“Democracy is for the people, of the people and by the people”
-Abraham Lincoln
In a democratic polity, informed citizenry and transparent governance are essential. Elections, as a cornerstone of democracy, ensure people’s representation. However, the cost and resource-intensive nature of elections necessitate careful regulation of election funding to prevent the emergence of a dominant party system. Political finance has historically been a breeding ground for corruption. To enhance transparency, the Indian government introduced electoral bonds in 2018. While intended to increase transparency, the scheme’s anonymous nature has ironically legitimized opacity. This article examines the Supreme Court’s constitutional bench judgment on electoral bonds, analysing how the Court has reinforced and expanded concepts related to legislative scrutiny, fundamental rights balancing, and the scope of informational privacy.
Introduction
For a democracy to function progressively, it requires well-informed citizens and effective transparency in governance. Elections are a cornerstone of democracy, playing a crucial role in ensuring the representation of the people in a democratic nation. However, conducting elections can be costly and resource-intensive, highlighting the importance of properly regulating election funding to prevent the misuse of resources, which can lead to a dominant party system. Since the inception of democracy, political finance has often been described as the “wellspring of corruption.” In his 2017 Budget speech, the late Arun Jaitley introduced the concept of electoral bonds, which were officially notified by the central government in 2018. The scheme was implemented through the Finance Acts of 2016 and 2017, leading to amendments in various legislative acts. Electoral bonds allow for anonymous donations, as these bonds do not disclose the donor’s identity. Although the government introduced this new political funding mechanism to create a more transparent system, ironically, electoral bonds have institutionalized opacity in political financing. This article aims to succinctly analyse and summarize the judgment on the electoral bond case passed by the Constitutional Bench of the Supreme Court. Additionally, it examines how the Supreme Court has reaffirmed and enhanced various doctrines related to testing legislative actions, balancing the perpetual conflict between fundamental rights, and defining the extent and reach of informational privacy. The Court’s judgment underscores the need for transparency and accountability in political financing while navigating the complex interplay between privacy rights and the public’s right to information, thereby upholding democratic principles and the integrity of the electoral process.
Background
The electoral bond scheme, initially mentioned in the 2017-budget speech by the late Arun Jaitley, was formally notified on January 29, 2018, after a year-long process[1]. This scheme introduced amendments to various relevant legislations. An electoral bond is a bearer instrument, resembling a promissory note, and an interest-free banking instrument. Individuals or corporate entities can purchase these bonds using checks or digital payments within India. As defined in Clause 2(a) of the Electoral Bond Scheme, 2018, and further clarified in Clause 11, payments for bond issuance are accepted in Indian rupees through demand drafts, checks, electronic clearing systems, or direct debits to the buyer’s account. Citizens or corporate bodies can only acquire bonds from notified branches of public sector banks for ten days each in the months of January, April, July, and October. These bonds are available in specified denominations ranging from Rs 1,000 to Rs 1 crore. The payee can then donate these bonds to registered political parties, which can redeem them within 15 days from their verified accounts. One of the key advantages of the scheme is the provision for anonymous donations. The bonds do not bear the name of the donor. However, the payee must comply with KYC norms and undergo an audit trail at the bank. Additionally, receiving donations via electoral bonds does not require the receiving party to submit any reports. In essence, neither the donor nor the receiver is obligated to disclose the source of the donation [ clause 7(6)]. Only political parties that have secured at least one percent of the votes polled in the most recent Lok Sabha or State election and are registered under Section 29A of the Representation of the People Act, 1951, are eligible for a verified account by the Election Commission of India[2]. Consequently, only parties meeting these criteria can receive donations via electoral bonds. As outlined in Clause 13, the value of the bonds is regarded as income derived from voluntary contributions received by the political party, exempt from income tax under the amended provisions of Section 13A of the Income Tax Act, 1961. Before its final notification, the Electoral Bond Scheme was submitted for review and guidance by the Reserve Bank of India (RBI) to the Committee of the Central Board under the RBI Act. The Committee expressed serious concerns regarding the issuance of electoral bonds in physical form, noting that such issuance could be construed as the creation of currency—a function exclusively reserved for the RBI, which cannot be delegated to any other entity or authority. Additionally, the Committee warned that issuing electoral bonds in physical form could facilitate money laundering by leaving no digital trail of transactions, and may be vulnerable to forgery, cross-border counterfeiting, and misuse by aggregators.
Legislative provisions in question before the Court
Before the introduction of the Electoral Bond Scheme in 2018, Section 31 of the RBI Act authorized only the Reserve Bank of India (RBI) or the Central Government to draw, accept, make, or issue any bill of exchange or promissory note for the payment of money to the bearer of the bond. However, following the implementation of the scheme, the Central Government was empowered to allow any scheduled bank to issue electoral bonds through the insertion of Section 31(3). Under Section 239A of the former Companies Act of 1956, there were stringent regulations governing corporate donations to political parties, as well as contributions exceeding ₹25,000 to any individual or body for political purposes. These provisions included a cap on contributions set at 7.5% of a company’s net annual profits for the preceding three years. Additionally, donor companies were required to be in existence for over three years and could only make contributions following a resolution passed by their Board of Directors explicitly authorizing the donation for a particular purpose. Violations of these conditions could result in penal consequences. Moreover, companies were mandated to disclose in their profit and loss accounts any amounts contributed to political parties during the financial year, detailing the total contribution and the names of the recipients. However, with the introduction of the Electoral Bond Scheme, Section 182(3A) of the Companies Act, 2013, was amended to relax these requirements, thereby permitting companies more freedom in making contributions to political parties without adhering to the previous stringent disclosures and limits. This move has faced criticism due to the perception that it fosters a strong sense of corporate influence in political financing. There were previously stringent conditions for political parties to claim income tax exemptions on financial contributions. For contributions exceeding ₹20,000, political parties were required to maintain comprehensive books and accounts, which had to be audited and submitted to the Election Commission of India. Section 13A(b) of the Income Tax Act, 1961, allowed political parties to receive substantial monetary benefits through donations made via these bonds without incurring tax liabilities. The Amendment Act of 2017 removed the obligation to maintain detailed records of contributions, including the specifics of donors, if the donations were received through electoral bonds. Under Section 29C of the Representation of the People Act, 1951, political parties were required to disclose all details of contributions, including the individual information of each contributor, to the Election Commission of India. Failure to submit such a report would disqualify them from claiming exemptions under the Income Tax Act. However, with the introduction of the Electoral Bond Scheme, political parties were exempted from the responsibility of disclosing details of contributions received through electoral bonds to the Election Commission of India. This exemption has raised concerns about transparency and accountability, as it allows political parties to receive large sums of money without providing detailed information about the sources of these funds, potentially undermining democratic processes and public trust.
Directions by the Court
The Court declared several provisions of various enactments unconstitutional, including the amendment to Section 31 of the RBI Act, the corresponding amendment to Section 29C of the Representation of the People Act, the amendment to Section 13A of the Income Tax Act, and Section 182 of the Companies Act, and issued specific directives. The issuing bank must immediately cease the issuance of electoral bonds. The State Bank of India (SBI) is directed to provide detailed records of all electoral bonds purchased from the date of the Court’s interim order on 12-04-2019 until now to the Election Commission of India. This report must include the purchase date of each electoral bond, the name of the purchaser, and the bond’s denomination. Additionally, SBI is required to submit the details of political parties that have received contributions via electoral bonds during the same period to the Election Commission of India. This submission must also disclose the specifics of each electoral bond encashed by political parties, including the encashment date and the bond denominations. SBI must provide this comprehensive information to the Election Commission of India within three weeks from the date of this judgment, which is 06-03-2024. Subsequently, the Election Commission of India must publish the information provided by SBI on its official website within one week of receiving it, specifically by 13-03-2024. Furthermore, any electoral bonds still within their 15-day validity period that have not yet been encashed by the political party must be returned to the issuing bank, either by the political party or the purchaser, depending on who holds the bond. Upon the return of a valid bond, the issuing bank is obligated to refund the amount to the purchaser’s account.
Conclusion
The analysis of the Electoral Bond Scheme raises significant concerns about the potential implications for transparency, accountability, and the integrity of the political financing landscape in India. While the scheme was introduced with the intent to curb the flow of black money into the political system and streamline donations, it appears to have opened the door to new challenges, particularly regarding anonymity and the lack of a transparent audit trail. These issues could potentially undermine democratic processes by allowing untraceable funds to influence electoral outcomes without proper oversight. To address these concerns, a few strategic reforms could be considered. Firstly, enhancing transparency by mandating stricter disclosure requirements for political parties receiving donations through electoral bonds would ensure better public scrutiny and reduce the risk of undisclosed influence. Secondly, the Reserve Bank of India (RBI) could be empowered with a more active role in monitoring and regulating the issuance and redemption of these bonds, ensuring that such activities do not compromise the institution’s monopoly over currency issuance or enable financial malpractices. Thirdly, implementing robust mechanisms to track and audit the flow of funds—potentially through digital means—could mitigate the risks of money laundering and ensure a clear trail of transactions. In essence, while the Electoral Bond Scheme represents a noteworthy attempt to reform political funding, it requires comprehensive reforms and stringent safeguards to fulfill its intended purpose without compromising the democratic fabric and financial integrity of the nation.
[1] Budget 2017
[2] Government of India, Ministry of Finance, No. 20 (January 2, 2018)
Author: Devu R
Juris Centre 