Electoral Bond and its challenges – Explained, Pointwise


Recently the Supreme Court agreed to hear a plea to stay the fresh sale of Electoral Bonds. It is a significant decision considering the upcoming state assembly elections in West Bengal, Tamil Nadu, Kerala, and Assam. Political parties rely on Electoral Bonds for the majority of their funding.

Electoral bonds are surrounded by criticisms since their introduction. The Election Commission of India(ECI) and the Reserve Bank of India(RBI)  stated that these bonds allow the transfer of illicit black money from shell companies. Later, the ECI also criticized the bonds as a “retrograde step as far as transparency of donations is concerned”. In this article, we will analyze the issues surrounding the Electoral Bonds in India.

About the recent case
  1. The Finance Act 2017 introduced amendments in the Reserve Bank of India Act, Income Tax Act, Companies Act, Representation of Peoples Act, and Foreign Contributions Regulations Act. It made the implementation of the Electoral Bonds Scheme in India, possible.
  2. Right after that, in 2017 itself, the NGOs Association of Democratic Reforms(ADR) and Common Cause filed a case in court against the Finance Act 2017 to stay the execution of such bonds.
  3. The Supreme Court in 2019 directed the Political Parties to submit the details of donations received through the bonds in a sealed cover to the Election Commission of India. Based on that, the political parties submitted the amount of donations received through bonds.
  4. The ECI and the RBI analysed these reports. After that, they both opposed the implementation of Electoral bonds. Further, they also mentioned these Bonds as detrimental to Indian Democracy. The ECI even filed an affidavit mentioning the anonymous nature of bonds.
  5. Since the case is not yet decided, the ADR recently demanded to fast pace the case. Further, it also cited the issues surrounding the Electoral Bonds. The SC also agreed to hear the dispute sooner.
What are Electoral Bonds?

The Electoral Bonds are the non-interest-bearing financial instruments. These Electoral bonds allow eligible donors to pay eligible political parties using banks as an intermediary. The Electoral Bonds aim to ensure transparency in the funding of political parties.

Eligibility criteria for receiving and donating funds
  1. Eligibility of Political Parties
    • Only the political parties registered under Section 29A of the Representation of the People Act, 1951 are eligible to receive funds through Electoral Bonds.
    • Further, these registered political parties also have to receive not less than 1% votes in the last Lok Sabha elections or the State Legislative Assembly to receive funds through electoral bonds.
  2. Eligibility of Donors
    • Any citizen of India or entities incorporated or established in India can purchase these Electoral Bonds.
    • Citizens can buy electoral bonds either singly or jointly with other individuals.
Functioning of the Electoral Bond Scheme
  1. The State Bank of India (SBI) issues electoral bonds in the months of January, April, July, and October.
  2. The electoral bonds are available in denominations from Rs 1,000 to Rs 1 crore.
  3. The donors can buy electoral bonds and transfer them into the accounts of the political parties as a donation. The name of the donor is kept confidential.
  4. Political parties will create a specific account. This account will be verified by the ECI. The political parties will encash the electoral bonds only in this verified account.
  5. The bonds will remain valid for 15 days. Within that time, the political parties have to encash the electoral bond in the designated accounts.
Need for Electoral Bonds
  1. These bonds are aimed to reduce anonymous cash donations made to political parties. In the previous system, the political parties did not disclose the donor, the amount of donations received, etc. These anonymous donations led to the generation of black money in the economy.
    For example, Nearly 70% of the Rs.11,300 crore in political funding came from unknown sources.
  2. The Electoral bonds encourage political donations of clean money. According to the government, the bonds will encourage political donations from individuals, companies, HUF, religious groups, charities, etc. Since the amount is transferred through the bank, the identity of the donor can be captured by the issuing authority.
Challenges with Electoral Bonds
  1. Firstly, the problem of Anonymity: In the electoral bond scheme, there is no provision exist for revealing the donor of the political party.
    • This violates the freedom of political information, which is integral to Article 19(1) (a) of the Constitution.
  2. Secondly, the challenges with the amendments of Finance Act 2017. The Election Commission points out various challenges in the Finance Act like,
    • Amendments made to Companies Act 2013: The amendment removed an eligibility clause(A company can make a political contribution only if its net average profit of three preceding financial years is at 7.5%).
      • As per ECI,  this gives rise to the creation of shell companies just to fund political parties.
      • Due to this amendment, Any troubled, dying company can donate an unlimited amount anonymously to a political party
      • Further, this also gives rise to the issue of Black Money again in political funding.
    • Amendments made to RPA 1951: The amendment made political parties need not report to ECI the donations received through electoral bonds.
      • This reduces the transparency in political parties. Further, it hampers public scrutiny in democracy.
    • Amendments made to Foreign Contributions Regulation Act: This permitted acceptance of donations from foreign companies with retrospective effect.
      • This facilitated the unchecked foreign funding of political parties in India.
      • Further, This provision also threatens Indian policies influenced by foreign companies.
    • Amendments made to Income Tax Act: The amendment provided 100% tax exemption to the political donations. Further, the amendments also exempted companies from mentioning such donations to the Income Tax department.
      • The shareholders of the company won’t know where their money has gone.
  3. Lastly, A threat to the donor: Since the electoral bonds are issued by the State Bank of India(a Public Sector Bank) the government can know the donor even though the bond does not mention the name. Thus, the bonds provide a ruling party with a chance to threaten the donors of the opposition party.
Suggestions to improve the political funding
  1. An alternative to electoral bonds is a National Electoral Fund to which all donors can contribute. The funds can be allocated to political parties in proportion to the votes they get. This will protect the identity of donors. Apart from that, it would also weed out black money from political funding.
  2. The best way to bring transparency in political funding is to put a complete ban on cash donations by individuals or companies to political parties. (At present Political parties can receive cash donation below Rs.2000)
  3. Further, India has to consider State funding of political parties. The Indrajit Gupta Committee on State Funding of Elections has supported partial state funding of recognised political parties.
  4. Further, the government have to amend the changes made in the Finance Act of 2017.

The issue of electoral bonds can be rectified easily if the political parties wish to improve transparency. But that is not an easy thing to do. The Supreme Court has to address the issue clearly to improve transparency in political funding. Apart from that, India needs to educate the Voters through awareness campaigns especially about the ill-effects of money power during elections.

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