End of Anonymous Political Donations: Supreme Court Declares Electoral Bonds Scheme Unconstitutional

Shikha Gupta*

Introduction

Politics and money are inherently linked to each other. Finance is crucial for the sustenance and progression of political parties. Electoral money, directly and indirectly, plays a significant role in the country’s politics and electoral outcomes. It is utilized for electoral campaigns including campaigns through social media, television advertisements, and campaign events, enabling candidates and political parties to reach a wider audience and potentially influence voters. 
While Section 77 of the Representation of People Act 1951 (“RPA”) read with Rule 90 of the Conduct of Election Rules 1961 prescribes a limit on the total expenditure a candidate is allowed to make in an election, such restrictions do not extend to political parties. Notably, individual and corporate contributions constitute a significant source of funding for any political party.

On 2 January 2018, the Ministry of Finance in the Department of Economic Affairs notified the Electoral Bond Scheme 2018 (“EBS Scheme”), as a means of facilitating financial contributions to political parties. In a recent landmark judgment of Supreme Court in Association for Democratic Reforms and Another v Union of India and others [Writ Petition (C) No. 880 of 2017] (“Judgment”), the constitutional validity of the EBS Scheme was challenged before the Supreme Court where the Apex Court held that the electoral bonds (“EBs”) are unconstitutional on the grounds that they are in violation of Article 19(1)(a) of the Constitution and are arbitrary in nature. 

Background

The EBS Scheme permits individuals and corporates to donate to political parties anonymously and without limitation by purchasing EBs from the authorized bank. Clause 2(a) of the EBS Scheme defines an Electoral Bond as “a bond issued in the nature of promissory note which is a bearer banking instrument and does not carry the name of the buyer”. The EBS Scheme allowed political parties to receive unrestricted political donations from individuals and corporates without the obligation to disclose the details of these contributions. EBs buyers are not required to disclose their identities or the names of the beneficiary political parties.

With the introduction of the EBS Scheme, amendments were also introduced to the Reserve Bank of India Act 1934 (“RBI Act”), the RPA, the Income Tax Act 1961 (“IT Act”) and the Companies Act 2013 pertaining to political financing and public disclosure, through the Finance Act 2017. The changes brought in the aforementioned acts are as follows:

1. Section 135 of the Finance Act 2017 and the corresponding amendment in Section 31 of the RBI Act: The amendment diluted the exclusive authority of the RBI to issue bearer instruments, authorizing the central government to designate any scheduled bank for issuing EBs.
2. Section 137 of the Finance Act 2017 and the corresponding amendment in Section 29C of the RPA: The amendment stipulated that political parties are no longer required to disclose details of financial contributions received through EBs.
3. Section 11 of the Finance Act 2017 and the corresponding amendment in Section 13A(b) of the IT Act: The amendment exempted political parties from the requirement to maintain records of contributions received through EBs. 
4. Section 154 of the Finance Act 2017 and the corresponding amendment to Section 182 of the Companies Act 2013: The amendment simplified and omitted many of the compliance requirements for corporate political funding. The prescribed cap on corporate fundings to political parties was omitted, allowing corporates to contribute without any limitation. Additionally, the requirement to disclose the amount of contributions made to each political party in a company’s annual financial statement was replaced with the disclosure of the total amount contributed to all political parties by a company in a financial year.

Importance of Free and Fair Elections and Right to Information 

Free and fair elections are an integral component of a democratic setup. However, a free and fair election cannot be ensured without providing citizens with transparency and the Right to Information (“RTI”), as guaranteed under Article 19(1)(a) of the Constitution. In this regard, the Supreme Court in its Judgment held that the EBS Scheme violates the fundamental right of citizens. Furthermore, the EBS Scheme denies a fair chance to voters to access to information regarding political financing necessary for them to exercise their freedom to vote effectively.

The Union contended in favour of the EBS Scheme in that it was introduced with the intention to curb black money and to maintain donor’s privacy, and is a more transparent and legitimate channel as compared to earlier system of cash donations, which were difficult to trace. However, the Apex Court, applying the proportionality test, noted that there are other legitimate alternatives (such as cheques, demand drafts, and electronic and digital payments) to realise the objectives of the EBS Scheme with minimal impact on the RTI. Regarding donor privacy, the Court emphasized that the public interest in free and fair elections outweighs the private interest in confidentiality. 

Transparency in electoral funding is crucial. The RTI is the paramount right of voters, essential for making rational decision and ensuring the conduct of free and fair elections. Moreover, any infringement of the RTI can only be justified if the purpose of the restriction serves one of the grounds specified in Article 19(2) of the Constitution, such as sovereignty and integrity of India, public order, security of the state, decency or morality. The purpose of curbing black money does not align with any of these grounds. 

Anonymity v Transparency

In its Judgment, the Supreme Court rejected the Union’s argument that the EBS Scheme protects donor privacy. The Court observed that the donor may like to keep his identity anonymous is a mere ipse dixit (unproved assertion) assumption. It is impossible to hide donor identity if donation is through banking channel. Further, the authorized bank can reveal the identity of the donor for investigation pursuant to registration of a criminal case or by court’s order/direction. Political parties who are in power could also have access to this information with the authorized bank. Therefore, this protection is only de jure and not de facto, i.e. protection of the identity of the donor exists only on paper, but in practical terms it can always be revealed. Hence, instead of protecting donor privacy, EBs only protects the recipient political party who received the contribution and the amount of such contribution.

The Union contended that the citizens’ right to know is not a general right, and emphasized the need to balance this right  with individuals’ right to keep their political affiliations confidential, as it is a form of political self-expression. Additionally, disclosing details of donations to political parties could potentially subject corporates to apprehension from other political parties. The Supreme Court denied these contentions, highlighting  that under the EBS Scheme, it is still open to the political party to coerce persons to contribute. Further, any form of retribution, victimisation or retaliation against donors exercising their choice to donate to a political party is an abuse of law and power which must be checked and corrected. The wrong itself cannot be a justification or a purpose of the EBS Scheme.

Subsequently, the Court distinguished donor privacy with the confidentiality of secret ballots in elections. While secret ballots are crucial for ensuring free and fair elections, transparency rather than secrecy in the funding of political parties is a prerequisite for free and fair elections. Also, the right to privacy is not absolute and subject to evaluation based on public interest and for legitimate purposes.

Unlimited and Anonymous Corporate Contributions

Large corporations and business houses wield significantly more power and influence over politics compared to ordinary citizens due to their vast financial resources. By leveraging their financial strength and established political connections, these entities can easily influence political outcomes, policymaking, and government decisions. Such practices undermine the fundamental principles of free and fair elections and political equality, enshrined in the concept of “one person, one vote“.

The amendments to Section 182 of the Companies Act 2013 allowed corporations to make unlimited contributions to political parties without disclosing their identities. Before the amendment, companies’ contributions were not allowed to exceed 7.5% of their average net profits during the three immediately preceding financial years. In this regard, the Apex Court considered EBs as arbitrary and violative of Article 14 of the Constitution. The Court reasoned that EBS Scheme permits donations from loss making companies to political parties and opens the possibility of creation of shell companies established solely for the purpose of political funding. Moreover, the amendment removed the control of shareholders over the decisions of the Board on political funding. Consequently, permitting unlimited contributions by corporates through EBS Scheme would undermine democratic principles. 

Directions of the Court 

The Court declared the EBS Scheme and the corresponding amendments in the relevant acts by the Finance Act 2017 to be unconstitutional. Among other things, the Court has also issued the following directions:

1. Fresh issue of EBs is not allowed;
2. The State Bank of India (“SBI”) shall submit the following details of the EBs (purchased since the interim order of the Court on 12 April 2019 till date) to the Election Commission of India (“ECI”) within three weeks, i.e., 6 March 2024:
3. Date of purchase of each EB, name of the purchaser and the denomination of the EB purchased;
4. Details of political parties which have received contributions through EBs; and
5. Details of each EB encashed by political parties including date of encashment and the denomination of the EB.
6. The ECI shall publish the information received from the SBI on its official website within one week of receiving the information, i.e., 13 March 2024.

Impact of the Judgment on Upcoming General Elections and Indian Polity

The Supreme Court’s Judgment on the constitutionality of the EBS Scheme is highly welcomed and deemed critically important, especially with the general elections approaching. It stands as a prominent example of the power of judicial review in curbing arbitrary decisions made by the legislature. After the introduction of the EBS Scheme, many experts and scholar raised concerns about its legitimacy and its misuse by political parties and corporations. The Law Commission of India in its 255th Report highlighted concerns regarding the translation of financial superiority into electoral advantage. The report emphasized that lobbying and capture give undue importance to big donors and certain interest groups, thereby undermining the right of every citizen to equal participation in the polity. Several opposition parties have also claimed that the ruling party has misused the EBS Scheme to obtain political donations from corporate houses in return of political favours. Furthermore, they  alleged that preferential treatment (such as tender and government contracts in various government-aided projects, and donations given after raids by central probe agencies) was given to donors who contributed to the ruling party, while those who did not donate or donated to opposition parties were not afforded the same treatment.

Transparency is crucial for a functioning democracy as it ensures accountability. The Supreme Court’s decision to strike down the EBS Scheme is likely to curb money laundering in Indian politics. The consequences of this Judgment on Indian politics and the outcome of the SBI’s disclosure of EBs’ details to the ECI, as directed by the Court, remain to be seen. 

**Shikha Gupta was a student of Dr. Ram Manohar Lohiya National Law University. She interned with the Impact Collective at Vidhi.