Fuzzy funding

Electoral bonds make for zero transparency in the funding of political parties and leave open ample scope for unfair influences on the electoral process.

Published : Apr 10, 2019 12:30 IST

The Election Commission office in New Delhi.

The Election Commission office in New Delhi.

The electoral bond scheme makes a mockery of the National Democratic Alliance government’s tall claims of eradicating black money and ensuring transparency in the funding of political parties. In two counter affidavits filed in the Supreme Court, the Election Commission (E.C.) has said that electoral bonds, by making it possible for donors to remain unindentified and for political parties to not report donations, undermine the provisions of the Representation of the People (RA) Act, 1951. The E.C. has also criticised the move, through the Finance Act of 2017, to remove the cap on corporate funding of political parties. According to the response to a query under the Right to Information Act, State Bank of India recorded a 62 per cent jump in the sale of electoral bonds in January and March this year compared with last year.

An electoral bond is a bearer banking instrument for funding registered political parties that have secured not less than 1 per cent of the votes polled in the last Lok Sabha and State Assembly elections. Applicants can make multiple purchases of such bonds from authorised banks (State Bank of India), in denominations of Rs.1,000, 10,000, 1,00,000, 10,00,000 and 1,00,00,000. A bond is valid for a maximum of 15 days from the date of issuance. The first batch of bonds was sold in March 2018.

On February 28, 2019, the government authorised the SBI and all its 29 branches to launch the sale of such bonds in three tranches spread over March, April and May. Electoral bonds can be purchased until the last phase of elections in May.

The launch of electoral bonds through a notification on January 2, 2018, was preceded by amendments to four pieces of legislation—the Representation of the People Act, the Companies Act, the Income Tax Act and the Foreign Contributions Regulation Act—through the Finance Acts of 2016 and 2017.

The Association of Democratic Reforms (ADR) challenged the electoral bond scheme in the Supreme Court and sought a stay on its implementation; so has the Communist Party of India (Marxist), the only political party to have done so. The petitions are now being heard together in the Supreme Court. The ADR petition said the amendments had “opened the floodgates to unlimited corporate donations to political parties and anonymous financing by Indian as well as foreign companies which can have serious repercussions on Indian democracy”. It said corporate funding received by political parties through electoral bonds in April and May would play a critical role in the general election.

CPI(M) petition

The basic premise of the writ petition filed by the CPI(M) and its general secretary was that the amendments made through the Finance Act, 2017, and the 2018 notification launching the electoral bond scheme had the effect of “encouraging corruption and lack of accountability in the financing of political parties, by removing safeguards promoting transparency and fairness in opposition to the guidelines and recommendations of the Election Commission of India and Law Commission of India”.

The petition said the amendments would not act as a check on black money because there was no reasonably effective prohibition or penalty on the aggregate value of cash donations or a cap on the number of donations that could be made by a person. The petition contended that the amendments to the Companies Act made it possible to float fraudulent shell companies in order to make donations to political parties. The purported objective of the scheme, ironically, is to reduce black money.

Who can buy electoral bonds

An electoral bond can be purchased by any individual, a Hindu undivided family, a company, a firm or an association of persons in specified multiples of amounts for making contributions to political parties.

Under the scheme, political parties are not required to record and report the name, address and other details of the donor making any donation of more than Rs.20,000 under Clause (2) of Section 29 of the RPI Act. The CPI(M) petition pointed out that that the clause was intended to make the process of donating to political parties transparent by making the declaration necessary for the donors, either individuals or companies, to get the benefits of tax relief under the Income Tax Act. The exception made for electoral bonds was “expressly contrary to the purpose of the section”, it said.

The petition referred to several reports of the E.C. and the Law Commission that emphasised the need for disclosure of contributions to political parties. In 2016, the E.C. recommended that it should be compulsory for political parties to maintain accounts in order to check the under-reporting of contributions. The Law Commission in 2015 (Report No. 255) recommended that political parties should disclose particulars of all contributions, including those below Rs.20,000 if such contributions together exceeded Rs.20 crore or if they amounted to 20 per cent of the total contributions, whichever was lesser. All such recommendations went unheeded by the government.

The petition said that the amendments made through the Finance Acts allow for “pernicious quid pro quo arrangements between political parties and corporate contributors who retain the right to disclose the fact of their contribution to the relevant political parties without any corresponding duty to reveal this information to the general public”. It cited the example of the United States, where contributions were capped and direct contributions to election campaigns by corporations, national banks and foreign nationals were banned and contraventions were punishable as criminal offences. In the United Kingdom, contributions were restricted to registered permissible sources, disclosures of donations had to be made on a quarterly basis, and criminal action could be taken against the treasurer of the political party if she failed to provide timely accounts. In France and Canada, only individuals were permitted to make contributions, which were capped by spending limits. In all these countries, the disclosure of the details of sources of funds was essential.

For citizens to exercise meaningfully their constitutional right to vote, access to information and knowledge of political parties is essential. In State of U.P. vs Raj Narain (1975) , the petition said, the court had held that Article 19 (1) (a) included the right of citizens to know every public act and everything that was done in a public way by their functionaries. The right of citizens to have relevant information about their candidates was affirmed by a three-judge bench in 2002 in Union of India vs Association of Democratic Reforms . In another judgment in 2003 ( PUCL vs Union of India ), the court held that “the foundation of a healthy democracy is to have well-informed citizens-voters”. The National Commission to review the working of the Constitution, headed by Chief Justice (former) M.N. Venkatachaliah, had noted succinctly that “the greater the contribution, the greater the risk of dependence, corruption, and lack of probity in public life”.

The government amended the definition of “foreign source” in the Foreign Contribution (Regulation) Act, 2010, through Section 236 of the Finance Act, 2016, which allowed a company having a nominal value of share capital within the limits specified for foreign investment specified under the Foreign Exchange Management Act (FEMA), 1999, not to be considered as a foreign source. The change in the definition of what constitutes a foreign source, read along with the amendments made through the Finance Act, had the effect of allowing foreign corporations to make uncapped and anonymous donations to political parties in India.

In a counter affidavit pertaining to the petition filed by the CPI(M), the E.C. stated that it had from time and time issued instructions to candidates and political parties for “furnishing correct information relating to donations received and expenditure expended by the political parties” and had proposed further electoral reforms to bring “more transparency and fairness in the electoral process in the country”.

In 2004, when the Congress-led United Progressive Alliance was in power, the E.C. sent a set of 22 proposals relating to election reforms to the government. One of those proposals stressed the need for transparency in the funding of political parties and in the spending of those funds. In December 2016, with a BJP-led government at the Centre, the E.C. sent a list of 47 proposals to the government on compulsory maintenance of accounts by political parties. It recommended changes in the Representation of the People Act, 1951, on the basis of recommendations made by the Law Commission. Both the E.C. and the Law Commission, therefore, were on the same page regarding the transparency of sources of political funding through a system of maintenance and publication of audited accounts. There has been no change in their respective positions.

Section 29C of the Act, therefore, had to be amended and recast as Section 29 D to include in its scope aggregate contributions by a single donor amounting to Rs.20,000 and the requirement for parties to disclose the names and permanent account numbers of donors along with the amount of each donation. They were also required to disclose contributions less than Rs.20,000 if these together exceeded Rs.20 crore or constituted 20 per cent of all contributions.

E.C.’s position

In its counter affidavit pertaining to the ADR petition, the E.C. stated that it had “time and again voiced the importance of declaration of donation received by the political parties and also about the manner in which those funds are expended by them for better transparency and accountability in the election process”.

In both counter affidavits, the E.C. referred to an earlier communication with the Ministry of Law and Justice. On May 26, 2017, the E.C. wrote to the Ministry expressing serious reservations about the Finance Act of 2017. The amendments made to the RP Act, the IT Act and the Companies Act through the Finance Act of 2017 would have a “serious impact on transparency aspect of political finance/funding of political parties”, it said. The amendment to the RP Act, which provided for an exemption from reporting electoral bonds under the Contribution Report (29C of the RP Act), was a “retrograde step as far as transparency of donations was concerned”, it said.

The Commission said that this exemption would prevent the E.C. from ascertaining whether a political party had taken donations in violation of Section 29B of the RP Act, which prohibited parties from taking donations from government companies and foreign sources. The amendments to the Companies Act, it said, would “open up the possibility of shell companies being set up for the sole purpose of making donations to political parties with no other business of consequence having disbursable profits”.

It also pointed out that abolishing Section 182 (3) of the Companies Act, which required companies to declare political contributions in their profit-and-loss statements, would compromise transparency and lead to increased use of black money for political funding through shell companies. The E.C. recommended that the earlier provision that only profitable companies with a proven track record could provide donations should be restored.

The two almost identical counter affidavits submitted by the E.C. on March 27, 2018, were critical of the Finance Acts of 2016 and 2017. In its counter affidavit pertaining to the petition filed by the ADR and others, it said that the amendment “allowed donations to be received from foreign companies having a majority stake in Indian companies, provided they follow the FEMA guidelines pertaining to foreign investment in the sector they operate”. This, the affidavit said, was “a change from the existing law that barred donations from all foreign sources as defined under the FCRA”. This would, it added, “allow unchecked foreign funding of political parties in India which could lead to Indian policies being influenced by foreign companies”.

Government dismisses concerns

On April 2, 2019, the government through its Department of Economic Affairs presented its counter affidavit in the case relating to the ADR. It dismissed the E.C.’s concerns and claimed that electoral bonds were a “pioneer step” to bring about electoral reforms to ensure transparency and accountability in political funding and deal with corruption in elections. The government dismissed the E.C.’s concerns on foreign donations from companies having a majority stake in Indian companies as having no “legal or factual merit”.

A final ruling on the petitions is awaited, but the trends show a surge in the use of electoral bonds. By the time the final figures emerge, perhaps from more RTI queries, the general election will be over. Jagdeep S. Chhokar, former director, Indian Institute of Management, Ahmedabad and co-founder of ADR, said electoral bonds prevented voters from making informed choices. He told Frontline : “Informed choice is the first fundamental issue. If political parties get money, the source of which is not known to the voter, then the voter cannot exercise an informed choice. There is also the issue of the passage of the scheme as a Money Bill, which is ultra vires the Constitution. One person is buying a bond and a private party is buying it. Where does the Consolidated Fund of India come into it? The way the scheme was notified and implemented is completely against anything remotely resembling transparency. Ironically, in his 2017-18 Budget speech, the Finance Minister had two paragraphs on transparency and electoral funding. The same evening he had an interaction with the media where he introduced the scheme and said the donor would be anonymous. I am still to find the dictionary that says transparency and anonymous are synonymous terms.”

He said that SBI was authorised to collect full KYC (know your customer) particulars but would not reveal the identity of the donor. “This is completely opaque. A journalist bought an electoral bond and found that there was a number which was not visible to the naked eye. So it is possible to trace the donors. The question is who can trace them? The plea of anonymity is that donor identity has to be protected to escape harassment. It seems that the principle of anonymity is only for people at large, but the government will have all the information. The SBI reports to the RBI, and the RBI reports to the government. There is an apprehension that the moment someone buys a bond, it has the potential to choke funding for opposition parties, as the ruling party in government has knowledge of it. We also know that 90 per cent of the bonds have gone to the ruling party at present.”

Apparently the Congress-led UPA government had also floated a similar scheme for political funding, the beneficiaries of which were primarily the Congress and the BJP. Chhokar said the UPA had introduced the concept of electoral trusts, which could be floated by anyone and donation could be given to political parties at the discretion of the trustees. “A good number of trusts came up and we started digging around. We came upon one Public and Political Awareness Trust. It sounded good. It turned out that it had been formed by three different companies, one each in shipping, mining and plastics—all located in different cities and different States. When we looked for these companies, all of these were hundred per cent subsidiaries of one single company in the United Kingdom. This was a fit case of violation of the FCRA. This trust had donated money to major political parties,” he said. In 2018, the ADR found that the BJP had been the largest beneficiary of electoral trusts, having received 86 per cent of all donations in 2017-18.

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