Context: The Supreme Court said that it will hear petitions challenging the Electoral Bonds scheme on October 31. The 2018 scheme introduced instruments through which money could be donated to political parties in India. However, in April last year, the court had said it would take up the petitions filed by two NGOs — Common Cause and Association for Democratic Reforms (ADR) — challenging the scheme. What exactly are electoral bonds and why are they facing a legal challenge?

Background

• Electoral bond scheme was announced in Union Budget 2017-18 in an attempt to “cleanse the system of political funding in the country.”
• The electoral bonds were introduced by amendments made through the Finance Act 2017 to the Reserve Bank of India Act 1934, Representation of Peoples Act 1951, Income Tax Act 1961 and Companies Act.
• However, there are certain provisions in the scheme, which raised an objection on transparency of political funding itself.
• Some petitioners had move to the Supreme Court for a plea to stay the Electoral Bonds Scheme.
• The Election Commission also filed an affidavit to the SC on some provisions in the scheme, which can have serious repercussions on political funding in the country.

Rationale behind introduction of Electoral Bonds

• To limit the use of cash in political funding: To reduce using illicit means of funding and the ‘system’ was wholly opaque and ensured complete anonymity.
• To curb black money- due to the following features included in the electoral bonds
  • Payments made for the issuance of the electoral bonds are accepted only by means of a demand draft, cheque or through the Electronic Clearing System or direct debit to the buyers’ account”.
  • Limiting the time for which the bond is valid ensures that the bonds do not become a parallel currency.
• Eliminate fraudulent political parties- that were formed on pretext of tax evasion, as there is a stringent clause of eligibility for the political parties in the scheme.
• Protects donor from political victimization- as non-disclosure of the identity of the donor is the core objective of the scheme.

Arguments against the Electoral Bonds Scheme

• Brings Opacity in the Political Funding- Ordinary citizens are not able to know who is donating how much money to which political party, and the bonds increase the anonymity of political donations-
  • The rules for declaring sources of funding for political parties are outlined in Section 29C of the Representation of the People Act, 1951. Prior to 2017, the Act said all registered parties had to declare all donations made to them of over Rs.20,000. However, an amendment in finance act has kept electoral bonds out of the purview of this section. Therefore, parties will not have to submit records of electoral bonds received to the Election Commission for scrutiny.
  • Further, political parties are legally bound to submit their income tax returns annually under Section 13A of the Income Tax Act, 1961. However, the electoral bonds have also been exempt from IT Act. Thus, removing the need to maintain records of names, addresses of all donors.
  • Opens up possibility of corporate misuse- with the removal of the 7.5% cap on the net profits of the last three years of a company, corporate funding has increased manifold, as there is now no limit to how much a company, including loss-making ones, can donate. Hence, companies can be brought into existence by unscrupulous elements primarily for routing funds to political parties through anonymous and opaque instruments like electoral bonds.
  • Favors ruling party– SBI being a government own ed bank will hold all the information of the donors which can be favorable to the party in power and also deter certain entities from donating to opposition due to fear of penalization.
• E.g. the data revealed through the Right to Information shows that State Bank of India issued a whopping Rs.1, 716 crore in electoral bonds in just two months of 2019 and the ruling party has received 94.6% of all the electoral bonds sold in 2017-18.

Election Commission’s concerns regarding the scheme

• Does not allow ECI to check violation of provisions in the Representation of the People Act- as any donation received by a political party through an electoral bond has been taken out of the ambit of reporting under the Contribution Report.
  • E.g. the Representation of the People Act, 1951 prohibits the political parties from taking donations from government companies.
• Allows unchecked foreign funding- An amendment to the Foreign Contribution Regulation Act (FCRA) allow political parties to receive funding from foreign companies with a majority stake in Indian companies. It can lead to Indian policies being influenced by foreign companies.

Government’s arguments for the Electoral Bonds

• Limits the use of cash in political funding- as earlier, massive amounts of political donations were being made in cash, by individuals/corporates, using illicit means of funding and identity of the donors was not known. Hence, the ‘system’ was wholly opaque and ensured complete anonymity.
• Curbs black money- due to the following reasons-
  • Payments made for the issuance of the electoral bonds are accepted only by means of a demand draft, cheque or through the Electronic Clearing System or direct debit to the buyers’ account”. Hence, no black money can be used for the purchase of these bonds.
  • Buyers of these bonds must comply with KYC requirements, and the beneficiary political party has to disclose the receipt of this money and must account for the same.
  • Limiting the time for which the bond is valid ensures that the bonds do not become a parallel currency.
• Protects donor from political victimization- as non-disclosure of the identity of the donor is the core objective of the scheme. Further, the records of the purchaser are always available in the banking channel and may be retrieved as and when required by enforcement agencies.
• Has sufficient safeguards- such as donations through bonds received from a domestic company having a majority stake is permitted, subject to its compliance with KYC norms and FEMA guidelines.
• Eliminate fraudulent political parties- which are formed on pretext of tax evasion, as there is a stringent clause of eligibility for the political parties in the scheme.

Some measures which can complement Electoral Bonds

• Switch to complete digital transactions.
• Donations above a certain limit be made public to break the corporate-politico nexus.
• Political parties should be brought under the ambit of RTI.
• Establish a national electoral fund where donors contribute and funds are distributed among different parties.