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Electoral Bonds held unconstitutional by Supreme Court

I. Background

On February 15, 2024, the Supreme Court of India struck down the Electoral Bond Scheme as unconstitutional. Pegged against the measure of right to information under Article 19 (1)(a) of the Constitution, the landmark judgment was passed by a Constitutional Bench comprised of Chief Justice DY Chandrachud, Justice Sanjiv Khanna, Justice B.R. Gavai, Justice J B Pardiwala and Justice Manoj Misra.

Given the nature of the bonds, from its initiation, the Scheme was tarred with controversy. While a voter’s right to information remained central to its criticism, various issues such as quid pro quo, back door lobbying, corruption etc. continued to plague the Scheme.

II. What was the Electoral Bond Scheme of 2018?

The Electoral Bond Scheme of 2018, introduced by the Ministry of Finance on January 02, 2018, provided for donations to political parties through issuance of electoral bonds using machinery of the State Bank of India (“SBI”). Simply put, an Electoral Bond, much like a promissory note, is a money instrument that could be purchased from SBI by a donor, with a striking feature that it would not carry the name or any other information of the donor, thereby making the donation anonymous. It could be encashed by an eligible political party through a bank account with an authorised bank. SBI had been authorised to issue and encash bonds under the Electoral Bond Scheme and there was no limit to the number of bonds that a person or company could purchase.

Prior to the Scheme, under Section 182 of the Companies Act, 2013,  Indian companies were allowed to make financial contributions directly or indirectly to political parties with certain conditions, a) the amount contributed by the company should not exceed 7.5% of average net profits during the three financial years immediately preceding; b) the board of directors of the company would authorise the financial contribution by issuing a resolution authorising the contribution at a meeting; and c) the contribution must be disclosed in the company’s profit and loss account with the name of the political party to which the contribution was made. With the advent of the Scheme, the Finance Act, 2017 amended Section 182 of the Companies Act, thereby omitting not only the cap on funding by companies but also the requirement for companies to disclose the names of political parties in their profit and loss account.

III. Challenge to the constitutional validity

In the year 2017, Association for Democratic Reforms filed a Writ Petition before the Supreme Court, following which the Supreme Court saw a flurry of cases filed by different concerned parties all of which challenged the constitutional validity of the Electoral Bond Scheme. The Association for Democratic Reforms instituted the proceeding under Article 32 of the Constitution of India, challenging amendments in the Finance Act, 2017, which opened the path for the Electoral Bond Scheme, on the grounds that the anonymity associated with the issuance of electoral bonds weakens the transparency in political funding and invades upon the voter’s right to information. In addition to several other parties, even the Election Commission of India had opposed the Scheme on the ground that it would adversely impact transparency in political financing.

IV. What did the Supreme Court hold?

The Supreme Court, in deciding the various pleas, and striking down the Scheme as unconstitutional, answered two crucial questions, a) whether the non- disclosure of information on voluntary contributions to political parties under the Electoral Bond Scheme and the amendments to Section 29C of the Representation of People Act, Section 182(3) of the Companies Act and Section 13A (b) of the Income Tax Act were violative of the Right to Information of citizens under Article 19(1) (a) of the Constitution of India; and b) whether unlimited corporate funding to political parties, as envisaged by the amendment to Section 182 (1) of the Companies Act infringes the principle of free and fair elections and violated Article 14 of the Constitution.

Violation of Right to Information under Article 19(1)(a) of the Constitution of India.

The Court held that the anonymous Electoral Bond Scheme violated the Right to Information guaranteed to a voter under Article 19(1)(a) of the Constitution of India as it disproportionately restricted the right of a voter to know the source of funding of a political party, thus impacting the right to vote. This reasoning is at the core of the judgment and the primary reason why the Scheme has been struck down.

Under Article 19 of the Constitution, the Right to Information under Article 19 (1)(a) can only be restricted on the grounds stipulated in Article 19(2). The Electoral Bond Scheme was argued to be justly within the contours of such reasonable restriction to the fundamental right of freedom of speech and expression. However, the Court observed that the issue of curbing black money in electoral financing, which was the main purpose of the Scheme when introduced, cannot be traced to any grounds in Article 19(2). The proportionality standard, which is an operative standard to test whether the infringement of the fundamental right is justified, was found to be not satisfied in this case.

It was further observed that the purpose of curbing black money can be achieved using other means other than electoral bonds. While mentioning about alternative means, the Court proposed an Electoral Trust which can be formed only for collecting political contributions from the donors. Financial contributions through Electoral Trust, can be done with certain conditions a) the name, address, account number of the contributor, amount contributed, mode of contribution must be recorded; b) contribution to Electoral Trusts must be made through bank drafts, electronic transfers, and cheque only. Cash transfers are not accepted by the Electoral Trust; and c) the Electoral Trust shall maintain a list of persons from whom the contributions have been received and to whom these contributions have been made. Further, the Court held that any contribution less than twenty-five thousand can be made via cheques and other modes of electronic transfer.

Amendment to Section 182 of the Companies Act, 2013

While addressing this issue, the Court discovered that the amendment to Section 182, allowed both profit-making and loss-making companies to make unlimited donations to the political parties. The Court held this amendment to be arbitrary for the following reasons, a) the unlimited contribution by the companies allows to wield their clout and resources to influence policy making compared to that of an individual; and b) treating the companies and individuals at par made this scheme manifestly arbitrary. Further, the Court was of the view, that the unlimited financial contributions and unrestrained influence of companies on the electoral process, violates the principles of free and fair elections and political equality captured in the value of “one person one vote”, as the contributions made by companies are purely business transactions, made with the intent of securing benefits in return. The Court further observed the amendment to be manifestly arbitrary as it does not distinguish between the contributions made by loss making companies and profit-making companies, as it is more plausible for a loss-making company to contribute to political parties in exchange of benefits in return.

Directions of the Court

As a consequence of striking down the Scheme and quashing various consequential amendments in statutes, the Supreme Court has issued some critical directions being (a) Direction to SBI to stop the issuance of electoral bonds; (b) SBI to provide the Election Commission of India with the details of the electoral bonds purchased from April 12, 2019, till date, with the name of the purchaser of the bond and denomination of the electoral bonds purchased; (c) SBI to submit details of the political parties which have received contributions through electoral bonds; (d) the Electoral Bonds which are within the validity of 15 days and have not been encashed by the political parties to be returned to the purchaser; and (e) Election Commission of India to publish the information shared by SBI on its official website by March 13, 2024.

V. Conclusion

The Supreme Court’s decision of holding the Scheme as unconstitutional is monumental, as it recognizes and reaffirms the valuable right to information and has paved the path for free and fair elections, by upholding the need for absolute transparency in funding of political parties.

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