Supreme Court Verdict on Electoral Bonds Scheme (2024)

  1. Introduction
    • Electoral Bonds Scheme (EBS): Introduced in 2018 through the Finance Act, 2017, allowing individuals and companies to donate anonymously to political parties.
    • Supreme Court Verdict (2024): A five-judge Constitution Bench headed by the CJI unanimously struck down EBS as unconstitutional for violating the Right to Information (Article 19(1)(a)).
  2. What Are Electoral Bonds?

    Definition:

    • Electoral Bonds are interest-free bearer instruments that function similarly to promissory notes, payable to the bearer on demand. These bonds were introduced to facilitate transparent political donations while maintaining donor anonymity.
    • Being bearer instruments means that ownership is not recorded, and whoever possesses the bond can encash it, ensuring the donor's identity is not disclosed publicly.

Legal Framework:

  • Introduced through the Finance Act, 2017 and came into effect on January 29, 2018.
  • Amendments were made to the Representation of the People Act, 1951, the Income Tax Act, 1961, and the Companies Act, 2013 to enable their use.

Eligibility:

  1. Eligibility of Donors:
    • Who can donate?
      • Any citizen of India or entity incorporated in India is eligible to purchase electoral bonds.
      • Donations can be made individually or jointly with other individuals.
    • Restrictions:
      • Foreign citizens and foreign companies are not allowed to purchase electoral bonds.
      • Anonymous cash donations to political parties are capped at ₹2,000 (previously ₹20,000).
  2. Eligibility of Political Parties:
    • Who can receive donations?
      • Only political parties registered under Section 29A of the Representation of the People Act, 1951 can receive electoral bonds.
      • The party must have secured at least 1% of the votes in the most recent Lok Sabha or State Legislative Assembly elections.
    • Account Verification:
      • Political parties are required to maintain a designated bank account verified by the Election Commission of India (ECI).
      • The electoral bonds can only be encashed into this verified account.

Process: Step-by-Step

  • Issuance by SBI:
    • Electoral bonds are issued exclusively by the State Bank of India (SBI), which acts as the sole authorized bank.
    • Bonds are available for purchase during specific sale windows: January, April, July, and October each year.
    • Sale periods last for 10 days each quarter, with an additional 30-day window during General Elections.
  • Denominations Available:
    • Bonds are issued in fixed denominations of ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh, and ₹1 crore.
    • No upper limit is set for donations, allowing both small and large contributions.
  • Validity and Encashment:
    • Bonds are valid for 15 days from the date of purchase.
    • Within this period, political parties must encash the bonds by depositing them into their designated verified bank account.
    • Bonds not encashed within 15 days are deposited into the Prime Minister’s Relief Fund.
  • Mode of Payment:
    • Bonds must be purchased using cheque, demand draft, or digital banking methods—no cash payments are allowed.
    • Purchasers are required to fulfill KYC (Know Your Customer) requirements to ensure legal compliance.
  • Anonymity and Confidentiality:
    • Donor identities are kept confidential and are not disclosed to the public or the receiving political party.
    • However, the government, through SBI, has access to donor details, raising concerns about information asymmetry.
  • Disclosure Requirements:
    • Political parties must report donations received through electoral bonds to the Election Commission of India (ECI).
    • However, they are not required to disclose the names of donors, ensuring donor anonymity.

Key Features of Electoral Bonds:

  • Interest-Free: Electoral bonds do not accrue interest, making them non-profitable financial instruments.
  • Confidential Donations: Donor identity remains anonymous, with only SBI having access to the records.
  • Limited Validity: Bonds must be encashed within 15 days to ensure quick financial transactions.
  • Restricted Access: Only verified political parties with a minimum 1% vote share can receive donations.
  • Quarterly Sale Windows: Bonds are available during fixed sale periods each quarter.
  • Regulatory Oversight: Donations are regulated under the Representation of the People Act, 1951, the Income Tax Act, 1961, and the Companies Act, 2013.

Amendments to Facilitate Electoral Bonds:

  • Representation of the People Act, 1951:
    • Section 29C was amended to exempt political parties from disclosing donations received via electoral bonds.
  • Income Tax Act, 1961:
    • Companies were allowed to donate unlimited amounts to political parties without declaring the recipients
  • Companies Act, 2013:
    • The limit of 5% of average net profits for corporate donations was removed, allowing unlimited political contributions.

Controversy and Supreme Court Verdict (2024):

  • Verdict: A five-judge Constitution Bench of the Supreme Court of India declared the Electoral Bonds Scheme as unconstitutional on February 15, 2024, citing violations of:
  • Right to Information (Article 19(1)(a)) due to donor anonymity.
  • Principle of Proportionality: Restrictions imposed on transparency were disproportionate to the objective of curbing black money.
  • Violation of Equality: Unlimited corporate donations risked influencing political processes, violating the principles of free and fair elections.
  • Transparency: SBI was directed to disclose electoral bond details to the Election Commission of India (ECI) by March 31, 2024.

Key Judgement Principles:

  • Established that the Right to Information about political funding is essential for citizens to make informed electoral decisions.
  • Asserted that the state must use least restrictive means when limiting fundamental rights.
Supreme Court Verdict on Electoral Bonds Scheme (2024)

Government's Rationale for Introducing EBS

The Electoral Bonds Scheme (EBS) was introduced in 2018 to improve transparency and accountability in political funding while protecting donor privacy. Key objectives included:

  • Transparency:
    • Donations were to be made through KYC-verified purchases from State Bank of India (SBI), ensuring transparency in funding.
  • Reduced Misuse:
    • Limited sale windows (10 days per quarter) and a short validity period (15 days) aimed to prevent misuse and illegal transfers.
  • Donor Anonymity:
    • Anonymity was intended to protect donors from post-election harassment or political retaliation.
  • Political Accountability:
    • Political parties were required to submit details of electoral bond donations to the Election Commission of India (ECI).
  • Curb Black Money:
    • The scheme aimed to reduce cash donations, lowering the anonymous cash donation limit from ₹20,000 to ₹2,000 to discourage untraceable funding.

Supreme Court's Key Rulings Against EBS (2024)

On February 15, 2024, a five-judge Constitution Bench of the Supreme Court of India, led by the Chief Justice of India (CJI), struck down the Electoral Bonds Scheme as unconstitutional for violating fundamental rights:

  • Violation of Right to Information (Article 19(1)(a)):
    • The Court ruled that citizens have a fundamental right to know the sources of political funding, essential for making informed electoral choices.
  • Lack of Proportionality:
    • The Court found that the scheme's restrictions on transparency were disproportionate to its objective of curbing black money.
  • Failure to Adopt Least Restrictive Means:
    • The government could have adopted less restrictive measures that did not infringe on fundamental rights, such as mandatory public disclosure of donations.
  • Violation of Equality:
    • Unlimited corporate donations could lead to undue influence over political parties, violating the principles of equality and fair elections.
  • Unlimited Corporate Donations:
    • The removal of the 5% profit cap under the Companies Act, 2013 allowed companies, including loss-making entities, to donate unlimited amounts, raising concerns of crony capitalism.
  • Conflict with Existing Laws:
    • The scheme contradicted the Representation of the People Act, 1951, which requires political parties to disclose all donations above ₹20,000.
  • Transparency for Accountability:
    • The Court directed SBI to disclose details of all electoral bonds purchased since the scheme’s inception and submit them to the Election Commission of India (ECI) by March 31, 2024.

Implications of the Verdict

Positive Impacts

  • Enhanced Transparency:
    • The Supreme Court's ruling mandates public disclosure of political donations, making political funding more transparent.
    • Voters can now make informed electoral choices by knowing which individuals and entities fund political parties.
  • Reduced Corporate Influence:
    • Limiting anonymous corporate donations reduces the risk of quid pro quo arrangements, where businesses donate in exchange for favorable policies.
    • The removal of unlimited corporate donations ensures a more level playing field in elections.
  • Restored Electoral Integrity:
    • Transparency in political funding strengthens public trust in the electoral process.
    • Reducing opaque donations helps ensure elections are conducted fairly and ethically.

Concerns

  • Unregulated Cash Donations:
    • With the end of electoral bonds, political parties may revert to cash donations, which are harder to trace and regulate.
    • This could undermine the transparency achieved by reducing the anonymous cash donation limit from ₹20,000 to ₹2,000.
  • Alternative Funding Methods:
    • Political parties might seek new opaque channels to bypass disclosure requirements, such as:
      • Foreign donations through complex corporate structures.
      • Third-party intermediaries that do not fall under existing regulations.
      • Unregulated digital transactions and crowdfunding to evade scrutiny.

Way Forward:

  • To address these concerns, the government could introduce mandatory disclosure of large donations, cap cash donations, and promote state funding of elections.

Arguments Against Electoral Bonds

  • Right to Know Violated:
    • Citizens’ Right to Information (Article 19(1)(a)) was violated as donors’ identities were not disclosed.
  • Information Asymmetry:
    • The government could access donor details through SBI, creating an unfair advantage over opposition parties.
  • Loopholes for Black Money:
    • The removal of the 5% profit cap encouraged companies, including shell companies, to donate unlimited amounts, raising concerns of money laundering.
  • Shareholder Rights Violated:
    • Companies could donate without obtaining shareholder approval, violating corporate governance principles.
  • Corporate Influence:
  • Unlimited donations increased the risk of corporate lobbying and quid pro quo arrangements, undermining the fairness of elections.
  • Crony Capitalism:
    • Donations through shell companies raised concerns of preferential treatment and policy influence.
  • Foreign Funds:
    • Retroactive amendments to the Foreign Contribution (Regulation) Act (FCRA) allowed foreign-owned Indian companies to donate, raising sovereignty and national security concerns.
  • Violation of RBI’s Authority:
    • The issuance of bearer instruments by SBI infringed upon the Reserve Bank of India’s (RBI) exclusive mandate to regulate such instruments.
    • Opaque Process:
    • Electoral bonds were exempt from reporting under the Representation of the People Act, 1951, reducing accountability.

    Way Forward

    • State Funding of Elections: Partial state funding as recommended by the Indrajit Gupta Committee.
    • National Electoral Fund: Collective donations distributed based on party votes, ensuring anonymity.
    • Cap on Anonymous Donations:Law Commission (255th Report) proposed limiting anonymous donations to ₹20 crores or 20% of total funding.
    • Ban on Cash Donations: Prohibit cash donations to improve transparency.
    • Corporate Transparency: Companies must disclose party-wise donations in profit and loss statements.
    • Auditing Political Party Accounts: As per Venkatachaliah Committee (2002), ensure strict audits and disclosure.
    • Adopt Global Best Practices for Political Funding