Electoral Bonds Constitution Bench | Day 2: EB Scheme ensures confidentiality, not anonymity, Solicitor General argues

Constitutionality of the Electoral Bond Scheme

Judges: D.Y. Chandrachud CJI, Sanjiv Khanna J, B.R. Gavai J, J.B. Pardiwala J, Manoj Misra J

Respondents began their arguments in the second half of the day on 1 November 2023. Attorney General R. Venkataramani clarified that Solicitor General Tushar Mehta will be laying out the contours of the electoral bonds scheme. Venkataramani would argue on the question of whether the electoral bond scheme which facilitates anonymous corporate political funding violates fundamental rights. 

In the first half of the day, petitioners completed their arguments, with particular focus on the various amendments introduced through the 2016 and 2017 Finance Acts to the Reserve Bank of India Act, 1934 (RBI Act), Representation of the People Act, 1951 (RoPA), Income Tax Act, 1961 and the Companies Act, 2013.

Mehta began by requesting the Bench to cease using the terms “anonymity” and “opacity” in the context of electoral bonds, arguing that it was, in fact, “confidentiality” that was at the heart of the scheme. He then argued that all countries struggle with election funding, and that in India, every ruling party over the years had made “several attempt” to “eradicate the menace of use of unclean money” in Indian elections. The 2018 electoral bonds scheme was simply one such attempt, which focused on large-scale digitisation of financial transactions. Because of this, Mehta said, we now have “more clean money” in the economy.

Failure of previous mechanisms to eradicate black money circulation

Starting from 1956, Mehta took the Court through the key list of dates plotting the evolution of political donations and corresponding laws. That year, the Companies Act, 1956 was introduced, which permitted corporate political donations if the Memorandum of Association (MoA) permitted it. In 1957, the Bombay High Court, while deciding a challenge to a company’s amendment to its MoA in Jayantilal Ranchchoddas Koticha v Tata Iron and Steel Co Ltd, held that a joint stock company can do what an individual does unless expressly prohibited.

In 1969, an amendment was introduced to the Companies Act, following the recommendations of the Santhanam Committee, prohibiting any kind of political funding by corporate entities. Mehta referred to a research paper which noted that this ban opened “several backdoor routes” and started a practice of “Briefcase Politics” (where government permits were sold in exchange for a number of briefcases filled with money). 

Mehta referred to a debate in Parliament on 16 May 1985, where it was said that companies are “entitled to support a political party which believes in a certain amount of freedom of private business.” Further, they said that companies believe in their ability to “resist any pressure from any political party for “out of the books donations” if they are permitted to donate through lawful channels. Members believed that the “evil [of black money] which we want to remove cannot be removed by imposing a ban.” Following this, in 1985, companies were once again permitted to fund political parties, with a limit of five per cent of the company’s average net profits of the past three years. Further, the Board of Directors would have to approve such a contribution. 

Next, in 2003, several amendments to the Representation of People’s Act, 1951 and Companies Act, 1956 and Income Tax Act, 1961 permitted any amount of voluntary contributions from companies and made them entirely exempt from tax.

In 2009, electoral trusts were introduced which were also exempt from tax. In 2013, the limit imposed on companies of five per cent of the average net profit of the previous three years was raised to 7.5 per cent.

In 2014, the Election Commission of India introduced guidelines mandating that electoral trusts submit “Contribution Reports” to ensure that there was complete disclosure of details of political funding. Electoral trusts are formed by five companies who pool their money and have the trust then decide where that money should be donated. Mehta explained that Electoral Trusts continue to exist and that the Finance Minister in 2017 stated that it had not achieved its goals. 

Mehta argued that “after experimenting” with all these schemes, amendments and policies, the electoral bonds scheme was introduced. 

Electoral Bonds sought to bring about transparency in an otherwise opaque system of political funding

Mehta read the speeches and letters of former Finance Minister Arun Jaitley on the need for the scheme. Jaitley noted that the issue of unclean money in political funding had “only marginally improved” through all the changes mentioned above. Mehta said, “Unless you accept the problem, a solution cannot be found.” This solution, Jaitley proposed, was in the form of the Finance Acts 2016 and 2017. 

In the Parliamentary speech dated 1 February 2017, Jaitley noted that there was both a need to “cleanse the system of political funding” and ensure that the identities of the donors were protected. Mehta was quick to clarify that Jaitley never sought to resolve the issue of black money fully. Jaitley, he explained, only wanted “substantial” and “significant” change.

Jaitley had further said that donors’ balance sheets will reflect how much they donated and political parties’ balance sheets will disclose how much was received. This, he said, “will be the cleaner money coming from the donor, cleaner money coming into the hands of a political party who would have cleansed substantially the whole process. There would be a significant amount of transparency.” 

Before Mehta read on, the Bench raised concerns. Chief Justice D.Y. Chandrachud stated that the transparency in the system is hinged on the premise that the donors buy these bonds. “But the donor does not have to buy the bonds”, he said, indicating that the person who buys the bond and the actual donor could be different people. How will “source of the money, the donor and where it is spent” be known? Mehta assured that he will take the Bench through the scheme tomorrow—that will make it clear that there are various steps that will ensure transparency.

Confidentiality at the heart of the electoral bonds scheme

Mehta warned that if the electoral bonds scheme is interfered with, and the confidentiality of the donor was removed, “we go back to [the pre-2018] regime”. This regime is fraught with opacity, threat to donors and lack of control over the flow of illegal cash in electoral funding. Relying on a report published by the lead petitioner, Mehta argued that in the period before the electoral bonds scheme—specifically between Financial Years 2004-05 to 2014-15—69 per cent of the total income of the parties came from “unknown sources”. This, Mehta argued, is indicative of the fact that when there were no confidential mechanisms in place for donors to contribute without detection, they chose cash-based donations, which could not be detected by political parties. 

If the confidentiality of donors is not ensured, Mehta argued, they would be apprehensive about “victimisation and retribution” from political parties whom they do not fund. This would encourage them to convert white money to black—to use legitimate funds in cash form to avoid detection as donations. Any political funding that follows will likely be through back channels and unofficial means. The Bench suggested that though the previous regime did not provide for the confidentiality of the donors, it at least had safeguards to ensure that there was transparency of donations from the voters’ point of view. 

Further, the Bench stated that the scheme was offering selective confidentiality. While some amount of confidentiality is ensured for the donor, parties in power have the means to access that information. So, in reality, it would only be authorities such as the Election Commission of India and citizens who would be in the dark—not the party from whom the confidentiality was sought in the first place. 

The Bench also stated that this would mean that the ruling party would have the power to ascertain information about the political funding for the opposition party, while the opposition would have no means of equipping themselves with this information. The Bench posed these questions in light of the petitioners’ argument that electoral bonds created an uneven playing field between the ruling and opposition parties.

Mehta appeared certain throughout the hearing that the Bench’s concerns around confidentiality, circulation of black money and transparency would be dealt with when he takes the Court through the features of the scheme. He is expected to describe the contours of the 2018 electoral bonds scheme tomorrow, on 2 November 2023.