ELECTION LAW

RESEARCH PROJECT

“Electoral Bond: A Curious Case”

Submitted by: Submitted to:

Abhishek Anand Dr. Koushik Bagchi

Roll-786 Assistant Professor (Law)

Sem-10th. NUSRL, Ranchi.

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NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW

RANCHI

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 ABSTRACT
The Indian political regime is afflicted with illicit political funding, corruption, communalization,
and criminalization of politics. As per the ADR report, between the Financial Year 2004-05 and
2018-19 national parties received Rs11,234 crores in donations from unknown sources. Thus, the
State proposed reforms to curb dubious electoral funding by capping cash funding by a single
anonymous donor to Rs2000 (previously Rs20,000) and introducing Electoral Bonds (E-bonds).
In this article, the author has elaborated on the efficacy of this scheme by examining two narratives.
First, the introduction of Electoral Bonds and incidental amendments made in several Acts would:

1) grant exemption to political parties from disclosing donations and payment of tax;

2) facilitate donor anonymity and deleterious corporate nexus and;

3) allow unlimited funding from foreign companies.

Second, the constitutional validity of Electoral Bonds can be challenged as:

1) it infringes the citizens’ Right to Informed Voting under Article 19(1)(a) of the Constitution;

2) introduction of this scheme in the form of a Money Bill goes against the principles enshrined in
the Constitution and;

3) Disregarding grave concerns raised by the Reserve Bank of India as well as the Election
Commission shows abuse of power.

This paper highlights that E-bonds promise minimal transparency, limit digitalization and
legitimize privacy in political funding which breeds corruption. However, these issues can be
resolved by adopting certain reforms such as bringing political parties within the ambit of RTI to
enforce citizens’ Right to Informed Voting, empowering the Election Commission and the Income
Tax Department, checking amendments brought in Acts that promote crony capitalism, and
regulating election expenses. Moreover, the Supreme Court’s intervention in the regulation of E-
bonds is necessary to ensure it does not infringe on the citizens’ fundamental rights and sear
through the fabric of democracy by legitimizing opacity in electoral funding.

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 INTRODUCTION
The Indian political regime is afflicted with illicit political funding, corruption, communalization,
and criminalization of politics. There has been a sharp erosion of the preeminent democratic
structure due to the dominance of money and muscle power. Even after decades of Indira Gandhi
v Raj Narain1 , dubious electoral funding plagues politics. According to the Association for
Democratic Reforms (ADR) Report, from 2004-05 to 2014-15, the income generated by national
parties and regional parties from unknown sources increased by 313% and 652%, respectively.2
Furthermore, between the Financial years, 2004-05 and 2018-19 national parties received
Rs11,234 crores in donations from unknown sources.3 Implying private and not public interest
dictates policy; abets crony capitalism and chauvinistic polity.

The Finance Act 2017, which was passed by the Parliament, brought in four significant changes
to the electoral funding system. These were (a) introduction of Electoral bonds;4 (b) removal of
donations made to political parties by companies in India;5 (c) exemption granted to companies to
disclose donations made to political parties; (d) capping cash donations to a maximum amount of
Rs2000.6 Thus, the State proposed four reforms. These include capping cash funding by a single
anonymous donor to Rs2000 (previously Rs20,000) and the introduction of Electoral Bonds (E-
bonds).

1
(1975) 4 SCC 428.
2
Devesh K Pandey, ‘69% of political funds was from unknown sources’(The Hindu, 08 July 2017).
3
National parties got Rs 11,234 crore donation from unknown sources from 2004-19: ADR’ (India Today, 10 March
2020).
4
Representation of the People Act 1951, s 29C; Reserve Bank of India Act 1934, s 31 Income Tax Act 1961, s 13-A
as respectively amended by Finance Act 2017, s 137, 135, and 11.
5
Companies Act 2013, s 182 as amended by Finance Act 2017, s 154.
6
Income Tax Act 1961, s 13-A as amended by Finance Act 2017, s 11; In addition to the above stated amendments,
the Parliament also amended s 2(1)(j)(vi), Foreign Contribution (Regulation) Act 2010 via Finance Act 2016, in
order to expand the definition of ‘foreign source’ to further broaden the constituency of donors.

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 Electoral Bonds Explained

Electoral bonds are bearer instruments like an interest-free promissory note.7 They are valid for 15
days after being issued from an authorized bank and can be purchased only by making payment
through a bank account in fulfillment of Know Your Customer (KYC) requirements. The
instrument will neither carry the name of the buyer nor the payee to ensure anonymity and can be
redeemed in the bank account of political parties. While the bank will have the details of which
bond is redeemed by which political party, the details will not be made public.8 A purchaser with
a KYC-complaint bank account can buy them from certain notified SBI branches only for specific
denominations by cheque or digitally. Furthermore, the companies will not be required to disclose
the sum spent on electoral bonds on their balance sheet.9 Registered political parties, which have
secured at least 1% vote in recent elections, would be eligible to cash these bonds through a
designated bank account.

Amendments and their legal implication

Exemption from disclosing donation and payment of tax

Electoral bonds are exempted under Section 29(c) of the Representation of People’s Act, 195110,
which mandates each political party to disclose any donations above Rs20,000 in its Annual
Contribution Report made to the Election Commission.11 This exemption regarding disclosure to
the election commission is made possible by way of an amendment to the Reserve Bank of India
Act, 1934, by which the Government can authorize certain banks to issue electoral bonds enabling
the channelization of these bonds through a banking system. Similar amendments were made under
Section 13A of the Income Tax Act 196112 and Section 182 of the Companies Act 2013, conferring
tax exemption to recognized political parties.

7
What is an electoral bond? (Business Standard, 12 February 2018)< https://www.business-
standard.com/about/whatis-electoral-bond> (accessed on 3rd may 2022).
8
0 ‘The Government of India notifies the Scheme of Electoral Bonds’ (Press Information Bureau, Government of
India; 02 January 2018).
9
Companies Act 2013, s 182 - Prohibitions and Restrictions Regarding Political Contributions.
10
Representation of the People Act 1951, s 29C - Declaration of donation received by the political parties.
11
Representation of the People Act 1951, s 29C; Income Tax Act 1961, s 13-A.
12
Income Tax Act 1961, s 13-A - Special provision relating to incomes of political parties.

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 Donor anonymity and deleterious corporate nexus

Section 182 of the Companies Act, 2013 was amended to remove the cap that barred a company
from donating more than 7.5% of the Net Profits in 3 preceding FYs, and the company need not
have existed for three years.13 This provision allows companies that have not earned profits in the
last three years to donate unlimited money to political parties. This draconian amendment could
lead to mushrooming of “shell companies” transferring their illegal money to political parties using
electoral bonds, which is pernicious as various such companies work with the Government.14
Moreover, this facilitates the deleterious corporate-political nexus via cash routing by shell
companies promoting unbridled crony capitalism. Thus, ‘cronies’ in power will get preferential
treatment thereby, increasing economic inequality and abetting corruption. Lastly, donor
anonymity is reserved only for the public as the Government owns major stakes in SBI and can
know information through KYC norms.

Unlimited funding from foreign companies

Through the Finance Act, the Foreign Contribution (Regulation) Act 2010 was amended to enable
unlimited political funding by foreign companies done anonymously without the knowledge of the
Election Commission or Income Tax Department. The existing practice of recognizing electoral
trusts,15 through which such donations could be made, was already a device that created one degree
of anonymity for the donors,16but with the electoral bonds, there will be complete anonymity and
no limit on the number of donations that corporations both foreign and domestic, make to political
parties. These pose prospective legal challenges making political funding more opaque and
obscure.

13
Tanvi Deshpande, ‘Non-tax proposals in the Finance Bill, 2017’ (PRS Legislative Research, 22 March 2017).
14
Prashant Bhushan, The Case That Shook India (3rd edn, Penguin Books 2018) 12. (Accessed 12 th may 2022)
15
Samya Chatterjee & Niranjan Sahoo, ‘Corporate Funding of Elections: The Strengths and Flaws’ (Observer
Research Foundation Issue Brief no. 69, 4 Feb 2014) (Accessed 17 th may 2022).
16
Aradhya Sethia, ‘Where’s the money? Paths and Pathologies of the Law of Party Funding’ (2019) 1 NLUD
Journal of Legal Studies 96,98.

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 Constitutionality of Electoral Bonds

The constitutionality of Electoral bonds can be challenged in three ways;

(a) infringement of the Right to Informed Voting under Article 19(a) of the Constitution;

(b) validity of Electoral Bonds being passed as a Money Bill;

(c) disregard grave concerns raised by the RBI and Election Commission regarding amendments
in certain Acts.

Right to Informed Voting

The doctrine of the informed vote was first exposited by the Supreme Court in ADR v Union of
India17 and later elaborated in PUCL v Union of India18. The doctrine finds its antecedents in
other penumbral rights mentioned under Article 19(1)(a) of the Constitution of India19 – primarily
the Right to Know and the freedom to vote. The Right to Know was first articulated as a facet of
freedom of speech in cases of evidentiary privilege under Section 123 of the Indian Evidence Act.
The Court dealt with the question of whether the State can claim the privilege under Section 123
of the Indian Evidence Act 1872.

In-State of UP v Raj Narain20, the Court held that the Right to Know about government
organizations and functionaries has its origins in freedom of speech guaranteed as a Fundamental
Right under Article 19(1)(a) of the Constitution of India. It further went on to hold that “the people
of this country have a Right to Know every public act, everything that is done in a public way, by
their public functionaries.”

17
(2002) 5 SCC 294.
18
(2003) 4 SCC 399.
19
The Constitution of India 1950, a 19(1)(a).
20
(1975) 4 SCC 428.

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However, it is in Secretary, Ministry of Information and Broadcasting Government of India v
Cricket of Association of West Bengal21 that for the first time, the Supreme Court definitively
established a full-fledged “Right to be Informed” under article 19(1)(a) of the Indian Constitution:
“The freedom of speech and expression includes right to acquire information and disseminate it.”
Moreover, freedom of expression also includes ‘the right to be educated, informed and
entertained.’ “The right to participate”, held the Court, “is meaningless unless the citizens are well-
informed.”

The relevance of the Right to be Informed of funding of political parties was best articulated in
Buckley v Valeo22, where the US Supreme Court was required to decide the constitutionality of
statutory disclosure requirements on contributions made to candidates and political committees.
Further, complete disclosure about the funding of political parties can either result in the ending
of mutually beneficial transactions or push electorates against voting for political leaders who have
used or are most likely to use their position as elected candidates for mutually beneficial
transactions. Therefore, disclosure of sources of funding by political parties is vital information
for the electorates. These two rationales may converge as “the prospect of voter awareness of a
contribution may make the recipient less likely to provide a donor with favors.” One may argue
that electoral bonds merely facilitate but do not mandate anonymity. Even in the matter of ADR,
the law neither prevented nor mandated any disclosure. The Court had held that the absence of
mandatory disclosure itself resulted in the violation of voters’ Right to Know and went on to direct
mandatory disclosure.23 Therefore, even if electoral bonds only facilitate anonymity and do not
mandate it, to the extent these bonds facilitate anonymity, they infringe upon the Right to Informed
Vote.

Electoral Bonds introduced as a Money Bill Article 110 (1) of the Constitution of India defines
Money Bill, and Article 109(1) defines the procedure adopted for the passage of the Money Bill.
A Money Bill can be introduced only in Lok Sabha and contains provisions incidental or related
to “taxation, borrowings by the government, or expenditure from the Consolidated Fund of India
only.”

21
(1995) 2 SCC 161.
22
[1976] 424 US 1 [63].
23
Association for Democratic Reforms v Union of India (2002) 5 SCC 294 [48].

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Furthermore, Article 117 of the Constitution of India defines Financial Bill as a bill that deals with
the heads mentioned in Article 110(1) or any other additional matter. Finance Bill is further
classified into two categories, namely, Category-I and Category-II. Category-I deals with subjects
pertaining to Article 110(1) and Category II with other matters. Electoral Bonds, at best, will fall
under Financial Bill-Category II. Category II bills require the assent of both Lok Sabha and Rajya
Sabha. Therefore, any Financial Bill can be tabled on the floor of Parliament as a Money Bill only
in cases wherein it falls under any of the heads given in Article 110(1) of the Constitution.
However, when it comes to Electoral Bonds, they do not fall under any of the heads mentioned in
Article 110 (1). Thus, the introduction of Electoral Bonds couched in the form of the Money Bill
goes against the theory of separation of powers.

In the case of the Money Bill, Rajya Sabha does not enjoy the same power as Lok Sabha because
if the Rajya Sabha does not pass a money bill within 14 days of its sitting, then it is deemed to be
passed. In a bicameral legislature such as India, the significance of the Rajya Sabha cannot be
discounted as Rajya Sabha keeps a check on the abuse of power by Lok Sabha. Hence, Lok Sabha,
with the introduction of Electoral Bonds in the Finance Act 2017 as a Money Bill, has effectively
bypassed Rajya Sabha, which goes against the democratic norms and values enshrined in the
Constitution. To conclude, Electoral Bonds could not be introduced as a Money Bill, and thus,
allowing the same would mean attacking the sacrosanct Constitution.

Prior consent of the RBI and Election Commission

Revelations have been made through RTI replies that many sections of the Government, which
included the Reserve bank of India (RBI), Election Commission (EC), and a wing of the Finance
Ministry (Financial Sector Reforms and Legislation), objected to the idea of this draconian scheme
since the inception due to their independent reasons. While replying to the Finance Ministry, RBI
stated that only they have the power to issue currency, and an amendment to Section 31 of the RBI
Act will vest that power in the hands of the Government in case of electoral bonds24. Additionally,
RBI stated that the introduction of electoral bonds would allow money laundering and
counterfeiting of currency illegally obtained, which will funnel into the system.

24
Reserve Bank of India Act 1934, s 31.

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In several letters exchanged between RBI and the Finance Ministry, RBI never agreed to the
scheme of electoral bonds.

Moreover, the objections of the Election Commission of India became public when it filed an
affidavit in the Supreme Court. The Commission had categorically stated in their exchange with
the Law Ministry that the introduction of electoral bonds would seriously impact the transparency
of political funding. Additionally, it was alleged that the Government consulted several political
parties on the scheme without consulting them. These allegations establish that critical
stakeholders in and outside the Government were not consulted when the electoral bonds scheme
was being introduced in Parliament despite grave concerns being raised by the RBI and Election
Commission about its legitimacy.

Judicial Intervention

A Public Interest Litigation (PIL) was filed in the Supreme Court by NGOs Association for
Democratic Reforms and Common Cause to question the legitimacy of this utopian scheme,
alleging that it facilitates illegal political funding by foreign lobbyists. The Supreme Court, by way
of an interim order though refused to grant a stay on this scheme. However, it ordered political
parties to disclose all the information regarding donations via Electoral Bonds to the Election
Commission till 15th May 2019. The Court also directed all the political parties to disclose
information of donors like name, amount, and bank details in a sealed envelope by 30th May
2019.25

It is to be noted that most of the parties did not comply with the order and submitted detailed
information related to the donor way after 30th May 2019. It was argued that the KYC norms are
verified by the bank before furnishing the E-Bond, so it enables transparency, but the Apex Court
rightly observed that verification of KYC norms does not guarantee verification of the source of
money. Association for Democratic Reforms applied for a stay on electoral bonds in the Supreme
Court in November 2019 based on the RTI replies, which threw light upon the glaring lapses on
the part of the Government (matter sub-judice)26.

25
Association for Democratic Reforms v Union of India (2019) SC Writ Petition No. 880 of 2017, Order dated 12
April 2019.
26
Ibid.

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The need of the hour is for the Supreme Court to expedite the final hearing on the petition
challenging Electoral Bonds and deliver a verdict clarifying the situation soon. The anonymity
created by the electoral bonds gives an unfair advantage to the ruling party in the Centre. It cannot
be denied that failure to give an early hearing to this matter has already led to the free functioning
of the electoral bonds scheme in several major elections of the country, including the 2019 Lok
Sabha elections. This has jeopardized the process of fair elections in India, which is quintessential
for the functioning of a viable democracy.

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 CONCLUSION
E-Bonds promise minimal transparency, limited digitalization, and an apparent deterrent to black
money circulation. Since political parties are not required to keep records of the donors and
donations, it facilitates tax evasion and channelization of illegal money. Moreover, donor
anonymity and unlimited foreign funding create opacity and non-accountability in the political
funding structure. The cons outweigh the pros. However, specific recommendations, if
implemented, can minimize the damage.

Firstly, there has to be a check on the amendments made to the Finance Act, Companies Act, and
RBI Act as these amendments bolster nefarious corporate black money apportion within the
political realms. Donor anonymity, exemption from disclosing information, and checkless funding
from sources abroad promote crony capitalism thereby, increasing economic inequality and
harming free opportunity due to favoritism to specific businesses. This jeopardizes national
security by acceptance of large donations from unknown sources abroad.

Secondly, political parties should come under the ambit of the Right to Information (RTI), so the
public has the requisite information to make informed decisions during elections thereby,
upholding the Right to Informed Voting. In 2013, the Central Information Commission (CIC) ruled
that political parties can be interpreted as ‘Pubic Authorities’ within the meaning of the RTI Act
and, therefore, can be covered under the ambit of the RTI Act.70 However, all the political parties
have flouted this rule resulting in a breach of the citizen’s right to inquire about the political parties’
donors and expenses.

Thirdly, state funding of elections should be considered, which will also give a fair chance to
candidates who do not have access to large amounts of money. Indrajit Gupta Committee and the
2nd Administrative Reforms Commission recommended complete State funding and partial state
funding, respectively. However, Law Commission, in its 255th Report, rejected the idea of
complete state funding and suggested better regulation of election expenses. Under the system of
state funding of elections, the Government can be mandated to refund each candidate, after the
elections, the expenses incurred by him/her in proportion to the number of votes received by
him/her.

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Thus, candidates without access to much money, if they are popular and if they receive a significant
number of votes, would be able to get a large part of their expenses reimbursed by the State.

Fourthly, the Income Tax Department and Election Commission should be empowered to make
political funding more transparent and canonical. Lastly, Electoral bonds give an unfair advantage
to the ruling party, which hampers the spirit of democracy. To conclude, E-Bonds enhance
transparency between the donor and the donee but not between the public and the politicians.
Electoral Bonds were introduced to bring transparency in political funding but, if left unregulated,
will now indeed challenge the sacrosanct principles of the Constitution, infringe the citizens’
fundamental rights, and sear through the fabric of democracy legitimizing opacity in electoral
funding.

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