Electoral Bonds in India: Transparency, Anonymity & Legal Challenges in Political Funding

Electoral Bonds in India: A Deep Dive into Transparency, Anonymity, and Legal Battles

A Comprehensive Analysis of the Now-Struck-Down Political Funding Mechanism

The landscape of political funding in India witnessed a significant experiment with the introduction of Electoral Bonds in 2018. Hailed by the government as a revolutionary step towards transparency and curbing black money in politics, the scheme simultaneously sparked intense debate and legal challenges over its anonymity provisions and potential impact on the fairness of elections. This blog post delves deep into the intricacies of the Electoral Bond Scheme, its objectives, the legal framework that underpinned it, the controversies it generated, landmark judicial pronouncements, and its ultimate striking down by the Supreme Court of India.

Introduction: The Perennial Challenge of Political Funding

Political funding has long been a contentious issue in India, often linked to opacity and the influence of unaccounted wealth in the electoral process. The need for a transparent mechanism that allows individuals and corporations to contribute to political parties without fear of retribution, while ensuring public accountability, has been a long-standing quest. The Electoral Bond Scheme was presented as a solution to "cleanse the system" by channelling donations through formal banking routes and offering donor anonymity.

The stated objectives of the Electoral Bond Scheme were:

• Enhanced Transparency: By routing donations through banking channels, the government aimed to create a more transparent system compared to previous cash-based donations.
• Curbing Black Money: The scheme intended to reduce the role of illicit cash in political funding.
• Protecting Donor Anonymity: It aimed to shield donors from potential political victimization by keeping their identities confidential from the public and political parties (though the State Bank of India, the sole authorized issuer, would have KYC details).

However, these objectives, particularly the aspect of anonymity, became the focal point of intense scrutiny and criticism.

Constitutional Provisions and Legal Framework

The introduction of the Electoral Bond Scheme necessitated amendments to several key legislations through the Finance Acts of 2016 and 2017. These included:

• Representation of the People Act, 1951 (RoPA):
  • Section 29C of RoPA, which mandates political parties to declare donations above a certain threshold (₹20,000 prior to the scheme), was amended to exempt them from disclosing contributions received through electoral bonds.
• Companies Act, 2013:
  • Section 182 was amended to remove the cap on corporate donations (previously limited to 7.5% of the average net profits of the preceding three years). It also removed the requirement for companies to disclose the names of the political parties to which they contributed in their profit and loss statements, only requiring them to state the total amount.
• Income Tax Act, 1961:
  • Section 13A was amended to exempt political parties from maintaining records of contributions received via electoral bonds.
• Foreign Contribution (Regulation) Act, 2010 (FCRA):
  • Amendments were made to allow foreign companies with majority stakes in Indian entities to donate to political parties, a move that drew significant criticism.
• Reserve Bank of India Act, 1934:
  • Section 31 was amended to permit the Union government to authorize any scheduled bank to issue electoral bonds.

The Electoral Bond Scheme, 2018, notified on January 2, 2018, by the Ministry of Finance, laid down the operational details.

Key Features of the (Now Defunct) Electoral Bond Scheme:

• Bearer Instrument: Electoral bonds were in the nature of a promissory note and were bearer instruments, meaning the holder (the political party) was presumed to be the owner, and the bond did not carry the name of the buyer or payee.
• Denominations: Available in multiples of ₹1,000, ₹10,000, ₹1,00,000, ₹10,00,000, and ₹1,00,00,000.
• Authorized Issuer: Only designated branches of the State Bank of India (SBI) were authorized to issue and encash these bonds.
• Eligibility to Purchase: Any citizen of India or a body incorporated or established in India could purchase electoral bonds, either singly or jointly, after fulfilling KYC norms.
• Eligibility to Receive: Only political parties registered under Section 29A of the Representation of the People Act, 1951, and which secured not less than one percent of the votes polled in the last general election to the House of the People or the Legislative Assembly, were eligible to receive electoral bonds.
• Validity: The bonds were valid for 15 calendar days from the date of issue, within which they had to be encashed by an eligible political party through a designated bank account. If not encashed within this period, the amount would be deposited into the Prime Minister's Relief Fund.
• Anonymity: The donor's identity was kept anonymous from the public and the recipient political party. However, SBI maintained KYC details of the purchaser.
• Tax Exemption: Donations were tax-deductible for the donor, and the income received by political parties through electoral bonds was tax-exempt.

How Electoral Bonds Worked: A Visual Overview

graph TD
    A[Donor (Indian Citizen/Entity)] -- KYC Compliant Account --> B(Scheduled Bank - SBI);
    B -- Issues Electoral Bond (Anonymous) --> A;
    A -- Donates Bond --> C{Registered & Eligible Political Party};
    C -- Deposits Bond in Designated Account --> B;
    B -- Verifies & Encash Bond (within 15 days) --> C;
    D{Political Party uses funds};

    subgraph Legend
        direction LR
        L1[---> Flow of Money/Bond]
        L2[--- KYC/Verification]
    end

Explanation of the Flowchart:

1. Purchase: An Indian citizen or a company incorporated in India could purchase electoral bonds from specified branches of the State Bank of India (SBI) using a KYC-compliant bank account.
2. Issuance: SBI would issue the electoral bond, which was a bearer instrument and did not contain the donor's name.
3. Donation: The donor would then give this bond to a registered political party of their choice that met the eligibility criteria.
4. Encashment: The political party had to encash the bond through its designated bank account with SBI within 15 days of its issuance.
5. Usage: The political party could then use these funds for its activities.

Key Institutions and Their Roles

• Government of India (Ministry of Finance): Notified the Electoral Bond Scheme and made enabling amendments to various laws.
• State Bank of India (SBI): The sole authorized bank to issue and encash electoral bonds. It was responsible for maintaining KYC details of the purchasers.
• Election Commission of India (ECI):
  • Initially raised concerns about the scheme's impact on transparency in political funding, warning against "repercussions/impact on the transparency aspect of political finance/funding" and the risk of "unchecked foreign funding."
  • Political parties were required to submit details of bonds received in their contribution reports to the ECI, but without disclosing donor names.
  • Following the Supreme Court's final verdict, the ECI was tasked with publishing the data provided by SBI on bond purchasers and recipient political parties.
• Reserve Bank of India (RBI):
  • The RBI Act was amended to allow the issuance of electoral bonds.
  • Reports indicated that the RBI had reservations about the scheme, particularly regarding the issuance of bonds as bearer instruments, which could be misused and undermine efforts against money laundering.
• Parliament of India:
  • Amendments enabling the electoral bond scheme were passed via Finance Acts, controversially classified as Money Bills, thus limiting the Rajya Sabha's scrutiny. This classification itself became a subject of legal challenge.

The Transparency vs. Anonymity Debate

The core of the controversy surrounding electoral bonds lay in the inherent tension between the stated goal of transparency and the provision of donor anonymity.

Arguments in Favor of Electoral Bonds (as presented by the Government):

• Curbing Cash Donations: Proponents argued that the scheme would encourage donations through formal banking channels, thereby reducing the reliance on unaccounted cash in politics.
• Donor Privacy: Anonymity was deemed essential to protect donors from potential harassment or retribution from political parties they did not support. It was argued that without anonymity, donors might revert to cash donations.
• Increased Transparency (for the system): While individual donor details were anonymous, the aggregate amounts received by parties through bonds were to be declared, and the flow of money was through the banking system, making it traceable to an extent (by SBI).
• Accountability: Political parties were required to encash bonds through designated bank accounts, which were subject to audit.

Arguments Against Electoral Bonds (Highlighting Opacity and Other Concerns):

• Violation of Voter's Right to Information: Critics, including petitioners in the Supreme Court, argued that the anonymity of donors violated the citizens' fundamental right to know who is funding political parties, which is crucial for making informed electoral choices and ensuring accountability. Information about funding sources could reveal potential influences on party policies.
• Opacity and Lack of Transparency: The scheme was criticized for making political funding more opaque rather than transparent, as the public and even the Election Commission could not ascertain the source of funds beyond the fact that they came via electoral bonds.
• Potential for Quid Pro Quo and Crony Capitalism: The anonymity, coupled with the removal of limits on corporate donations, raised serious concerns about shell companies being used for routing funds and the possibility of quid pro quo arrangements between corporations and the ruling party. Wealthy corporations could disproportionately influence policy without public scrutiny.
• Information Asymmetry Favoring the Ruling Party: While donors were anonymous to the public and other parties, the fact that SBI (a public sector bank) held KYC details led to apprehensions that the government of the day could potentially access donor information, creating an uneven playing field and potentially intimidating donors to contribute to the ruling party.
• Legitimizing Electoral Corruption: Opponents argued that the scheme, far from cleansing political funding, effectively legalized opacity and could become a channel for illicit funds.
• Undermining Democratic Principles: The lack of transparency and the potential for unchecked corporate influence were seen as detrimental to free and fair elections and the principles of political equality.
• Concerns about Foreign Influence: The amendments to FCRA and the anonymity of bonds raised concerns about the possibility of foreign entities influencing Indian politics through undisclosed donations. The ECI itself had flagged this risk.

Landmark Judgments and Legal Challenges

The Electoral Bond Scheme was challenged in the Supreme Court of India through Public Interest Litigations (PILs) filed by organizations like the Association for Democratic Reforms (ADR) and Common Cause, as well as political parties like the Communist Party of India (Marxist).

Chronology of Key Legal Events:

• 2017: Electoral Bond Scheme introduced in the Finance Bill. ADR and others move the Supreme Court challenging the scheme.
• January 2, 2018: Central Government notifies the Electoral Bond Scheme.
• April 12, 2019: The Supreme Court, in an interim order, directed all political parties to submit details of all bonds received by them (including donor identity, amount, and bank account details) in a sealed cover to the Election Commission by May 30, 2019. However, the Court did not stay the operation of the scheme at that stage.
• October 16, 2023: The Supreme Court referred the pleas challenging the scheme to a five-judge Constitution Bench.
• October 31 - November 2, 2023: The Constitution Bench, led by Chief Justice D.Y. Chandrachud, heard arguments over three days and reserved its judgment.
  • Petitioners' Arguments: Focused on the violation of the voter's right to information under Article 19(1)(a), the scheme's opacity fostering corruption, enabling quid pro quo, and creating an uneven playing field. They argued that transparency in political funding is essential for free and fair elections.
  • Union Government's Defence: Argued that the scheme aimed to curb black money, protect donor privacy from retribution, and that anonymity was a policy choice. They contended that voters do not have a general right to know everything and that donor anonymity was crucial to encourage formal donations.
• February 15, 2024: The Landmark Verdict
  • A five-judge Constitution Bench of the Supreme Court unanimously struck down the Electoral Bond Scheme as unconstitutional.
  • The Court held that the scheme violated the voter's fundamental right to information under Article 19(1)(a) of the Constitution, which is essential for making informed choices and ensuring government accountability.
  • The Court found the non-disclosure of information about political funding through electoral bonds to be unreasonable and not justified.
  • The amendments to Section 182 of the Companies Act (removing the cap on corporate donations and disclosure requirements) were also held to be unconstitutional and manifestly arbitrary, as they allowed for unlimited and anonymous corporate funding, which could lead to quid pro quo arrangements and influence policymaking. The Court noted that treating companies and individuals alike for political contributions was arbitrary and that allowing loss-making companies to donate raised concerns.
  • The Court rejected the government's argument that donor anonymity was necessary to prevent their victimisation, stating that less restrictive means could be found to achieve this objective. It also held that curbing black money cannot be a ground to restrict the fundamental right to information under Article 19(1)(a).
  • Directions Issued by the Supreme Court:
    1. SBI to immediately stop the issuance of any further electoral bonds.
    2. SBI to submit details of electoral bonds purchased from April 12, 2019, till date to the Election Commission of India (ECI). These details were to include the date of purchase, the name of the purchaser, and the denomination of the bond.
    3. SBI to submit details of the political parties which received contributions through electoral bonds since April 12, 2019, including the date of encashment and denomination.
    4. SBI was initially given three weeks (by March 6, 2024) to submit this information to the ECI.
    5. The ECI was directed to publish this information on its official website within one week of receiving it from SBI (by March 13, 2024).
• Post-Verdict Developments:
  • March 4, 2024: SBI moved the Supreme Court seeking an extension of time till June 30, 2024, to furnish the details, citing the complexity of collating the data.
  • March 7, 2024: A plea was filed in the Supreme Court seeking contempt action against SBI for allegedly willfully disobeying the court's direction.
  • March 11, 2024: The Supreme Court dismissed SBI's plea for an extension and directed it to furnish the details by the close of business hours on March 12, 2024. The ECI was to publish the data by March 15, 2024.
  • Subsequently, SBI submitted the data, and the ECI published it, revealing details of purchasers and recipient political parties, leading to widespread public discussion and analysis.

Key Legal Principles Reaffirmed/Established by the Supreme Court:

• Voter's Right to Information (Article 19(1)(a)): The Court strongly reaffirmed that the right to information is a fundamental right and crucial for a functioning democracy. It emphasized that voters need information about political funding to make informed choices and hold political parties accountable.
• Transparency in Political Funding: The judgment underscored the necessity of transparency in political financing to ensure fair elections and prevent corruption.
• Proportionality Test: The Court likely applied the proportionality test to balance the right to information against the claimed right to donor privacy and found the restrictions imposed by the Electoral Bond Scheme to be disproportionate.
• Arbitrariness (Article 14): The striking down of amendments to the Companies Act was based on the grounds of manifest arbitrariness, indicating that legislative actions must be reasonable and non-discriminatory.

Current Relevance and Evolving Interpretations

The Supreme Court's verdict striking down the Electoral Bond Scheme has fundamentally altered the landscape of political funding in India.

• End of Anonymity (through this route): The primary impact is the end of state-sanctioned anonymity for large political donations made through this specific instrument.
• Increased Public Scrutiny: The disclosure of past electoral bond data has led to significant public and media scrutiny of political funding patterns, corporate donors, and potential links between donations and policy decisions or contracts.
• Search for Alternatives: The judgment necessitates a re-evaluation of political funding mechanisms in India. Discussions around more transparent and equitable systems, possibly including state funding of elections or reformed electoral trusts, are likely to gain momentum.
• Strengthening Democracy: The verdict is widely seen as a significant step towards strengthening democratic principles of transparency and accountability.
• Ongoing Debates: The disclosure of data has fueled debates about crony capitalism, the influence of big money in politics, and the need for further electoral reforms.

The Pre-Electoral Bond Scenario vs. The Electoral Bond Scenario vs. Post-SC Verdict Scenario:

Comparison with Global Systems (Brief Overview)

Many democracies grapple with regulating political finance. Approaches vary significantly:

• United States: Allows corporate and union funding but has disclosure requirements (though "dark money" via certain non-profits remains a concern). Super PACs can raise unlimited sums but cannot coordinate directly with candidates.
• United Kingdom: Has spending limits for campaigns and requires disclosure of donations above a certain threshold.
• Germany: Political parties receive significant state funding based on electoral performance and private donations. Donations above a certain amount must be disclosed.
• Canada: Relies on a mix of public subsidies and private contributions, with strict limits on donation amounts and extensive disclosure requirements.

The Indian Electoral Bond Scheme, with its emphasis on anonymity for large corporate donations, was quite distinct from the transparency-focused regulations in many other established democracies.

Conclusion: Towards a More Transparent Future?

The Supreme Court's decision to strike down the Electoral Bond Scheme is a watershed moment in India's journey towards cleaner and more transparent political finance. While the scheme was introduced with the stated aim of reforming a flawed system, its design, particularly the anonymity clause and the removal of caps on corporate funding, raised more concerns than it addressed. The verdict strongly champions the citizen's right to know, a cornerstone of a healthy democracy.

The challenge now lies in developing a new framework for political funding that balances the need for financial resources for political activity with the imperative of transparency, accountability, and a level playing field. The discourse will likely revolve around strengthening existing disclosure norms, exploring models of state funding, reforming electoral trusts, and ensuring that the influence of money does not disproportionately distort the democratic process. The path ahead requires careful consideration of constitutional principles, political realities, and the overarching goal of safeguarding the integrity of India's electoral democracy.

Interactive Q&A / Practice Exercises

Multiple-Choice Questions (MCQs):

1. Which Article of the Constitution was primarily invoked by the Supreme Court to strike down the Electoral Bond Scheme? (a) Article 14 (Equality before Law) (b) Article 21 (Right to Life and Personal Liberty) (c) Article 19(1)(a) (Right to Freedom of Speech and Expression, including Right to Information) (d) Article 324 (Superintendence, direction and control of elections to be vested in an Election Commission)

   Answer: (c) Explanation: The Supreme Court primarily held that the Electoral Bond Scheme violated the voter's fundamental right to information, which is encompassed within Article 19(1)(a). This right is crucial for voters to make informed electoral choices.

2. Which of the following Acts was amended to remove the cap on corporate donations to political parties as part of the legal framework for Electoral Bonds? (a) Representation of the People Act, 1951 (b) Companies Act, 2013 (c) Income Tax Act, 1961 (d) Reserve Bank of India Act, 1934

   Answer: (b) Explanation: Section 182 of the Companies Act, 2013, was amended to remove the earlier limit on corporate donations (7.5% of average net profits) and the requirement to disclose the names of recipient parties in profit and loss statements.

3. What was the maximum validity period for an Electoral Bond from its date of issue? (a) 7 days (b) 15 days (c) 30 days (d) 45 days

   Answer: (b) Explanation: Electoral Bonds were valid for 15 calendar days from the date of issue, during which they had to be encashed by an eligible political party.

4. Who was the sole authorized issuer of Electoral Bonds in India? (a) Reserve Bank of India (b) Election Commission of India (c) Ministry of Finance (d) State Bank of India

   Answer: (d) Explanation: Only designated branches of the State Bank of India (SBI) were authorized to issue and encash Electoral Bonds.

5. The Supreme Court's judgment on Electoral Bonds directed SBI to disclose donor details from which date onwards? (a) January 2, 2018 (Scheme notification) (b) April 1, 2017 (Finance Act amendments) (c) April 12, 2019 (Date mentioned in SC's earlier interim order) (d) February 15, 2024 (Date of final judgment)

   Answer: (c) Explanation: The Supreme Court directed SBI to submit details of Electoral Bonds purchased from April 12, 2019, onwards. This date corresponds to an earlier interim order where the Court had asked for details to be submitted to the ECI.

Scenario-Based Questions:

1. Scenario: A corporation, "Alpha Ltd.," wanted to donate a significant sum to a political party "X" before the Electoral Bond Scheme was struck down. They were concerned about potential repercussions from rival party "Y" if their donation became public. How did the Electoral Bond Scheme address this concern, and what were the counter-arguments regarding this mechanism?

   Answer Explanation: The Electoral Bond Scheme addressed Alpha Ltd.'s concern by providing donor anonymity. When Alpha Ltd. purchased electoral bonds, their name would not be mentioned on the bond itself, and Party X would not officially know the identity of the donor through the bond. SBI would have Alpha Ltd.'s KYC details, but this was not meant to be public. This was intended to protect donors from political victimization.

   However, the counter-arguments were significant:

   • Violation of Voter's Right to Know: Citizens have a right to know who is funding political parties to assess potential influences on policy.
   • Opacity: Critics argued it made funding opaque, hindering public scrutiny.
   • Information Asymmetry: The ruling party could potentially access donor information through SBI, creating an uneven playing field.
   • Quid Pro Quo: Anonymity for large corporate donations could facilitate hidden deals between donors and parties.

2. Scenario: Post the Supreme Court's verdict striking down the Electoral Bond Scheme, a citizen's group wants to advocate for a new, transparent political funding mechanism. What key principles, derived from the Supreme Court's judgment and general democratic theory, should they emphasize in their proposal?

   Answer Explanation: The citizen's group should emphasize the following principles:

   • Maximum Transparency: All significant political donations should be traceable and open to public scrutiny. This aligns with the Supreme Court's emphasis on the voter's right to information.
   • Accountability: Political parties must be fully accountable for the funds they receive and spend, with clear records and independent audits.
   • Level Playing Field: The system should not unduly favor the ruling party or wealthy donors. This addresses concerns about information asymmetry and the impact of unlimited corporate funding.
   • Curbing Undue Influence: Mechanisms should be in place to prevent large donations from translating into undue policy influence or quid pro quo arrangements.
   • Clarity and Simplicity: The rules governing political funding should be clear, easy to understand, and effectively enforceable.
   • Respect for Fundamental Rights: While ensuring transparency, any mechanism should also consider privacy concerns for small, individual donors, but this should not override the public's right to know about substantial contributions that can influence policy. The SC prioritized the right to information in the case of electoral bonds.
   • Limited and Regulated Corporate Funding: Reinstating reasonable caps on corporate donations and ensuring full disclosure would be crucial.

Match the Following:

Answers:

1. D
2. C
3. A
4. B
5. E

Explanation:

1. Section 29C of RoPA was amended to exempt political parties from publishing contributions received via electoral bonds in their Contribution Reports.
2. Article 19(1)(a) guarantees the freedom of speech and expression, which the Supreme Court has interpreted to include the right to information, a key basis for striking down the scheme.
3. The five-judge Constitution Bench delivered the unanimous verdict in February 2024, annulling the Electoral Bond Scheme.
4. Section 182 of the Companies Act, 2013, was amended to remove the upper limit on corporate political donations.
5. The State Bank of India was the only bank authorized to issue and encash electoral bonds.

Chronological Order Exercise:

Arrange the following events related to Electoral Bonds in chronological order:

1. Supreme Court refers the challenge to Electoral Bonds to a five-judge Constitution Bench.
2. The Electoral Bond Scheme, 2018 is notified by the Ministry of Finance.
3. The Finance Act, 2017, amends various laws to enable the Electoral Bond Scheme.
4. The Supreme Court delivers its final judgment striking down the Electoral Bond Scheme.
5. SBI is directed by the Supreme Court to disclose electoral bond data by March 12 after dismissing its extension plea.

Correct Chronological Order: 3. The Finance Act, 2017, amends various laws to enable the Electoral Bond Scheme. 2. The Electoral Bond Scheme, 2018 is notified by the Ministry of Finance. (January 2, 2018)

1. Supreme Court refers the challenge to Electoral Bonds to a five-judge Constitution Bench. (October 16, 2023)
2. The Supreme Court delivers its final judgment striking down the Electoral Bond Scheme. (February 15, 2024)
3. SBI is directed by the Supreme Court to disclose electoral bond data by March 12 after dismissing its extension plea. (March 11, 2024)

Diagram-Based Question:

(Refer to the "How Electoral Bonds Worked: A Visual Overview" flowchart provided in the blog post)

Question: According to the flowchart, what was the crucial step that ensured donor anonymity to the political party, and what information did the SBI retain about the donor?

Answer Explanation: According to the flowchart, the crucial step ensuring donor anonymity to the political party was that the Electoral Bond issued by SBI to the Donor was anonymous (did not carry the donor's name). When the donor gave this bond to the political party, the party would not know the original purchaser's identity from the instrument itself.

However, the flowchart also indicates (and as stated in the blog) that the Donor purchased the bond from SBI via a KYC Compliant Account. Therefore, SBI retained the Know Your Customer (KYC) details of the purchaser (donor). This included information about the donor's identity as per banking regulations.

Recommended Books

You can explore these highly recommended resources for a deeper understanding.

• Indian Polity (English) by M Laxmikanth for UPSC CSE 2025 | 7th edition (latest) | Civil Services Exam - Prelims, Mains and Interview | State PSCs exams/ PCS exams - by M Laxmikanth
• Oswaal NCERT One For All Book for UPSC & State PSCs | Indian Polity Classes 6-12 - by Oswaal Editorial Board
• Bharat Ki Rajvyavastha (भारत की राजव्यवस्था) - M Laxmikanth for UPSC CSE