The new face of funding election campaigns

The 2017 Union Budget introduced the concept of electoral bonds to facilitate political funding. It was introduced as a mean to bring about a ‘transparent funding mechanism in the political system’. The electoral bond Scheme was notified in January 2018, allowing persons who are citizens, as well as entities incorporated or established in India to purchase electoral bonds. The rationale behind the act was to remove the influx of black money from the sphere of political funding and make it more transparent. However, contradictions between the scheme and existing laws have led to increased opacity of electoral funding due to improper implementation.

What are Electoral Bonds?

An electoral bond is similar to a promissory note, which would be payable to the bearer on demand, however it is not governed under the Negotiable Instruments Act, 1881. The bonds are issued in multiples of INR 1000 from specified branches of the State Bank of India, and can be purchased by both donors who have an account at SBI and those who don’t. Each transaction has KYC (know your customer) norms which the donor must follow, regardless of whether or not they have an account with the bank.

These bonds can only be sold on specific days in the year, which must be notified by the government. They are available for purchase for 10 days at the beginning of each quarter i.e. January, April, July and October. An additional period of 30 days is also added in the year of Lok Sabha elections.

A condition precedent to the use of electoral bonds is that the party in question must be registered under section 29A of the Representation of the Peoples Act, 1951 (RP Act) and have secured at least one per cent of the votes polled in the most recent Lok Sabha or State election. They will be allotted a verified account by the Election Commission of India (ECI) and electoral bond transactions can be made only via this account.

This brings its own complications with it, at the current stage, in order to be eligible for receiving electoral bonds, a party must gain 1% of 543 seats, which is at least 6 seats. After the results of the 2019 Lok Sabha elections, this reduces the number of eligible parties to just 11 parties.

Legal implications of Electoral Bonds

There are varied legal implications of the introduction of electoral bonds. These mainly fall under the ambit of tax implications, transparency concerns and the amendments to the Representation of People Act (RP Act).

Section 13A of the Income Tax Act was amended to state only donations up to INR 2,000 can be accepted by political parties in cash. Any donation of more than INR 2,000 can only be accepted though the banking system by means of a cheque, a draft or an electoral bond. This creates a conflict between the reporting requirements for cash donations under S. 13A of the IT Act and section 29C of the RP Act, which states that political parties are not required to disclose contributions under INR 20,000 to the ECI. The RP Act needs to be amended in order to bring in line with the new limit of INR 2,000 in order to remove the conflict between laws.

The main point of contention regarding electoral bonds are the transparency concerns that it raises, with many arguing that the anonymity provided by the new regime may result in making the currently cloudy electoral funding system even more opaque. The scheme prevents the public from knowing who has contributed, how much, and to which party. In response to this, the government maintains that this anonymity is not a matter of concern as voters do not have the right to know the source of a parties political funding.

On the other hand, concerns have also been raised relating to not enough privacy for the donors. Since electoral bonds do not have the name of the donor or the receiving political party, SBI states that all KYC norms applicable to general bonds, would apply to electoral bonds. Additionally, SBI also ask for additional information if it feels the need, however there are no rules to dictate when and if it must do so. Experts argue that this clause may not help protect donor identity as the information gathered by the bank could be disclosed to the Reserve Bank of India, and then further to the Finance Ministry. Furthermore, each bank is labelled with an invisible code which is only visible under UV light, this coupled with the information collected by the bank would reveal exact details of who donated money via electoral bonds and to which political party.

The amendment of Section 29C of the RP Act inserted a new proviso and explanation to sub-section (1) stating:

“Provided that nothing contained in this sub-section shall apply to the contributions received by way of an electoral bond”.

This amendment is especially important as it removes the obligation upon a party to report any income received by way of an electoral bond. Additionally, the source of electoral bonds are anonymous and banks have no record of the party to which these bonds are being donated, this would make it impossible to keep track of electoral spending. The ECI in its statement stressed that

“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.”

This amendment to the RP Act therefore make the donations made to political parties more opaque as parties would no longer be required to report the donations to the ECI. Despite multiple oppositions by the ECI, the proviso has not been withdrawn.

Supreme Court decision

The Association of Democratic Reforms filed a petition in the Supreme Court challenging the validity of the scheme of electoral bonds. While the central government continued to support the scheme, stating the scheme would help in maintaining transparency, the ECI, in its affidavit to the SC, took an opposing view.

The ECI stated that at the time of passing the scheme it had communicated its concerns regarding the impact of certain provisions of the Finance Act, 2017 and the corresponding amendments to the Income Tax Act and the Representation of People Act (RP Act) to the Ministry of Law and Justice.

It clarified its position by stating that it did not oppose the bonds itself, but rather the anonymity which they provided to the donor. The main concern raised by ECI was in relation to the anonymity of the donor and clauses which could allow for election funding by shell companies and foreign entities, which could in turn allow for foreign influence over Indian elections. The Chief Justice also questioned the validity of the claims of removal of black money from political funding “If the identity of the donor is unknown, your entire exercise to eliminate black money becomes a futile exercise. Black money only becomes white”.

However, in its order the Supreme Court refused to grant a stay on electoral bonds, ahead of polls, citing lack of sufficient time for a detailed hearing. It ordered the parties to present details of the money they’ve raised from electoral bonds to the ECI in a sealed envelope by May 30th. This order is itself inconsistent with the Proviso to Section 29C of the RP Act, as the parties are not required to keep records of any donations made via electoral bonds.

While the matters were stayed pending elections, it is now upon the returning government and the courts to agree upon a course for the future which would remove the infirmities caused by the conflicts in laws due to the introduction of the Electoral Bond Scheme 2018. Free and fair elections are the backbone of a democracy, the issues relating to funding of these elections are a prime concern. The subject of electoral funding is an important one which must be addressed with a holistic view which includes all the relevant stakeholder such as the ECI.

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