Are Electoral Bonds Constitutional? Here’s What You Need to Know

SC is set to hear PILs against electoral bonds. Why do critics argue they are opaque? What is the govt’s defence?

On Tuesday, 26 March, the Supreme Court was supposed to hear petitions challenging the constitutionality of the electoral bonds scheme, which came into operation from 2 January 2018. The matter has now been adjourned to 2 April.

The scheme 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 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.

The Centre filed an affidavit in the apex court on 14 March 2019 in which it has argued that the scheme actually promotes transparency, and keeping donors anonymous is for their benefit.

Here is everything you need to know about the arguments, and the issues that the Supreme Court needs to consider.

How Does the Electoral Bond Scheme Work?

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.

Petitioners: Why the Electoral Bond Scheme is Unconstitutional

Both petitions point out the big-picture consequences of these amendments, which they argue will have a negative effect on Indian democracy.

• According to the PIL filed by Common Cause and ADR, the amendments when read together show that electoral bonds are “designed to keep the identity of donors secret from company auditors, the Income Tax authorities, the Election Commission, and finally from the Public at large who are the voters.”
• This is argued to be against public policy since it reduces transparency and allows foreign interference.
• The CPI(M)’s petition argues that the amendments run contrary to the recommendations of the Election Commission and Law Commission of India, and warns that these amendments will lead to a “strengthening of corporate influence over governance.”
• They allege this will lead to an increase in quid pro quo arrangements between corporates and governments, and more crony capitalism.

These overarching concerns are tied into more technical legal arguments as well, to establish that the whole scheme should be struck down.

There are three broad arguments on constitutionality which can be derived from both petitions.

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 arbitrarily 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.

Electoral Bonds Scheme is Constitutional and Good for the Country: Government

Finance Minister Arun Jaitley has 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 this 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.

How do the Arguments Before the Court Stack Up?

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.”
• 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 BJP has indeed received a disproportionate amount of electoral bond money – as an example, of the Rs 222 crore worth of electoral bonds sold in March 2018, Rs 210 crore was donated to the BJP (92%).

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 last year.

The government affidavit does not go into much detail countering the constitutional arguments raised by the petitioners, which do seem to be on solid footing in terms of precedent and reasoning. Still, it is difficult to predict how the court will view the arguments, with the government certain to make more detailed submissions during the hearings.

The arbitrariness issue is likely to see vociferous arguments from the government on how the courts cannot go into questions of policy which have been teased in the affidavit. The right to know is being countered with the right to privacy (an interesting move for a government which argued that privacy wasn’t a fundamental right), though a long line of cases on the importance of transparency in political funding should justify any restriction on the right to privacy.

The Money Bill argument should be a strong one for the petitioners, but the apex court hasn’t got a good track record when it comes to keeping the Modi government’s attempts to use the Money Bill route and bypass the Rajya Sabha in check. The best example is the Aadhaar case, of course, where Justice Chandrachud’s dissenting opinion called it a “fraud on the Constitution”.

One of the other major worries with this case is how long it has taken to be heard despite dealing with an urgent subject, especially in light of the 2019 elections. Unlike the demonetisation challenge, at least it is being heard, but the potential adverse consequences of the scheme will already play a major role in deciding who forms the next government.