Electoral Bond Scheme: Where do the ADR, EC & Union stand on the issue?

In this post, we look at the positions taken by the petitioners (ADR & CPI(M)), the Election Commission and the Union in the electoral bonds case before the Supreme Court of India. We analyze the submission of the petitioners, the Election Commission, and the Union of India.

An electoral bond is a bearer instrument, like a promissory note, that is payable to the bearer on demand. These bonds can be purchased from a notified Scheduled Bank and can be en-cashed by political parties within 15 days.

Two NGOs — the Association for Democratic Reforms, Common Cause — along with the Communist Party of India (Marxist) challenged the scheme in the Supreme Court. They called for the Court to place a stay order on the scheme. The Election Commission of India intervened to express its opposition to the scheme in its current form.

On April 12th 2019, a 3 judge Bench comprising Chief Justice Ranjan Gogoi, Justice Deepak Gupta and Justice Sanjiv Khanna passed an interim order.  It directed all political parties to submit to the Election Commission details of all bonds received until May 15th by May 30th. The parties are to disclose the donations, donors’ identity and bank account details in a “sealed cover”  to the Election Commission. The Court directed the Finance Ministry to alter its notification, which granted 5 extra days for purchasing electoral bonds.  The Court did not place a stay on the electoral bonds scheme.

I. Election Commission challenges Electoral Bonds Scheme

The Election Commission in its Counter- Affidavit expressed a strong objection to electoral bond scheme. It submitted that the scheme introduced further opaqueness in political funding.

The EC has made it clear that certain provisions of the Finance Act, 2017 and the corresponding amendments made to the statutes – Representation of Peoples Act (1951), Income Tax Act (1961), Companies Act (2013), Foreign Contributions Regulation Act (2010) and Reserve Bank of India Act (1934) will be counter-productive to transparency efforts in political funding. Let us examine why the Election Commission is against the Electoral Bond Scheme.

1. Section 137 of the Finance Act 2017 and the corresponding Proviso to Section 29C of The Representation of People Act, 1951

Section 29C(1) of the RPA requires political parties to prepare a Contribution Report on any funding received by them in excess of Rs 20000. However, Section 137 of the Finance Act introduces a proviso to Section 29C, which says that contributions received through electoral bonds, need not be reported in Contribution Reports.

The Election Commission has criticized the added proviso on the ground that in the absence of a Contribution Report on electoral bonds, the Commission has no way of finding out if donations have been made by Government Companies or Foreign Companies, which are prohibited sources of political funding under section 29-B of the RPA. In addition, the Commission expressed concerns over electoral bonds being used for funneling illicit money, due to the inherent lack of transparency associated with them.

2. Section 11 of the Finance Act 2017 and Section 13A of the Income Tax Act, 1961.

Section 13A grants an Income Tax exemption to Registered Political Parties for Voluntary Contributions, provided that the Political Party maintains a ‘books of account‘ of the voluntary contributions.

The Amendment to Section 13A of the Income Tax Act adds a proviso, which exempts political parties from maintaining a detailed breakdown of contributions received through electoral bonds of any amount, even while they still enjoy the exemption.

The EC criticized the Amendment. It criticized how the proviso allows political parties to not disclose the details of electoral bond donors, making voluntary contributions above 20,000 INR. Previously, political parties were required to disclose the name, address and PAN details of donors making donations over 20,000 INR.

3. Section 236 of the Finance Act 2016 and section 2 (1)(j)(vi) of the Foreign Contribution Regulation Act, 2010

Under Section 236 of the Finance Act, a proviso is added to Section 2(1)(j)(VI) of FCRA Act, 2010 which is given retrospective effect from April 5th 1976.

Under the Law, Foreign Companies cannot donate to political parties.

Through Finance Act 2017, the government changed the definition of foreign source in a manner that it allows donations to be received from foreign companies who have majority stakes in Indian Companies. This is a change from existing law, which barred donations from foreign sources as defined under FCRA and FEMA.

The Election Commission contends that due to this, there might be direct infusion from Foreign Companies, which hold a majority stake in Indian Companies via electoral bonds. They fear that this might lead to the foreign influencing of elections.

4. Section 135 of the Finance Act, 2017 and corresponding Amendment in Section 31(3) of the RBI Act, 1934.

The Finance Act 2017 amends the Reserve Bank of India (RBI) Act so as to allow the Central Government to authorize any scheduled bank to issue electoral bonds, without this authorization being subject to review by the RBI. The Amendment is introduced by Section 135 of the Finance Act, which states that Section 31(3) shall be added to the RBI Act.

The Election Commission did not comment on the provision as it fell outside of its jurisdiction.  In this instance, the Central Government has allowed only the State Bank of India (SBI), a public sector bank to issue electoral bonds.

II. Union of India defends Scheme     

The Ministry of Finance, on behalf of the Union, challenged Election Commission’s version that legalizing Electoral Bonds in its current form is an instrument of opaqueness. In its counter-affidavit, the Finance Ministry maintained that the main purpose behind electoral bonds is to prevent the victimization of donors by political parties.  It maintained that concealing the donor identity through the Electoral Bond Scheme is a thought-out policy consideration to prevent victimization.

It also mentioned that routing political funding through electoral bonds would check the inflow of black money flowing through cash donations. It reasoned that the present system whereby political parties record donations under Rs 20,000 to circumvent reporting of political donations. Electoral bonds can cure this as only individuals or companies with a verified KYC account can purchase them. Donation made through banking channel leave an audit trail, if any donation merits investigation.

It maintained that the electoral bond scheme achieves the twin purpose of protecting a donor’s identity, while also enforcing transparency.

III. Finance Act 2017 cannot be passed as a Money Bill – Petitioners

The petitioners – ADR and CPI(M) argue that the Finance Act was wrongly passed as a Money Bill, so as to introduce amendments to various laws without the oversight of the Rajya Sabha. They contend that for a Bill to be passed as Money Bill, all its provisions should deal with the subject matter contained in Article 110 (a) to (g) of the Constitution. They argued that the Finance Act 2017 cannot be passed as Money Bill merely because it has some provisions pertaining to the Consolidated Fund of India, especially since other substantive provisions do not deal with government expenditure.