which is moving in the direction of a cashless digital economy.
Electoral bonds are interest free, bearer money instruments, similar to
promissory notes, which can be bought anonymously by individuals and companies in India. An individual can also
buy them jointly with other individuals. The SBI has been authorized to issue
electoral bonds through its twenty-nine designated branches
by the ministry of finance.
Electoral bonds can be encashed
only by an eligible political
party by depositing the same in its
authorized account with the SBI. Here, eligible political party means a
political party which is registered under section 29A of the Representation
of the People Act, 1951 and has secured
not less than one percent of votes casted in the preceding general election of
the people’s house or state legislative assembly.
The electoral bonds were made available in a number of denominations,
specifically, rupees one thousand,
ten thousand, one lakh, ten lakh and one crore. At the time of its introduction in the year 2018, these bonds were made
available for a term of ten days each in the months of January, April, July and October. However, as per a new
para introduced by way of amendment
in the year 2022, an additional period of fifteen days shall be specified by
the central government in the year of
general elections. The validity of the bonds is fifteen days from the date of issue beyond
which no payment shall be made to
the political party.
The buyers of electoral bonds need to comply with KYC norms. The
application by buyers has to be in
the format specified under Annexure II of the schedule, the applications are verified by the issuing branches. A
noteworthy attribute of the electoral bonds was that the name and details of the buyer were not mentioned on the bonds,
leading to the anonymity of the
donor. Also, the donations through electoral bonds were tax deductible for
donors and exempt for the political parties.
Legal Framework and Legislative Amendments
The Representation of the People Act, 1951 lays down the rules and
regulations regarding elections in India, including
disclosures on expenses,
contribution and maintenance of books of accounts by political parties.
Political parties are registered under section 29A of Representation
of the People Act, 1951and section 29B of the act, empowers political
parties to accept voluntary contributions.
The Income Tax Act, 1951, deals with the treatment of voluntary
contributions. Any person contributing to political parties
by way of electoral bonds can claim
deductions under section
80GGB and section 80GGC. Under section 13A of the said act, income earned
by political parties by way of voluntary contribution is exempt.
Corporate funding to political
parties is governed by the provisions of Companies Act, 2013. Section 182 of the act provides for the
existence of the company for three years, disclosures in profit and loss
account and the requirement of board approval
for making contributions to the political parties. It also provides the fine which may be
imposed on account of breach of the above provisions.
With the advent of the electoral bond scheme certain amendments were made
to the above laws, the constitutional validity
of those amendments was one of the most important considerations of the case.
Petitioners: Association for
democratic Reforms and Communist Party of India (Marxist) Respondents: Union of India and Election commission of India
Bench: CJI D.Y. Chandrachud, Justice Sanjiv Khanna,
Justice B.R Gavai, Justice J.B Pardiwala and Justice
Manoj Mishra
In the case of Association for Democratic Reforms Vs UOI (2024 INSC 113),
the Supreme Court of India ruled that
the electoral bond scheme was unconstitutional as it violated the right to information of the voters. In this judgement, the court declared the amendments made
to Section 29C of the Representation of People Act (RPA), Section 13A of
the Income Tax Act, and Section 182 of the Companies Act via
the
Finance Act, 2017 to be
unconstitutional.
Initially, Section 29C of the RPA[1] required
each political party to disclose the details of the contributions received. Political
parties were required
to submit a report detailing
contributions in excess of Rs. 20,000 to the Election Commission of
India (ECI) before the due date for
furnishing income tax returns under the Income Tax Act. However, the Finance Act, 2017 amended this provision,
removing the requirement for political parties to disclose the details of political contributions.
Additionally, significant changes were made to Section 182 of the
Companies Act[2].
Section 182(1) originally placed a cap on political contributions by companies, limiting
them to 7.5% of their
average net profit over the past three years. The three changes made to Section
182 are as follow:
1. Section 182(1) which provided
for cap was omitted
2.
Section
182(3) was amended and the companies now were required to only disclose the total amount of contributions
made and not how much contribution is made to
which political party.
3.
Sub-section
3A was introduced, specifying that a company can donate to a political party only through a cheque,
bank draft, or electronic clearing system. However,
the proviso to this sub-section states that a company can also make contributions through any instrument
issued under a scheme notified by any current law for
political donations.
In the case, 5 major issues were raised:
·
Is the electoral bond scheme Unconstitutional?
·
Does it violate the right to information of the voters?
·
Can the scheme permit
anonymity to protect
the privacy rights of donors?
·
Does the electoral bond scheme pose a risk to democracy and to the process of free and fair elections?
·
Are curbing of black money, donor privacy
and fear of retribution, victimization or retaliation valid grounds for justifying the electoral bond scheme?
The SC bench
discussed the following points in the judgment:
a) Infringement
of Right to information: The electoral bond scheme had an anonymity provision.
This scheme enabled the donors to donate unlimited amount in the form of promissory
notes to political parties and the political parties were not required to
disclose their sources of political funding to anyone including the election
commission of India. This led to infringement of the Right to know the sources
of political funding of voters, which is essential for making an informed decision
in a democratic process.
b) Lack of De
Facto Anonymity: Despite the scheme's claim to maintain donor anonymity, the Court
noted that the anonymity is only de jure (in law) and not de facto (in practice).
There are sufficient gaps in the scheme that allow political parties to know
the contributors' identities. The purchase of electoral bonds involves banking
transactions that are recorded and can be traced. Although the donors' names
are not disclosed publicly, political parties could potentially access these
records through their banking relationships or other means. The reports and
records of the bonds received that the political parties are required to maintain,
creates a paper trail that could be used to identify donors. This selective anonymity
favors economically resourced contributors, providing them with anonymity from the
public but not from the political parties themselves.
c) Least Restrictive
means test: The constitutional bench drew the inference that the government failed
to apply least restrictive means to balance the right to privacy of donors and
right to information of the voters. Non- disclosure of political funding is not
the least restrictive mean to achieve the purpose of curbing black money. As a result,
the amendments to Section 13A(b) of the Income Tax Act and Section 29C (1) of the
Representation of the People Act introduced by the Finance Act 2017 were found unconstitutional.
d) Doctrine of
Proportionality: Doctrine of proportionality states that there should be a
rational nexus between the desired results and the actions taken to achieve it.
In other words, any restriction on a fundamental right must be necessary and
proportionate to the aim sought to be achieved. The anonymity provision in the electoral
bond scheme did not meet this standard as it restricted the voter’s right to information
disproportionately without sufficient justification.
Additionally, the Justifications given by the state were refuted by the Court.
Curbing of black
money, donor privacy and fear of retribution, victimization or
retaliation are not the valid grounds
for upholding the electoral bond scheme. The SC bench held that there are many other ways to curb black money and violating voter’s
right to information is not one of those.
Instead, concealment of details may lead to laundered money being
legitimized. In view of donor’s
privacy, the electoral bond scheme fails to balance voter’s right to
information and donor’s right to privacy as the scheme ensures an
absolute non-disclosure of political donations
which in turn leads to violation of right to information of voters.
Secondly, Hon’ble Justice Sanjiv Khanna gave this
reasoning, that if the donation is made through banks the question of right to privacy does not
arise as the identity of the person making donation is known to the respective bank’s
officer where donation
is being made and hence, the scheme is
contradictory as the political party may get access to the information. Though victimization,
retaliation and retribution are wrongs but these aren’t the valid grounds for justifying the scheme as usually the party
in power receives the highest amount of donation and hence the argument of retribution is not valid[1].
Electoral bonds first emerged in the Union
Budget of 2017, with the program being unveiled the following year in 2018. According to
the government, the scheme aims to enhance transparency, safeguard against political victimisation for donors, promote
Digital India, and bring political
donations under the tax
purview. The government asserts
that the new approach
will be more transparent, as cash donations to political parties cannot exceed
Rs. 2000 per donation, with any surplus
being given through
bonds. This system protects donors from
political retaliation by preventing the exposure of their information. The
funders were exposed to a lot of political retaliation and backlash
when their information was made public.
Additionally, the cashless transactions will contribute to the progress
of Digital India by shifting major
political donations to digital modes, ensuring efficient tax collection on donations
while exempting recipient
parties from tax.
In contrast, the Election Commission of India (ECI) has expressed major
concerns over anonymous political
funding, submitting an affidavit to the Supreme Court. Senior advocate and civil rights activist Prashant
Bhushan filed a motion, accepted by the Hon’ble Supreme Court, on behalf of the non-governmental Organization for
Democratic Reforms. The ECI worries
that anonymous donations could lead to the infusion of illicit funds into
political campaigns ahead of
elections. Due to changes in political finance regulations over the past two years, the ECI finds it challenging to
verify the legality of the funds. Moreover, the new electoral bond scheme, along with the removal of the foreign
election funding cap, allows foreign
companies with majority stakes in Indian companies to make significant
donations, potentially increasing foreign intervention in Indian elections.
Many people view the judgement as a positive
step toward ensuring
transparency in political
funding. By requiring the disclosure of all electoral
bond donations, the decision aims to shed
light on the sources of political funding, which has often been shrouded
in secrecy. The judgement mandates
that all electoral bond donations be made public within a week, aiming to provide voters with the information
needed to make informed decisions. By making
funding sources public, the ruling seeks to hold political parties
accountable for their
financial backers and reduce the influence of undisclosed money in politics.
Opinion pieces highlight that while the judgement is a milestone, it must
be supported by political will to
bring about broader electoral reforms. The government and political parties need to commit to transparency and accountability for the judgement to have a lasting impact.
Ensuring compliance with the new transparency requirements will require robust mechanisms
and monitoring. Beyond electoral bonds, there is a call for wider reforms in
the electoral system to address
various loopholes and ensure
fairer elections.
Some critics argue that the judgement may face practical challenges in
implementation and could disrupt
existing political funding mechanisms. They caution that without careful execution, the decision might lead to
unintended consequences. Ensuring that all political donations are disclosed
and monitored effectively may be difficult. There are concerns
about how political parties
will adapt to the new requirements and whether it might affect their funding
sources.
Social media and online platforms reflect a generally positive reaction
to the judgement. Many netizens
have welcomed the decision as a much-needed reform to curb corruption and bring
transparency to political funding. Social media users and online commentators
have praised the Supreme Court for
taking a strong stand against opaque political funding. There is a push from the public for the
government to take further steps to ensure clean and transparent elections.
The Supreme Court's judgement on electoral bonds has sparked a wide range
of opinions, from strong support for transparency and accountability to concerns about practical implementation. The judgement is seen as a
crucial step toward cleaner electoral processes, but it requires
political resolve and broader reforms
to be fully effective. The public reaction
is largely positive, with a significant portion of netizens and commentators
advocating for continued efforts
to enhance transparency in political funding.
The SC had directed the the State Bank Of India to stop issuing
electoral bonds immediately (Feb15). It was asked to issue
details of all the parties that have been associated and received the bonds to the Election
Commision of India by March 06,2024. It must furnish
purchase details which
must include date of purchase, name of purchaser,
denomination.
The election commission of India was further directed to make public on
its website all the details of electoral bonds on its official website
by March 13,2024.
The direction to refund the electoral bonds which have not been encashed
by any political party was also
given. The bank had to refund the purchasing party after the bonds were returned.
The Validity of Electoral Bond Payments and Their Implications
The recent judgement declaring the Electoral Bond scheme unconstitutional
has significant implications for
political funding and corporate contributions in India. This delves into the repercussions of this decision on
previously made payments, the requirements for financial disclosure, the continuity of bond subscriptions, and the broader
impact on public
perception and democratic integrity.
Validity of Already Made
Payments:
The ruling on the unconstitutionality of the Electoral
Bond scheme raises
questions about the validity
of payments made under this scheme prior to the judgement. Generally, Payments made under a law that is subsequently
declared unconstitutional are considered valid for the period during which the law was in effect.
Therefore, payments made through the Electoral Bond scheme before the
judgement are likely to remain valid, maintaining their legality and shielding them from retrospective invalidation.
Non-disclosure of Political Contributions:
The judgement provides clarity on the disclosure requirements for
political contributions made through
the Electoral Bond scheme. Specifically, it states that non-disclosure of political
contributions in financial
statements for years prior to the judgement will not attract
penalties. This implies that companies are not required to
retrospectively disclose detailed information
about contributions made through the scheme in their financial statements for the fiscal year 2023-2024. This decision likely aims to prevent undue
administrative burdens on companies and acknowledges the compliance with the then-existing legal framework.
Limits on Subscription to Electoral
Bonds:
One of the critical outcomes of the judgement is the prohibition on the continued subscription to Electoral
Bonds without limits.
Following the declaration of the scheme as unconstitutional, companies can no longer purchase
these bonds freely.
This marks a significant
shift in the regulation of political funding, ensuring that corporate
contributions are subject
to more stringent scrutiny and limits, thereby
reducing the potential
for undisclosed and disproportionately large donations.
Impact on Public Perception and Democratic Integrity:
The judgement has profound implications for public perception of
political parties and their funding
sources. The lack of transparency associated with the Electoral Bond scheme has been a longstanding concern, as it obscures
the origins of political donations and raises
questions about the integrity of the electoral process. The scheme's
opacity undermines trust in political
parties and fosters scepticism about
their financial backers'
motives and influence.
Concerns have been raised about the potential
for electoral bonds to undermine
the democratic process
by enabling large,
undisclosed corporate donations
to sway political parties and election outcomes. This could result in
policies that prioritise corporate interests
over public welfare, further eroding public trust in the democratic
process. By allowing significant
corporate influence in politics, the scheme threatens to skew policy decisions
in favour of donors, potentially marginalising the interests of the general
populace.
The judgement declaring the Electoral Bond scheme unconstitutional
represents a pivotal moment in the
regulation of political funding in India. While it upholds the validity of payments made under the scheme prior to
the ruling, it imposes new limits on future subscriptions and emphasises the need for greater transparency in political contributions. This decision is
crucial for restoring public trust in the democratic process and ensuring that political
parties operate with accountability and integrity. Moving forward, it is imperative to establish robust
mechanisms for the transparent and equitable funding of political activities, thereby safeguarding the democratic values that underpin
the nation.
References:
1. (2024) 2024 INSC 113. Available at: h
ps://main.sci.gov.in/supremecourt/2017/27935/27935_2017_1_1501_50573_Judgement_15-Feb-2024.pdf
(Accessed: 29 July 2024).
2. Livemint (2024)
Electoral bonds ‘unconstitutional’: Netizens Cheer Supreme Court ruling: Today
news, mint. Available at: https://www.livemint.com/news/india/electoral-bonds-unconstitutional-netizens-
hailsupreme-court-ruling-much-needed-belt-treatment-11707980467002.html (Accessed:
29 July 2024).
3. Raj, K.
(2024) The electoral bond verdict needs political resolve, The New Indian Express. Available at: https://www.newindianexpress.com/opinions/2024/Feb/18/theelectoral-bond-
verdict-needs-political-resolve (Accessed: 29 July 2024).
4. Supreme
Court rules electoral bond scheme is unconstitutional: Judgement matrix (2024) Supreme Court Observer. Available at: https://www.scobserver.in/reports/supreme-court-rules-electoral-bond-scheme-
isunconstitutional-judgement-matrix/ (Accessed: 29 July 2024).
5. Constitutionality
of the Electoral Bond Scheme (2024) Supreme Court Observer. Available at: https://www.scobserver.in/cases/association-for-democratic-
reformselectoral-bonds-case-background/ (Accessed: 29 July 2024).
6. A complete
timeline of the Electoral Bond Scheme (2024) Supreme Court Observer. Available at:
https://www.scobserver.in/journal/a-complete-timeline-of-the-
electoralbond-scheme/amp/ (Accessed: 29 July 2024).
Article Information
ELECTORAL BONDS: COMBATING ILLICIT FUNDING OR INSTITUTIONALISING EXTORTION?
Authors: CHINMAYEE DESHMUKH, LAKSH MULCHANDANEY, RAJAN N. SABOO
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/08/01
- Issue 7
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International Journal for Legal Research and Analysis
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