SC Says It Will Hear Electoral Bonds Case Soon – Why is it Under Challenge?

"If it was not because of COVID, I would have heard this. Let us see, we will take this up", CJI Ramana said.

"If it was not because of COVID, I would have heard this. Let us see, we will take this up", Chief Justice NV Ramana said on Tuesday, 5 April, as he agreed to hearing a petition challenging the Electoral Boards Scheme on an urgent mentioning.

(Image: Arnica Kala/The Quint)

"If it was not because of COVID, I would have heard this. Let us see, we will take this up", Chief Justice NV Ramana said on Tuesday, 5 April, as he agreed to hearing a petition challenging the Electoral Boards Scheme on an urgent mentioning.

Mentioning the petition filed by Association for Democratic Reforms, a non-governmental organisation (NGO), advocate Prashant Bhushan had informed the apex court:

"This matter has not been listed for more than a year. Every two months, fresh tranche of electoral bonds are issued. In fact today, there is a report that a Calcutta based company has paid Rs 40 crores through electoral bonds to stop excise raids."

"This is distorting democracy," Bhushan added, according to LiveLaw.

According to media reports Kolkata-based IBG Agro Industries has said that its board has approved contributions of up to Rs 40 crore to political parties via electoral bonds. In a disclosure to stock exchanges, they also reportedly spoke about “excise related issues being faced by/affecting the company”.

So far, Communist Party of India (Marxist), and NGOs Common Cause and Association for Democratic Reforms (ADR) are among the petitioners who have challenged the legality of the scheme.

In 2021, however, the then Chief Justice SA Bobde had refused to stay the electoral bonds scheme ahead of assembly elections in five states. This came even after the Election Commission had already filed a counter-affidavit dubbing the scheme a "retrograde step as far as transparency of donations is concerned" and seeking its withdrawal.

What is the Electoral Bonds Scheme? How Does it Work?

The Electoral Bonds scheme, introduced through the Finance Act 2017, allows individuals or corporations to purchase electoral bonds, which can then be provided to political parties. The bonds are bearer instruments, so the political parties just need to deposit them in their accounts to obtain the amount – the donor remains anonymous.

The petitions against electoral bonds are not just about the bonds themselves. The petitions also challenge the changes to our laws on disclosure of political donations in the Representation of People Act 1951, Companies Act 2013, Income Tax Act 1961 and RBI Act 1934. Most of these changes were brought in by the Finance Act 2017.

The electoral bond scheme, therefore, needs to be viewed as a composite of the following elements:

THE BONDS

• Can be purchased from selected SBI branches on a quarterly basis. The value of each bond can be Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh or Rs 1 crore.

• Any individual or corporation which satisfies certain KYC requirements can buy a bond; their name or other details are not entered on the instrument. The details furnished during KYC are supposed to be confidential, though they can be shared on demand of a competent court or a request by a law enforcement agency.

• Every registered political party which received at least 1 percent of the vote at the previous Lok Sabha elections or state elections gets an account in which the bond amounts can be deposited within 15 days of their issue.

TAX EXEMPTION FOR POLITICAL PARTIES

• Political parties don’t pay tax on “voluntary contributions” to them, provided certain details of such donations are properly maintained by them. Previously, the political parties had to maintain a record of all donations in excess of Rs 20,000, including the name and address of the donor (Section 13A, Income Tax Act).

• However, Finance Act 2017 created an exception to this for donations greater than Rs 20,000 which are made through electoral bonds: not only are these tax exempt, the political parties don’t need to record the details of the donor.

LIMIT ON CASH DONATIONS

• Earlier, cash donations (which could remain anonymous) could be made to political parties in amounts up to Rs 20,000. This has now been reduced to a Rs 2,000 limit.

• Any donations above Rs 2,000 have to be in cheque, bank transfers or electoral bonds.

LIMIT ON CORPORATE DONATIONS

• Previously, there was a cap on the amount of money that a company could donate: 7.5 percent of its average net profits during the previous three financial years (first proviso to Section 182(1) of the Companies Act). This was meant to prevent shell companies from being set up to funnel money into political parties.

• This cap was removed by Finance Act 2017.

DISCLOSURE BY CORPORATE DONORS

• Previously, companies needed to disclose the amount of money donated and the names of the political parties to which they donated money in their profit and loss accounts (Section 182(3) of the Companies Act).

• However, the requirement to disclose the names of the political parties was removed by Finance Act 2017.

DONATIONS BY FOREIGN COMPANIES

• India has strict laws against political parties receiving funding from a “foreign source”. Under the old law in 1976 and the new law in 2010, political parties cannot even accept donations from an Indian company if it is a subsidiary of a foreign company.

• Finance Act 2016 made a retrospective amendment to the 2010 law, which meant the restriction would not apply to such Indian subsidiaries if their share capital is below a specified amount. This limit was conveniently fixed in the relevant FEMA rules to exempt all donations to political parties from such companies till now.

• Finance Act 2018 extended the retrospective protection all the way back to 1976.

What Have the Petitioners Said in the Case?

The Association for Democratic Reforms and Common Cause had filed a petition against the scheme in the Supreme Court after it was brought into law in the Finance Act 2017, in which they argue the scheme is “unconstitutional, illegal and void.”

The Communist Party of India (Marxist) – CPI(M) – also filed a petition against the scheme in 2018, in which they have argued that the scheme encourages corruption and removes safeguards meant to ensure transparency in electoral funding.

There are three broad arguments on constitutionality which can be derived from the petitions in the case

CONSTITUTIONAL ISSUE I: THE ‘RIGHT TO KNOW’

In a number of previous decisions, the Supreme Court has held that freedom of speech and expression under Article 19(1)(a) of the Constitution also includes a ‘right to know’ about the activities of political parties and candidates, including their funding. This is essential for voters to make an informed choice and exercise their freedom of expression when voting.

It is not difficult to see how the identity of corporate donors of a political party will impact what new laws and policies they will seek to introduce, and how existing laws and policies will be implemented.

The electoral bonds scheme, by making the bonds anonymous, and by removing the requirements on companies to disclose which parties they are donating to, deprives voters of this crucial information, and thereby violates their right to know.

CONSTITUTIONAL ISSUE II: MANIFEST ARBITRARINESS

Any law which is manifestly arbitrary violates Article 14 of the Constitution of India – an unreasonable or capricious law, or a law which has no connection to its intended purpose – would be unconstitutional.

There are a number of ways in which the electoral bonds scheme appears to be manifestly arbitrary.

• The amendments to the laws required for it actually go against the stated purpose of the scheme as well as why those legal provisions were introduced in the first place: to improve transparency in donations to political parties and eliminate black money in politics.

• The amendments to the rules on foreign contributions were made without any rational basis. The removal of limits on corporate funding means that shell companies and companies making losses can also donate to political parties, with no countervailing restriction.

• The amendments and elements of the scheme as it stands were never recommended by any independent body such as the Law Commission or the Election Commission, who have both in fact recommended limits on corporate spending and improved transparency on who is funding political parties.

• It is also difficult to see how the restriction on the right to know created by this scheme can be justified as a ‘reasonable restriction’ on freedom of speech under Article 19(2).

CONSTITUTIONAL ISSUE III: THE MONEY BILL QUESTION

Money Bills are a special form of legislation, which basically only need approval of the Lok Sabha. If the Rajya Sabha suggests any amendments to these laws, the Lok Sabha is not bound to consider them and their version can be pushed through despite any protests by the Upper House of Parliament.

Finance Acts are generally quintessential Money Bills because they are supposed to deal with the budget and taxation. According to Article 110 of the Constitution, Money Bills are laws which only contain provisions dealing with taxes, regulation of government finances, and matters relating to the Consolidated Fund of India.

The key amendments relating to the electoral bond scheme do not fall within this constitutional definition of Money Bills – how can amendments to the Companies Act on disclosure satisfy the test of Article 110, for instance? – and yet were enacted via a Money Bill: the Finance Act 2017.

This was not just a procedural mistake, but an illegality, which means the court can look into it, and invalidate the Speaker’s decision to certify these elements of the Finance Act 2017 as a Money Bill.

What Has the EC Said About this Issue?

The Election Commission of India (ECI), in March 2019, told the apex court, in a counter-affidavit, that the 'Electoral Bonds Scheme' has a serious impact on transparency in political funding.

The commission also informed the court that it had written a letter to the Ministry of Law and Justice, expressing their concerns, in May 2017 itself — immediately after the passage of the Finance Act 2017.

In its letter to the ministry, the ECI had said:

“It is evident from the Amendment which has been made, that any donation received by a political party through an electoral bond has been taken out of the ambit of reporting under the Contribution Report as prescribed under Section 29C of the Representation of the People Act, 1951 and therefore, this is a retrograde step as far as transparency of donations is concerned and this proviso needs to be withdrawn.”

Further, the ECI had stated, that in a situation where contributions are not reported, it cannot be ascertained that the political party has not taken any donation in violation of provisions under Section 298 of the Representation of the People Act, 1951.

The Representation of the People Act prohibits political parties from taking donations from Government Companies and Foreign sources.

As per the poll body, anonymous corporate donations could also lead to an increase in the utilisation of black money for the purposes of political funding through shell companies.

However, in March 2021, the EC had, in the top court, opposed a stay on electoral bonds, stating that they are not opposed to the electoral bonds, but “we want transparency.”

The EC had, in a seeming u-turn, said via their counsel senior advocate Rakesh Dwivedi:

“We are against stay of electoral bonds as then we will go back to the unaccounted cash system.”

Further, according to LiveLaw, they had stated that the issue of transparency can be considered at the final argument stage.

So Why Hasthe SC Not Stayed the Scheme?

The Supreme Court had in March 2021, refused to stay the issuance and sale of electoral bonds ahead of the upcoming Assembly polls, stating that "sufficient safeguards are already in place."

“The bonds are released at periodical intervals in January, April, July and October of every year; that they had been so released in the years 2018, 2019 and 2020 without any impediment, and that certain safeguards have been provided by this Court in its interim order dated 12.4.2019, we do not see any justification for the grant of stay at this stage.”

Supreme Court

The bench, led by CJI Bobde, had observed that the scheme was introduced to make sure that political donations were made through banking channels, and that donor anonymity could be "pierced" by drawing information from the records filed before public authorities and doing "match the following".

Speaking to The Quint, experts had questioned this order as the 'safeguards' referred to by the court had been issued in an interim order dated 12 April 2019, and only related to information on donors up till 30 May 2019.

The order also failed to address the information asymmetry created because only the central government can pierce the identity of donors from information obtained through the SBI, not the public or opposition parties.

Read the full analysis of 2021's Supreme Court order here.

In April 2019, an apex court bench led by the then Chief Justice Ranjan Gogoi had delivered an interim order refusing to stay the electoral bonds scheme – while at the same time directing all political parties to provide details of donations received through electoral bonds to the Election Commission by 30 May.

The petitioners had sought interim measures — a stay on the electoral bonds scheme, or at least an order to the State Bank of India (which sells the bonds) to disclose details about the bonds — on the basis that the sale of these anonymous bonds during election season affected the level-playing field that is supposed to exist at this time.

Analysis of party funding disclosures had revealed that one political party appeared to be the beneficiary of most of the bonds purchased.

They also argued that voters should know who is funding political parties at this time when they need to vote for political candidates.

This order, however, did not affect the broader challenge to the constitutionality of the scheme, which Chief Justice Ranjan Gogoi noted is a “weighty” issue and requires further time and arguments.

Thus, 2019’s order ended up being an ineffective one, neither ensuring transparency and the right of voters to know, nor helping to ensure a level-playing field during this election.

Read this analysis of 2019's order for more details.

The Centre's Defence of the Scheme

Former Finance Minister Arun Jaitley had been a vocal proponent of the electoral bond scheme, and wrote about how he felt it would improve transparency back in 2017 after the introduction of the Finance Bill 2017. According to him, the scheme “envisages total clean money and substantial transparency coming into the system of political funding.”

Excerpts from his article, including this justification of the scheme, have been quoted in the Central government’s affidavit to the apex court, which denies that the scheme is arbitrary or brings unreasonable restrictions on freedom of information.

The key arguments raised by the government to support the scheme are as follows:

1. The short life-cycle of the bonds and their limited availability means misuse of the bonds will be difficult.

2. There will be transparency since the donors will have to reflect the amount of donations made in their balance sheet, and requires them to use the banking route to donate.

3. The returns of political parties will specify how much money they have received through electoral bonds, which will provide accountability.

4. The right of donors to purchase bonds without disclosing their preference of political party is in furtherance of the right to privacy, and that ensuring anonymity is an extension of the right to vote in secret ballot.

5. The Money Bill issue is already under challenge in the Supreme Court in another writ petition Kudrat Sandhu vs Union of India, and so this issue can only be looked at after the court decides that case.

6. The electoral bonds scheme is part of the government’s larger policy of fighting black money and encouraging a cashless economy, and the courts are not supposed to interfere in matters of policy.

But Here's Why Experts Are Still Critical About the Scheme...

The electoral bond scheme has come in for significant criticism ever since it was announced. Though other political parties have not made much noise (perhaps because of the benefits that they could also get from it), experts have been ringing the alarm bells for quite some time.

• When the Finance Bill 2017 was announced, before the amendments became law, the Election Commission actually wrote to the Ministry of Law & Justice to protest the scheme, which they termed a “retrograde step” which opened up the possibility of setting up shell companies and routing black money. You can read more about how the Commission rebutted the Centre’s justifications here.

• Former Chief Election Commissioner OP Rawat gave an exclusive interview to The Quint in which he argued that electoral bonds actually make the whole system opaque, and vulnerable to manipulation. He confirmed that the Election Commission was never consulted on the plan to introduce the bonds.

• SY Quraishi, another former Chief Election Commissioner, has also criticised the scheme for increasing opacity. Indian political researcher and expert Milan Vaishnav notes that the system does appear to be in keeping with the Modi government’s “war on cash”, but there is “by design, nothing transparent about the scheme.”

• Milan Vaishnav also points out that the ruling government will always be able to find out who has bought which electoral bond. Constitutional scholar and lawyer Gautam Bhatia has also highlighted the information asymmetry in the Hindustan Times, which he argues: “threatens to skew the process in favour of whichever political party is ruling at the time, something that was in evidence when figures revealed that the Bharatiya Janata Party has been the largest recipient, by some distance, of electoral bond funding.”

• The ability of the government to track purchasers of electoral bonds, which isn’t supposed to be possible, is only emphasised by the fact that each bond contains a unique secret alphanumeric number only revealed by UV light, as The Quint exclusively revealed in 2017.