Supreme Court Strikes Down Electoral Bonds Scheme, Unanimous Verdict Declares Scheme Unconstitutional

In a landmark decision, the Supreme Court of India on 15 Feb 2024 declared the electoral bond scheme unconstitutional. The scheme, which allowed anonymous donations to political parties, was struck down by a five-judge Constitution bench.

Violation of Right to Information

The Supreme Court stated that the scheme violated the right to information of citizens. This right, enshrined under Article 19 (1) (a) of the Constitution, impacts free speech and expression. The court underscored that the scheme, by permitting anonymous political donations, infringed upon this fundamental right.

Amendments Quashed

In addition to striking down the scheme, the Supreme Court also quashed amendments made to the Income Tax Act and the Representation of People Act, which had made the donations anonymous.

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Immediate Actions Ordered

The top court ordered the issuing bank, State Bank of India (SBI), to stop the issue of electoral bonds immediately. Furthermore, SBI has been asked to furnish the details of donations through electoral bonds and the details of the political parties which received the contributions to the Election Commission by March 13, 2024¹.

This verdict marks a significant shift in the political funding landscape of India, emphasizing transparency and accountability in political donations.

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Objections of RBI and ECI to the Electoral Bond Scheme

The Electoral Bond Scheme, devised to anonymize political donations, met with significant objections from two pivotal institutions: the Reserve Bank of India (RBI) and the Election Commission of India (ECI).

The RBI raised concerns about the potential for money laundering and the scheme’s bypass of its regulatory authority, fearing it could compromise the integrity of financial governance. Concurrently, the ECI voiced apprehensions regarding the erosion of transparency in political funding, arguing that the anonymity provided to donors could undermine the democratic process. Despite these critical perspectives highlighting the scheme’s possible ramifications on electoral transparency and financial oversight, it was implemented, igniting a debate over its influence on the political and economic landscape.

Here is the detailed story:

On 2 January 2017, the RBI wrote a letter to the Joint Secretary in the Ministry of Finance on the proposal of the Government of India to enable Scheduled Banks to issue electoral bearer bonds for the purpose of donations to political parties before the Finance Act 2017 was enacted. The RBI objected to the proposal on the ground that: 

a. The amendment would enable multiple non-sovereign entities to issue bearer instruments. The proposal militated against RBI’s sole authority for issuing bearer instruments which has the potential of becoming currency. Electoral bonds can undermine the faith in banknotes issued by the Central Bank if the bonds are issued in sizable quantities; 

b. Though the identity of the person or entity purchasing the bearer bond will be known because of the Know Your Customer (KYC) requirement, the identities of the intervening persons/entities will not be known. This would impact the principles of the Prevention of Money Laundering Act 2002; and

c. The intention of introducing electoral bonds can be accomplished by cheque, demand draft, and electronic and digital payments. There is no special need for introducing a new bearer bond in the form of electoral bonds.

Chapter 1.

On 30 January 2017, the Finance Ministry responded to the observations of RBI and stated that: 

a. RBI has not understood the core purpose of electoral bonds which is to keep the identity of the donor secret while at the same time ensuring that the donation is only made from tax paid money; and

b. The fear that electoral bonds might be used as currency is unfounded because there is a time limit for redeeming the bonds. 

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Chapter 2.

By a letter dated 4 August 2017, the Deputy Governor of the RBI stated that India can consider issuing the electoral bonds on a transitional basis through the RBI under the existing provisions of Section 31(1) of the RBI Act. The RBI recommended the incorporation of the following safeguards to minimize the inherent scope of misuse of the bonds for undesirable activities: 

a. The electoral bonds may have a maximum tenure of fifteen days;

b. The electoral bonds can be purchased for any value in multiples of a thousand, ten thousand, or a lakh of rupees;

c. The purchase of electoral bonds would be allowed from a KYC compliant bank account of the purchaser; 

d. The electoral bonds can be redeemed only upon being deposited into the designated bank account of an eligible political party;

e. The sale of electoral bonds will be open only for a limited period, may be twice a year for seven days each; and

f. The electoral bonds will be issued only at RBI, Mumbai.

The draft of the Electoral Bond Scheme was circulated to the RBI for its comments. The draft conferred notified scheduled commercial banks, apart from the RBI, with the power to issue electoral bonds. The RBI objected to the draft Scheme by a letter dated 14 September 2017.

The RBI stated that permitting a commercial bank to issue bonds would “have an adverse impact on public perception about the Scheme, as also the credibility of India’s financial system in general and the central bank in particular.” The RBI again flagged the possibility of shell companies misusing bearer bonds for money laundering transactions. The RBI recommended that electoral bonds may be issued in electronic form because it would (a) reduce the risk of their being used for money laundering; (b) reduce the cost; and (c) be more secure.

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Chapter 3.

The Electoral Bond Scheme was placed for deliberation and guidance by the RBI before the Committee of the Central Board. The Committee conveyed serious reservations on the issuance of electoral bonds in the physical form. The reservations were communicated by the RBI to the Finance Minister by a letter dated 27 September 2017. The reservations are catalogued below:

a. Issuance of currency is a ‘monopolistic function’ of a central authority which is why Section 31 of the RBI Act bars any person other than the RBI from issuing bearer bonds;

b. Issuance of electoral bonds in the scrips will run the risk of money laundering since the consideration for transfer of scrips from the original subscriber to a transferee will be paid in cash. This will not leave any trail of transactions. While this would provide anonymity to the contributor, it will also provide anonymity to several others in the chain of transfer;

c. Issuance of electoral bonds in the scrip form could also expose it to the risk of forgery and cross-border counterfeiting besides offering a convenient vehicle for abuse by “aggregators”; and d. The electoral bond may not only be seen as facilitating money laundering but could also be projected (albeit wrongly) as enabling it. 

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Chapter 4

On 26 May 2017, the Election Commission of India (ECI) wrote to the Ministry of Law and Justice that the amendments to the IT Act, RPA, and Companies Act introduced by the Finance Act 2017 will have a “serious impact on transparency of political finance/funding of political parties.”

The letter notes that the amendment to the RPA by which donations through electoral bonds were not required to be disclosed is a retrograde step towards transparency of donations:

((ii) It is evident from the Amendment which has been made, that any donation received by a political party through 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.

(iii) Moreover, in a situation where contributions received through Electoral Bonds is not reported,on perusal of the Contribution reports of the political parties, it cannot be ascertained whether the political party has taken any donation in violation of provisions under Section 29B of the Representation of the People Act 1951 which prohibits the political parties from donations from Government Companies and Foreign sources.”

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Chapter 5.

Referring to the deletion of the provision in the Companies Act requiring companies to disclose particulars of the amount contributed to specific political parties, the ECI recommended that companies contributing to political parties must declare party-wise contributions in the profit and loss account to maintain transparency in the financial funding of political parties.

Further, the ECI also expressed its apprehension to the deletion of the first proviso to Section 182(1) by which the cap on corporate donations was removed. The ECI recommended that the earlier provision prescribing a cap on corporate funding be reintroduced because: 

a. Unlimited corporate funding would increase the use of black money for political funding through shell companies; and

b. Capped corporate funding ensured that only profitable companies with a proven track record could donate to political parties.

Electoral Bond Scheme

Chapter 6.

On 2 January 2018, the Ministry of Finance in the Department of Economic Affairs notified the Electoral Bond Scheme 2018 in exercise of the power under Section 31(3) of the RBI Act. The Electoral Bond is a bond issued in the nature of promissory note which is a bearer banking instrument and does not carry the name of the buyer. (Electoral Bond Scheme, Clause 2(a)).

The features of the Scheme are as follows:

a. The Bond may be purchased by a person who is

(i) a citizen of India; or

(ii) incorporated or established in India. (Electoral Bond Scheme, Clause 3(1) ‘Person’ includes

(a) an individual;

(b) a Hindu undivided family;

(c) a company;

(c) a firm;

(d) an association of persons or a body of individuals, whether incorporated or not;

(e) every artificial juridical person, not falling within any of the above categories; and

(f) any agency, office, or branch owned or controlled by such a person. An individual can buy bonds either singly or jointly with other individuals; (Electoral Bond Scheme, clause 3(3)

b. An Electoral Bond can only be encashed by an eligible political party. (Electoral Bond Scheme, Clause 12) A political party, to be eligible to receive an electoral bond, has to be registered under Section 29A of the RP Act, and ought to have secured not less than one per cent of the votes polled in the last general election to the House of the People or the Legislative Assembly of the State. (Electoral Bond Scheme, Clause 3(3). An eligible political party can encash a bond only through a bank account with an  authorised bank. (Electoral Bond Scheme, Clause 3(4). The scheme has notified the State Bank of India as the bank authorised to issue and encash bonds; (Electoral Bond Scheme, Clause 2(b) 

c. The instructions issued by the Reserve Bank of India regarding KYC apply to buyers of the bond. The authorised bank may call for additional KYC documents if necessary; (Electoral Bond Scheme, Clause 4(2)  

d. Payments for the issuance of the bond are accepted in Indian rupees, through demand draft, cheque, Electronic Clearing System or direct debit to the buyer’s account. Where payment is made by cheque or demand draft, it must be drawn in favour of the issuing bank at the place of issue; (Electoral Bond Scheme, Clause 11)

e. The bonds are issued in denominations of Rs 1000, 10,000, 1,00,000, 10,00,000 and 1,00,00,000; (Electoral Bond Scheme, Clause 5). The bond is valid for fifteen days from the date of issue.

f. No payment will be made to a political party if the bond is deposited after the expiry of fifteen days (Electoral Bond Scheme, Clause 6). If the bond is not encashed within fifteen days, it will be deposited by the authorised bank with the Prime Minister’s Relief Fund; Electoral Bond Scheme, Clause 12(2) 

g. A buyer who wishes to purchase electoral bond(s) can apply in the format specified in Annexure II of the Scheme. Electoral Bond Scheme, Clause 7(1). The issuing branch shall issue the bond if all the requirements are fulfilled. (Electoral Bond Scheme, Clause 7(3). The application shall be rejected if the application is not KYC compliant or if the application does not meet the requirements of the scheme; (Electoral Bond Scheme, Clause 7(4)

h. The bond issued is non-refundable; Electoral Bond Scheme, Clause 7(6)

i. The information furnished by the buyer is to be treated as confidential by the authorized bank. It shall be disclosed only when demanded by a competent court or upon the registration of criminal case by any law enforcement agency; (Electoral Bond Scheme, Clause 7(4)

j. The bond shall be available for purchase for a period of ten days on a quarterly basis, in the months of January, April, July, and October as specified by the Central Government. Electoral Bond Scheme, Clause 8(1). Bonds will be available for an additional period of thirty days as specified by the Central Government in a year when General Elections to the House of People are to be held; Electoral Bond Scheme, Clause 8(2).

k. No interest is payable on the bond. (Electoral Bond Scheme, Clause 9) No commission, brokerage, or any other charges for issue of a bond shall be payable by the buyer against purchase of the bond; (Electoral Bond Scheme, Clause 10)

l. The value of the bonds shall be considered as income by way of voluntary contributions received by an eligible political party for the purpose of exemption from Income Tax under Section 13A of the IT Act; (Electoral Bond Scheme, Clause 13) and

m. The bonds are not eligible for trading. (Electoral Bond Scheme, Clause 14)

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Chapter 7.

The petitioners instituted proceedings under Article 32 seeking a declaration that Electoral Bond Scheme and the following provisions be declared unconstitutional:

a. Section 135 of the Finance Act 2017 and the corresponding amendment in Section 31 of the RBI Act;

b. Section 137 of the Finance Act 2017 and the corresponding amendment in Section 29C of the RP Act;

c. Section 11 of the Finance Act 2017 and the corresponding amendment in Section 13A of the IT Act; and 

d. Section 154 of the Finance Act 2017 and the corresponding amendment to Section 182 of the Companies Act.

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Chapter 8.

In its order dated 13 April 2019, this Court (Supreme Court) observed that the amendments which have been challenged give rise to weighty issues which have a bearing on the sanctity of the electoral process.

Supreme Court directed all political parties, in the interim to submit details of contributions received through electoral bonds (with particulars of the credit received against each bond, date of credit, and particulars of the bank account to which the amount has been credited) to the ECI in a sealed cover.

The prayer for interim relief was rejected by observing that the operations under the scheme are not placed behind “iron curtains incapable of being pierced”:

“The financial statements of companies registered under the Companies Act, 2013 which are filed with the Registrar of Companies, are accessible online on the website of the Ministry of Corporate Affairs for anyone. They can also be obtained in physical form from the Registrar of Companies upon payment of prescribed fee. Since the Scheme mandates political parties to file audited statement of accounts and also since the Companies Act requires financial statements of registered companies to be filed with the Registrar of Companies, the purchase as well as encashment of the bonds, happening only through banking channels, is always reflected in documents that eventually come to the public domain. All that is required is a little more effort to cull out such information from both sides (purchaser of bond and political party) and do some “match the following”. Therefore, it is not as though the operations under the Scheme are behind iron curtains incapable of being pierced.”

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Chapter 9.

The petitioners have also challenged the introduction of the Finance Act as a Money Bill under Article 110 of the Constitution. The issue of the scope of Article 110 has been referred to a seven-Judge Bench and is pending adjudication. (47 Roger Mathew v. South Bank of India, CA No. 8588/2019) The petitioners submitted that they would press the grounds of challenge to the Finance Act independent of the issue on Money Bills in view of the upcoming elections to Parliament.

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Chapter 10.

By an order dated 31 October 2023, the batch of petitions was directed to be listed before a Bench of at least five-Judges in view of the provisions of Article 145(3) of the Constitution. It is in this background that  the   challenge to  the (47 Roger Mathew v. South Bank of India, CA No. 8588/2019) Electoral Bond Scheme and the amendments is before the Constitution Bench.

Source: Supreme Court of India