Supreme Court Declares Electoral Bonds Scheme Unconstitutional

In a momentous ruling that resonates across the corridors of power, the Supreme Court of India has unequivocally declared the electoral bond scheme unconstitutional. This verdict, delivered unanimously by a five-judge bench under the leadership of Chief Justice D.Y. Chandrachud on February 15, 2024, stands as a pivotal milestone in the quest for transparent and fair elections. Issued just ahead of the impending Lok Sabha polls, it underscores the fundamental significance of citizens’ right to information in shaping the democratic process. Upholding Article 19(1)(a) of the Constitution, the Apex court emphasises the paramountcy of free and fair elections, vehemently denouncing the deleterious impact of unbridled corporate contributions. Not only does this historic decision mandate the disclosure of donors, amounts, and recipients of electoral bonds, but it also halts their issuance forthwith, heralding a seismic shift towards enhanced accountability and integrity in political financing.

Supreme Court’s Judgment and its Analysis

The Supreme Court of India ruled in the case of Association for Democratic Reforms v. Union of India, affirming that the right to vote with full information is essential for political equality in a democracy. This ruling had significant implications for India’s democratic structure, as the court deemed several parliamentary laws unconstitutional, particularly amendments introduced by the Finance Act of 2017 to various existing laws including the Representation of the People Act, 1951; the Income Tax Act, 1961; and the Companies Act, 2013.

The Supreme Court’s judgment declaring the electoral bonds scheme violative of Article 19(1)(a) and unconstitutional is rooted in several key reasons outlined in the verdict. The introduction of the Electoral Bond Scheme was a major contention in this case. This scheme allowed donors to keep their identities and contribution details private; thus, it eroded transparency in the political funding. Moreover, the removal of crucial safeguards, such as limits on corporate donations, enabled potentially unlimited corporate funding and the creation of shell companies for political financing. The Doctrine of Proportionality served as a pivotal framework utilised by the Supreme Court in evaluating the constitutionality of the Electoral Bond Scheme.

The Doctrine of Proportionality originates from the European administrative law, and prescribes that administrative decisions and orders should only restrict individual rights to the extent necessary to achieve a legitimate public purpose. By requiring decision-makers to consider the proportionality of their actions, the doctrine safeguards the rights of individuals and ensures that government actions are aligned with democratic principles and constitutional norms.

There are two main models of proportionality: the British model and the European model. The British model emphasises the necessity of legislative objectives and limits administrative actions to those deemed essential for achieving those objectives. It emphasises judicial deference and restraint, particularly in matters where fundamental rights are at stake. On the other hand, the European model, originating from Prussia, adopts a four-stage test to assess the legitimacy, suitability, necessity, and proportionality of administrative measures. It seeks to optimise the balance between limiting rights and achieving legislative goals while also recognising the importance of judicial deference and restraint.

Key aspects of the doctrine of proportionality include a reasonable nexus between the objective sought and the means employed to achieve it, a balancing test to weigh differing objectives or interests, and ensuring that the measure taken is not more restrictive than necessary. Proportionality review may vary in intensity depending on the subject matter and the nature of the rights involved, expanding the scope of judicial review to evaluate both the correctness of the decision and the method used to reach it.

Some important decisions where the doctrine has been applied include:

• The Chintaman v. State of Madhya Pradesh (1951) case which emphasised on balancing fundamental rights against the legislative or administrative restrictions and laid the groundwork for applying the doctrine of proportionality in Indian law.
• The Hind Construction and Engineering Company Limited v. Workmen (1965) case ruled against the dismissal of workers for a minor offence and highlighted the principle of proportionality in employment matters.
• The Bhagat Ram v. State of Himachal Pradesh (1983) case held that disproportionate punishment violates Article 14 of the Constitution and emphasised relevance of proportionality in disciplinary actions.
• The Ranjit Thakur v. Union of India (1987) case found dismissal of Ranjit Kumar from service disproportionate to offence of refusing food while serving a sentence. It reaffirmed application of proportionality in disciplinary matters.
• The Om Kumar And Ors v. Union of India (2000) case recognised the doctrine of proportionality in reviewing administrative actions and applied the doctrine to cases infringing Articles 14, 19, and 21 of the Constitution.
• The Sandeep Subhash Parate v. State of Maharashtra (2006) case directed a university to grant degree to the appellant student with invalidated caste certificate and ordered compensation as a proportionate remedy for injustice done.
• Demonetisation The doctrine of proportionality also played a significant role in the Supreme Court’s decision-making process regarding the demonetisation of Rs 500 and Rs 1000 currency notes in 2016. Upholding the decision of the central government, the court concluded that demonetisation was not disproportionate to the stated objectives of curbing black money and counterfeit currency. The consultation between the Centre and the Reserve Bank of India (RBI) before demonetisation was deemed sufficient, and the notification announcing the demonetisation was considered reasonable.

Methods Employed by the SC

The Supreme Court employed several methods to apply the proportionality test in the context of the Electoral Bond Scheme, which played a crucial role in rendering the scheme unconstitutional.

Context of fundamental rights The Constitution of India guarantees fundamental rights to its citizens, including the right to free speech under Article 19(1). However, these rights are not absolute and can be subject to “reasonable restrictions” listed under Article 19(2). Any law or state action encroaching upon these rights must undergo scrutiny for reasonableness.

The proportionality test evaluates whether the state’s encroachment into individuals’ rights is proportional to the objective it seeks to achieve. This test acts as a safeguard against arbitrary state actions that might unduly curtail fundamental rights, even if pursued in the name of legitimate state interests.

Precedent and legal foundation The proportionality test has been established as a best practice judicial standard, emphasised in landmark rulings such as Puttaswamy v. Union of India case (2017), which recognised the right to privacy as a fundamental right. The case mandates that state actions must be sanctioned by law, serve a legitimate aim in a democratic society, be proportionate to the need for such interference, and include procedural guarantees against abuse.

Application of the Test in the Electoral Bond Case

Government’s argument The government contended that curbing black money and protecting donor anonymity were legitimate state interests which justify the electoral bond scheme.

• Counter-argument Justice Khanna held that donor anonymity could not be a legitimate state aim, and emphasised the importance of voters’ right to know.
• CJI’s perspective Chief Justice Chandrachud introduced the concept of the “double proportionality” test, recognising the competing fundamental rights of privacy and information. He stressed the need to examine whether the state adopted the “least restrictive” methods to achieve both the objectives.
• Evaluation of State action The court scrutinised whether the electoral bond scheme was the least intrusive method to curb black money and protect donor anonymity. The court found that alternative methods, such as the electoral trusts scheme, could achieve these objectives with lesser infringement upon the fundamental rights.
• Unconstitutional ruling The Court ruled that Clause 7(4) of the Electoral Bond Scheme disproportionately favoured the purpose of informational privacy over informational interests. As a result, the SC unanimously struck down the electoral bond scheme, deeming it unconstitutional. The scheme failed to meet the standards of the proportionality test, as it disproportionately encroached upon the fundamental rights of free speech and information without adequately justifying its necessity or considering less intrusive alternatives.

The Supreme Court’s application of the proportionality test ensured that fundamental rights were upheld while also considering legitimate state interests, thereby serving as a crucial mechanism for protecting democratic principles and constitutional norms.

Some Highlights of the Judgment

Redressal of primary issues The judgment addressed two primary issues—the violation of the right to information and the potential impact of unlimited corporate funding on the principles of free and fair elections and equality. The judgement advocated for comprehensive disclosure requirements and criticised the lack of classification and determination in the law regarding corporate contributions.

Immediate cessation of bonds The State Bank of India (SBI) was directed to halt the issuance of any further electoral bonds. Additionally, the SBI was mandated to furnish detailed information about all electoral bonds, purchased by political parties since April 12, 2019, to the Election Commission of India (ECI) by March 6, 2024, including the date of purchase, purchaser’s name, and bond denomination.

Publication information The ECI was instructed to publish all the provided details about electoral bonds on its official website by March 13, 2024, aiming to enhance transparency and public access to political funding information.

Return of uncashed bonds Electoral bonds still within their validity period of fifteen days but not yet encashed by political parties were required to be returned. Upon return, the SBI would refund the amount to the purchaser’s account, addressing concerns regarding bond’s anonymity and its potential misuse.

About the Electoral Bond Scheme

The Electoral Bond Scheme is a mechanism introduced by the Government of India to facilitate transparent political funding through amendments to several key Acts, including the Representation of the People Act, 1951 (RPA), the Companies Act, 2013, the Income Tax Act, 1961, and the Foreign Contributions Regulation Act, 2010 (FCRA). These amendments were incorporated into the Finance Acts of 2016 and 2017. However, it faced challenges and criticisms, particularly regarding the anonymity of donors and the potential for misuse.

Electoral bonds are interest-free bearer bonds or money instruments available in denominations ranging from Rs 1,000 to Rs 1 crore. They can be purchased by both individuals and companies from authorised branches of the State Bank of India (SBI). These bonds are used for making donations to political parties. Electoral bonds are designed to maintain anonymity, as the name and other details of the donor are not recorded on the instrument. Moreover, there is no cap on the number of electoral bonds that a person or company can purchase.

Political parties eligible to receive electoral bonds are those which secured at least 1 per cent of the votes polled in the last Lok Sabha or State Assembly elections and are registered under the RPA 1951. The ECI verifies the accounts of these political parties.

Electoral bond amounts are deposited into the verified accounts of political parties within 15 days of purchase. Political parties have a stipulated period of 15 days to encash the electoral bonds. If not encashed within this period, the bond amount is directed to the Prime Minister’s Relief Fund.

Electoral bonds are not available for purchase throughout the year. They are available for a period of 10 days in every four-month interval (January, April, July, and October). Additionally, during the Lok Sabha election years, they are available for a period of 30 days.

Electoral Trusts

Established by the UPA government in 2013, electoral trusts are entities formed by companies registered under Section 25 of the Companies Act, 1956. Any citizen of India, company registered in India, firm, Hindu Undivided Family, or association of persons living in India can donate to an electoral trust. Electoral trusts are required to submit yearly reports to the Election Commission of India detailing contributions from individuals and companies, as well as donations made to political parties. Donors’ information, such as PAN (for residents) or passport numbers (for NRIs), is collected at the time of contributions.

Electoral trusts must donate 95 per cent of contributions received in a financial year to political parties registered under the RPA 1951. It provides transparency on both contributors and beneficiaries, allowing the public to know who is funding which party.

Electoral Trusts vs Electoral Bonds

• Electoral trusts operate with transparency, requiring detailed reporting of contributions and donations to political parties, while electoral bonds prioritise donor anonymity.
• Electoral trusts allow for public knowledge of both contributors and beneficiaries, whereas electoral bonds keep donor identities confidential.
• Electoral bonds were introduced as a newer mechanism, superseding the previous electoral trusts scheme, and have seen a significant increase in political funding compared to electoral trusts.

Total funds generated through electoral bonds from March 2018 to January 2024 is Rs 16,518.11 crore. Over 50 per cent of total contributions is received by parties through electoral bonds. The percentage of contributions received by some regional parties through electoral bonds has exceeded 90 per cent. Almost half of the funds in electoral bonds come from corporate sources, with the remainder coming from various other sources.

Issues Associated with Electoral Bond Scheme

Despite government assertions that the scheme promotes transparency and does not facilitate black money, critics argue that it opens avenues for unregulated political donations. The legal battle surrounding the electoral bonds scheme has seen various twists and turns, including interim orders and pleas for judicial review.

Some key issues associated with the scheme raised by the critics are:

• It violates citizens’ fundamental right to information under Article 19(1)(a) by withholding information about political party funding, leading to suspicions of corruption and undisclosed agreements.
• Both the RBI and the Election Commission have voiced objections to the scheme, warning about the potential misuse of shell companies to channel black money.
• There are concerns that electoral bonds facilitate backdoor lobbying, with corporations allegedly making donations to political parties in power to secure favours. This anonymity may potentially enable quid pro quo arrangements between donors and political parties.
• The name “Electoral Bond” is misleading, as the funds can be used for purposes other than elections. The absence of spending restrictions enables political parties to use the funds for purposes beyond election-related activities.
• By providing anonymity to donors, it protects criminals from prosecution under anti-corruption laws. Additionally, reducing the disclosure threshold may not effectively reduce the use of cash in politics and could promote corruption.
• The dominance of the ruling party in receiving electoral bonds has raised concerns about the fairness and equality among political parties. Opposition parties argue that the scheme favours the ruling party, leading to an imbalance in political funding and undermining democracy.
• It provides anonymity to corporate donors while citizens making smaller donations are required to disclose their identities, potentially amplifying the corporate influence over citizens’ voices in the democratic process.
• Shareholders investing in companies may not be informed about how their money is being spent through electoral bonds, undermining their interests and accountability within corporations.
• While trading of electoral bonds is prohibited, there are concerns about the inability to stop such activities, raising questions about the scheme’s effectiveness in curbing the misuse of money and promoting transparency.

Way forward

Regulation of donations Implement clear and stringent regulations regarding political donations, including banning certain entities like foreign citizens or companies from making contributions.

• Set donation limits to prevent undue influence from a few large donors and ensure broader participation in the funding process.
• Consider models from other democracies like the US or the UK, where contribution limits or disclosure requirements are in place to effectively regulate the flow of money into politics.

Limits on expenditure Enforce expenditure limits on political parties to prevent a financial arms race and level the playing field.

Public financing of elections Introduce a system of public funding for political parties based on certain predetermined criteria, such as past electoral performance, membership fees, and private donations.

• Explore innovative methods like democracy vouchers, as seen in the US, to empower voters to contribute to political campaigns while ensuring transparency and accountability.

Disclosure requirements Strike a balance between transparency and anonymity by implementing disclosure requirements for political donations.

• Consider allowing anonymity for small donors while mandating disclosures for large contributors, as practised in countries like the UK and Germany.
• Enhance transparency in the funding process to deter quid pro quo arrangements and promote accountability among political parties and donors.

State funding of elections Introduce state funding for election campaigns, particularly at the candidate level, to reduce dependence on private funding and curb corruption.

• Allocate funds to candidates based on their final share of votes cast, promoting cleaner and more competitive elections.
• Explore financing options by reallocating resources from existing schemes like the Members of Parliament Local Area Development Scheme (MPLADS) to fund election campaigns.

Learning from international practices Learn from other countries’ experiences, such as Japan, Germany, Canada, and Sweden, where public funding combined with spending ceilings and restrictions on corporate donations has reduced the influence of money in politics.

• Adopt successful models like the UK’s capping of party expenditures per seat to avoid excessive spending.
• Learn from failures and challenges faced by other jurisdictions, such as the Chilean experiment with complete anonymity in party funding, to avoid similar pitfalls.

Legislative reforms

• Undertake comprehensive legislative reforms to overhaul the existing framework of political funding and strengthen regulatory mechanisms.
• Engage stakeholders, including political parties, civil society organisations, and election authorities, in the reform process to ensure transparency, fairness, and broad-based support.

Continued review and adaptation Regularly review the effectiveness of implemented reforms and make necessary adjustments to address emerging challenges and loopholes.

• Foster a culture of accountability and integrity in political financing through public awareness campaigns and enforcement of anti-corruption measures.

By adopting a multifaceted approach that combines regulatory reforms, public financing mechanisms, legislative interventions, and ongoing evaluation, India can work towards ensuring transparency, fairness, and accountability in its political funding system, thereby strengthening its democratic institutions, and safeguarding the integrity of electoral processes.

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