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A Constitutional Analysis To Demonstrate India's Electoral Bond Scheme

What are Electoral Bonds?

Electoral bonds are financial instruments introduced in India as a way for individuals, companies, and unions to make donations to political parties. These bonds are similar to promissory notes and can be purchased from authorised banks. The key feature of electoral bonds is that the identity of the donor is kept anonymous, providing a level of secrecy in political funding.

In electoral bond scheme- "Electoral bond" means a bond issued in the nature of promissory note which shall be a bearer banking instrument and shall not carry the name of the buyer or payee;

"Former Union Finance Minister Arun Jaitley, during the presentation of the 2017-18 Union Budget, highlighted the longstanding issue of the lack of transparency in political party funding in India. To address this issue and promote a cleaner system of political funding, he proposed the Electoral Bonds Scheme. The scheme was designed with the aim of "cleansing the system" of political funding by introducing a mechanism that would enhance transparency and accountability in the process."

On 31 March 2017, the Finance Act, 2017 introduced amendment in various acts. It amended the Representation of the People Act, 1951 (RoPA), the Reserve Bank of India Act, 1934, the Income Tax Act, 1961, and the Companies Act, 2013.
  • Exempted political parties from maintaining detailed records of contributions received through electoral bonds under Section 13A of the Income Tax Act.
  • Permitted the Union government to authorize scheduled banks to issue electoral bonds under Section 31 of the RBI Act.
  • Exempted political parties from disclosing contributions received through electoral bonds in "Contribution Reports" required by the Representation of the People Act, 1951.
  • Removed the upper limit on how much a company could donate to a political party. Previously companies could only donate up to 7.5 percent of three years of the company's net profits under Section 182 of the Companies Act, 2013.

Electoral Bond Scheme

On 2 January 2018, the Ministry of Finance issued a notification that introduced the Electoral Bond Scheme 2018.

Key features of Electoral Bond Scheme, 2018 are as follows:

  • Certain branches of the State Bank of India (SBI) were authorized to sell electoral bonds.
  • Electoral bonds could be purchased in denominations of ₹1,000, ₹10,000, ₹1,00,000, ₹10,00,000, and ₹1,00,00,000 from the SBI.
  • Electoral bonds were available for purchase for 10 days each in January, April, July, and October every year.
  • The identity of the purchaser remained anonymous to everyone except the SBI, which was required to record the buyer's Know Your Customer (KYC) details.
  • Political parties registered under Section 29A of the Representation of the People Act, 1951 (RPA, 1951) that secured more than one percent of the votes in the last general election to the House of the People or a Legislative Assembly were eligible to accept donations through electoral bonds.
  • Political parties had to encash the electoral bonds within 15 days of receiving them. After this period, if not encashed, the funds were deposited to the Prime Minister's Relief Fund.

Concerns Regarding Electoral Bonds

Electoral bonds let people or businesses donate money to political parties without revealing their identity. This brings up concerns about accountability and the chance that hidden motives could impact political parties without the public knowing. The fundamental principle of transparency in political funding has been undermined by the lack of transparency of the Electoral Bonds scheme.

The public is deprived of essential data about the sources of political funding and potential conflicts of interest as there is no compulsion for donors or the parties receiving funds to disclose their identities. Election-related bonds' anonymity and lack of transparency create an atmosphere that is favourable to corruption. The lack of transparency regulations encourages money from outside sources to pour into political parties, raising the possibility of corruption and affecting the fairness of the voting system.

Key Concerns of RBI:

  1. Potential for Money Laundering
  2. Undermining Faith in Currency
  3. Compromising Banking Integrity

The Reserve Bank of India (RBI) expressed concerns regarding the electoral bonds scheme, highlighting potential risks that could jeopardize various facets of India's financial landscape. They're concerned that it might make things less transparent. This means it could be harder to see where money is coming from and going to, which is important for a strong financial system.

RBI also raised alarms about the potential misuse of electoral bonds to legitimize illicit funds, posing a threat to the integrity of the financial framework. Furthermore, there's a risk that people might start to doubt the fairness of India's money system because of how this scheme works and the problems it might bring. These worries show that it's important to think carefully about the electoral bonds scheme and fix any issues to keep India's financial system healthy and trustworthy.

Constitutional Legality of the Electoral Bond Scheme

Association for Democratic Reforms; Common Cause; Communist Party of India (Marxist) have instituted proceedings under Article 32 of the Constitution challenging the constitutional validity of the Electoral Bond Scheme which introduced anonymous financial contributions to political parties.

The petitioners have also challenged the provisions of the Finance Act 2017 which, among other things, amended the provisions of the Reserve Bank of India Act 1934, the Representation of the People Act 1951, the Income Tax Act 1961, and the Companies Act 2013. Petitioners also argued that the scheme allowed "non-transparency in political funding" and legitimised electoral corruption at a "huge scale."

In April 2019, the Supreme Court directed all political parties to submit donation details in a sealed cover to the Election Commission of India (ECI) but refrained from imposing a stay on the implementation of the scheme, citing the need for thorough examination. Multiple pleas were filed seeking a stay on the scheme in 2021, but were rejected. On 31 October 2023, a five-judge Constitution Bench led by CJI Chandrachud, with Justices Sanjiv Khanna, B.R. Gavai, J.B. Pardiwala, and Manoj Mishra heard arguments over three days, which heard arguments in and reserved judgment.

Association for Democratic Reforms v Union of India

"The Supreme Court held that the Electoral Bonds Scheme was unconstitutional for violating the right to information of voters."

The Court unanimously struck down the Union's 2018 Electoral Bonds (EB) Scheme on February 15, 2024. The Bench held that the Scheme infringed upon voters constitutionally guaranteed right to access information as stated in Article 19(1)(a). It made clear that this sort of right extends beyond exercising one's freedom of speech and expression and is essential to developing participatory democracy by holding the government accountable.

The court also concurred with the arguments presented by the petitioners, highlighting that the objective of curbing black money did not align with any of the reasonable restrictions outlined under Article 19(2). Therefore, it was deemed an illegitimate basis for curtailing the fundamental right to information.

The court struck down the amendment Section 29C of RPA, 1951, noting that the initial requirement to reveal contributions exceeding ₹ 20,000 successfully balanced the right to information for voters with the right to donor privacy, particularly since contributions below this amount were considerably less likely to have an impact on political decisions.

The Court further ordered an immediate stop to the distribution of electoral bonds. Electoral bonds that are within the validity period of fifteen days but have not yet been encashed by the political party will have to be returned following which the issuing bank will refund the amount to the purchaser's account.

SBI was instructed to provide the ECI with information about all of the electoral bonds it has bought after April 12, 2019. This will contain information about the prospective purchaser as well as the political parties to whom the bonds were distributed. In addition, the Court mandated that the ECI post the data that SBI had supplied on its official website within a week of receiving it (i.e., by March 13, 2024).

In conclusion, the analysis of India's Electoral Bond Scheme highlights both its potential benefits and constitutional concerns. While it aims to enhance transparency and curb black money in politics, questions regarding its impact on democratic principles, such as anonymity of donors and equitable access to political funding, remain. Further examination and refinement are crucial to ensure the scheme aligns with constitutional values and strengthens democratic processes in India.

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