What is Electoral bonds?

Electoral Bonds

Electoral Bonds were introduced in India in 2018 as a financial instrument aimed at reforming the system of political funding. The scheme was launched by the Government of India through the Finance Act, 2017, with the objective of promoting transparency and reducing the use of black money in elections. These bonds were issued exclusively by the State Bank of India and were available in fixed denominations ranging from ₹1,000 to ₹1 crore.

Electoral bonds functioned as bearer instruments, meaning that the identity of the purchaser was not disclosed to the public. Any Indian citizen or company could purchase these bonds through a KYC-compliant process and donate them to eligible political parties. The receiving political parties, registered with the Election Commission of India, could encash these bonds within a specified period, usually 15 days.

The key idea behind electoral bonds was to shift political donations from cash-based transactions to formal banking channels, thereby ensuring cleaner funding. At the same time, the scheme sought to protect donor privacy by maintaining anonymity, which was expected to encourage more contributions from individuals and corporations.

However, despite its intended objectives, the scheme soon became controversial due to concerns over lack of transparency and potential misuse. Critics argued that anonymous funding could undermine democratic accountability. In 2024, the Supreme Court of India struck down the scheme as unconstitutional, emphasizing the importance of transparency in political financing.

Overall, electoral bonds represent a significant but contentious experiment in India’s electoral and financial reform process.

Electoral Bonds are financial instruments introduced by the Government of India in 2018 to facilitate donations to political parties in a structured and banking-based manner. They were launched through amendments made in the Finance Act, 2017, and were issued by the State Bank of India.

Electoral bonds function somewhat like promissory notes. Any Indian citizen or company could purchase these bonds from designated SBI branches in specific denominations (ranging from ₹1,000 to ₹1 crore). After purchasing, the donor could give the bond to a political party of their choice. The political party could then encash the bond through its verified bank account within a limited period, usually 15 days.

A key feature of electoral bonds was anonymity. The identity of the donor was not disclosed to the public or even to the receiving political party. While the bank recorded the purchaser’s details for compliance purposes, this information was not made publicly available. The government argued that this system would reduce the use of black money in political funding by encouraging donations through formal banking channels.

However, the scheme was widely criticized for its lack of transparency. Critics argued that anonymity undermined democratic accountability because voters could not know who was funding political parties. Additionally, concerns were raised about the possibility of large corporations influencing political decisions through undisclosed donations.

In a landmark ruling in 2024, the Supreme Court of India declared the Electoral Bond Scheme unconstitutional. The Court held that it violated citizens’ right to information, which is a part of freedom of speech under Article 19(1)(a) of the Constitution. It also directed authorities like the Election Commission of India to ensure greater transparency in political funding.

In summary, electoral bonds were intended to make political donations cleaner and more formal but ultimately raised serious concerns about transparency and democratic integrity.

Electoral bonds Introduction and Purpose

Electoral Bonds were introduced in India in 2018 as a financial instrument to facilitate political donations through formal banking channels. The scheme was launched by the Government of India via the Finance Act, 2017, and implemented through the State Bank of India, which was the sole authorized issuer.

These bonds functioned like bearer instruments, meaning whoever held the bond could donate it to a political party. Individuals, companies, and other entities could purchase electoral bonds in fixed denominations and give them to eligible political parties, which could then encash them within a specified time frame. Importantly, only political parties registered under the Election Commission of India and securing at least 1% of votes in elections were eligible to receive these funds.

A defining feature of electoral bonds was donor anonymity. While the bank recorded the buyer’s identity, this information was not disclosed publicly, making political funding less transparent to citizens.

The primary objective behind introducing electoral bonds was to reform political funding in India by making it more transparent, accountable, and free from black money. The government aimed to encourage donors to contribute through legitimate banking channels rather than cash, thereby reducing illegal or unaccounted political donations.

Another purpose was to protect donor privacy. The scheme intended to shield contributors from potential political backlash or victimization, especially in a competitive political environment. By ensuring anonymity, the government believed more individuals and corporations would be willing to donate.

Additionally, electoral bonds were meant to streamline the donation process. By centralizing transactions through a trusted banking system like SBI, the government sought to create a cleaner and more organized mechanism for political contributions.

However, despite these objectives, the scheme later faced criticism for reducing transparency in political funding. In 2024, the Supreme Court of India struck it down, stating that it violated citizens’ right to information and undermined democratic accountability.

Eligibility for Electoral Bonds

The Electoral Bond Scheme laid down specific eligibility criteria for both buyers (donors) and receivers (political parties):

1. Eligibility of Donors (Who can buy Electoral Bonds?)

Indian Citizens: Any individual who is a citizen of India could purchase electoral bonds, either singly or jointly with others.
Companies and Organizations: Corporate entities, firms, associations, and other bodies registered in India were also eligible to buy bonds.
KYC Compliance: Buyers had to fulfill Know Your Customer (KYC) norms through the State Bank of India. This ensured that the money used for purchasing bonds came through legitimate banking channels.
No Limit on Purchase: There was no upper cap on the number or value of bonds a donor could purchase.

2. Eligibility of Political Parties (Who can receive Electoral Bonds?)

Registered Political Parties: Only parties registered under Section 29A of the Representation of the People Act, 1951 were eligible.
Minimum Vote Share: The party must have secured at least 1% of the votes polled in the most recent Lok Sabha or State Legislative Assembly elections.
Verified Bank Account: The party needed to have a designated account verified by the Election Commission of India for encashing the bonds.
Time-bound Encashment: Bonds had to be encashed within 15 days of issuance; otherwise, they expired.

3. Issuance Conditions

Electoral bonds were issued only through authorized branches of the State Bank of India during specified windows announced by the government.

The eligibility framework aimed to ensure that only legitimate donors and recognized political parties could participate in the scheme. While it brought political donations into the formal banking system, critics argued that the absence of public disclosure reduced transparency.

Controversies and Criticisms of Electoral Bonds

The Electoral Bond Scheme, introduced in 2018, attracted significant criticism despite its stated aim of reforming political funding. One of the biggest concerns was the lack of transparency. Donations made through electoral bonds were anonymous, meaning voters had no way of knowing who funded political parties. Although purchase details were maintained by the State Bank of India, this information was not publicly disclosed, raising concerns about accountability in a लोकतांत्रिक system.

Another major criticism was the possibility of unequal access to donor information. Critics argued that the ruling government could potentially access donor details through official channels, giving it an advantage over opposition parties. This created fears of political pressure, favoritism, and misuse of financial data.

The scheme also enabled unlimited corporate funding. Changes in company laws removed caps on political donations and disclosure requirements. As a result, even loss-making or shell companies could donate large sums without transparency. This raised serious concerns about corporate influence over public policy and the risk of quid pro quo arrangements.

Additionally, the secrecy of funding was seen as a threat to free and fair elections. Without knowing the financial backers of political parties, voters could not make fully informed choices. This undermined the democratic principle of informed consent.

Legal challenges to the scheme argued that it violated fundamental rights, particularly the right to information under Article 19(1)(a) and the right to equality under Article 14. In 2024, the Supreme Court of India struck down the scheme as unconstitutional, emphasizing that transparency is essential in political funding.

Legal Provisions of Electoral Bonds

The Electoral Bond Scheme was introduced through the Finance Act, 2017, which amended several existing laws to regulate political funding in India. This Act provided the legal foundation for issuing electoral bonds and was passed as a Money Bill.

Key amendments were made to the Representation of the People Act, 1951, allowing political parties to receive donations via electoral bonds without disclosing donor identities. This marked a shift from earlier transparency requirements.

The Companies Act, 2013 was also amended to remove the 7.5% cap on corporate donations and eliminate the need to disclose recipient political parties. This enabled unlimited and anonymous corporate funding.

Under the Income Tax Act, 1961, donations made through electoral bonds were made tax-deductible, and political parties were exempt from maintaining detailed donor records if they complied with prescribed conditions.

Additionally, the scheme allowed the State Bank of India to issue these bonds, raising concerns about bypassing the Reserve Bank of India’s regulatory role.

Overall, these legal provisions enabled structured but anonymous political funding. However, in 2024, the Supreme Court of India declared the scheme unconstitutional for violating transparency and fundamental rights.

Latest Supreme Court Judgment on Electoral Bonds

The latest judgment of the Supreme Court of India on Electoral Bonds (delivered on 15 February 2024) is a landmark ruling that has significantly reshaped political funding in India. In the case of Association for Democratic Reforms v. Union of India, a five-judge Constitution Bench unanimously struck down the Electoral Bond Scheme as unconstitutional.

The Court held that the scheme violated the fundamental right to information under Article 19(1)(a) of the Constitution. Electoral bonds allowed individuals and corporations to donate money to political parties anonymously, which prevented voters from knowing who was funding political actors. The Court emphasized that this lack of transparency undermines democratic accountability and informed decision-making by citizens.

One of the key observations of the Court was that the right to know is an essential part of freedom of speech and expression. Voters must have access to information about political funding to assess potential influences on policy-making and governance. By allowing secrecy, the scheme distorted the principles of free and fair elections and opened the possibility of quid pro quo arrangements between donors and political parties.

The Court also struck down related amendments made through the Finance Act, 2017, which had removed limits on corporate donations and disclosure requirements. It found these changes to be arbitrary and violative of Article 14 (right to equality), as they enabled unlimited and opaque corporate funding.

As part of its directions, the Court ordered the State Bank of India (SBI) to immediately stop issuing electoral bonds and to disclose all details of bonds purchased and encashed since April 2019 to the Election Commission of India (ECI). The ECI was then directed to publish this data for public access, ensuring transparency.

In conclusion, the judgment marks a major step toward strengthening transparency, accountability, and democratic integrity in India. By prioritizing citizens’ right to information over donor anonymity, the Supreme Court reinforced the principle that democracy cannot function effectively without an informed electorate.

Arrest of CM Chandrababu Naidu in Electoral Bonds Case

In 2023, the arrest of former Chief Minister Chandrababu Naidu marked a significant development, as the Andhra Pradesh Criminal Investigation Department (CID) presented evidence to the Anti Corruption Bureau (ACB) Court, highlighting that the Telugu Desam Party (TDP) had received a substantial sum of ₹27 crore in electoral bonds as donations for the fiscal year 2018-19. This amount is purportedly linked to misappropriations in a skill development project.

In response, the TDP denounced these actions as a politically motivated campaign and an abuse of state law enforcement by the ruling YSR Congress Party (YSRCP), led by Chief Minister Y. S. Jagan Mohan Reddy. The TDP pointed out that the YSRCP itself had received a hefty sum through electoral bonds, totaling ₹99.84 crore in 2018-19, ₹74.35 crore in 2019-20, ₹96.25 crore in 2020-21, and ₹60 crore in 2021-22. However, these figures were not disclosed in the party's publication, Saakshi, raising concerns over transparency and accountability in political financing.

Conclusion

Electoral Bonds were introduced as a reformative step to modernize political funding in India by shifting donations from cash-based systems to formal banking channels. At a conceptual level, the scheme aimed to curb black money, enhance accountability, and encourage legitimate contributions to political parties. By involving institutions like the State Bank of India and regulating eligibility through the Election Commission of India, the government sought to create a structured and secure mechanism for political donations.

However, in practice, the scheme generated serious concerns. The most significant issue was the lack of transparency, as donor identities were kept anonymous from the public. While this was intended to protect donors, it also limited voters’ ability to make informed decisions. Additionally, the removal of caps on corporate donations raised fears about disproportionate influence of big businesses in politics, potentially affecting policy decisions and governance.

The scheme also triggered constitutional debates, particularly regarding the citizens’ right to information and the principle of equality in elections. Critics argued that secrecy in political funding undermines democratic accountability and could lead to an uneven playing field among political parties.

In 2024, the Supreme Court of India declared the Electoral Bond Scheme unconstitutional, reinforcing the importance of transparency in a democratic system. The judgment marked a turning point in India’s electoral reforms.

In conclusion, while electoral bonds were introduced with the intention of cleaning political funding, their implementation highlighted the delicate balance between privacy and transparency, ultimately reaffirming that informed citizen participation is essential for a healthy democracy.

References:

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What is Electoral bonds? - Everything Explained with Latest Judgment