Electoral Bonds: A Democracy’s Trojan horse The anonymity of the political party donor coupled with the fact that foreign entities can also be exempted under FEMA and contribute, has rendered the Indian electoral process open to manipulation
18, Oct 2022 | Legal Researcher
Electoral Bonds, in the transparency and accountability graph, as claimed by the government have some inherently anti-democratic characters. Their key feature of anonymity enables a system where people do not know who are giving/donating money to the political parties they then are voting for. An under-informed electorate can only make haphazard decisions which is a bad sign for electoral democracy. A combination of laws regarding election finance combined with the Electoral Bond Scheme acts as an impediment in India’s journey towards a stronger, more accountable democracy.
The Supreme Court on Friday October 14, 2022 posted a batch of petitions challenging the anonymous electoral bonds scheme to December 6, 2022 for the next hearing. The petitions challenging the scheme were listed for the first time on Friday after a long delay; the last hearing having been on March 26, 2021. [1] After much delay, the matter will now be finally heard on December 6, 2022.
Electoral Bonds are instruments through which persons can donate their contributions to political parties. Apart from offering anonymity to the donors, there are several characteristics of electoral bonds that make it a new and unique tool typifying the political finance regime in India. In this context, this bit of legal research is intended to present an overview of the recent amendment to election finance in India and illustrate, how these changes will work in the context of the Electoral Bonds Scheme as introduced by the government of India in 2018.[2]
The following are the laws that govern Election Finance in India:
- The Representation of the Peoples Act, 1951[3]
- Section 29B of the Act allows political parties to receive contribution provided it is not from a foreign source.
[29B. Political parties entitled to accept contribution
Subject to the provisions of the Companies Act, 1956 (1 of 1956), every political party may accept any amount of contribution voluntarily offered to it by any person or company other than a Government company:
Provided that no political party shall be eligible to accept any contribution from any foreign source defined under clause (e) of section 2 of the Foreign Contribution (Regulation) Act,1976 (49 of 1976) Explanation.–For the purposes of this section and section 29C,–
(a) “company” means a company as defined in section 3;
(b) “Government company” means a company within the meaning of section617; and
(c) “contribution” has the meaning assigned to it under section 293A, of the Companies Act, 1956 (1 of 1956) and includes any donation or subscription offered by any person to a political party; and
(d) “person” has the meaning assigned to it under clause (31) of section 2 of the Income-tax Act, 1961 (43 of 1961), but does not include Government company, local authority and every artificial juridical person wholly orpartially funded by the Government.]
- Section 29C of the Act states that in each financial year, the treasurer (of that political party) shall prepare a report in respect of contributions more than Rs. 20, 000 from individuals or companies and exempts (does not make it mandatory) for parties to disclose the details of contributions via electoral bonds.
(1) The treasurer of a political party or any other person authorised by the political party in this behalf shall, in each financial year, prepare a report in respect of the following, namely:–
(a) the contribution in excess of twenty thousand rupees received by such political party from any person in that financial year;
(b) the contribution in excess of twenty thousand rupees received by such political party from companies other than Government companies in that financial year.
1[Provided that nothing contained in this sub-section shall apply to the contributions received by way of an electoral bond.
Explanation.–For the purposes of this sub-section, “electoral bond” means a
bond referred to in the Explanation to sub-section (3) of section 31 of the
Reserve Bank of India Act, 1934 (2 of 1934).]
(2) The report under sub-section (1)shall be in such form as may be prescribed.
(3) The report for a financial year under sub-section (1) shall be submitted by the treasurer of apolitical party or any other person authorised by the political party in this behalf before the due date for furnishing a return of its income of that financial year under section 139 of the Income-tax Act, 1961(43 of 1961) to the Election Commission.
(4) Where the treasurer of any political party or any other person authorised by the political partyin this behalf fails to submit a report under sub-section (3), then, notwithstanding anything contained in the Income-tax Act, 1961(43 of 1961), such political party shall not be entitled to any tax relief under that Act.]
- Companies Act, 2013
Section 182 of the Companies Act, 2013 states that Companies can contribute directly or indirectly to political parties. Section 182 (3) states that the company shall report in its profit and loss account, the details of the contributions that they have made in a certain financial year. Before 2017, companies were restricted to use only 7.5% of the net profit of the past 3 preceding financial years but an amendment in 2017 made it possible for companies to contribute any amount of money, without limit, to political parties. [4]
- Income Tax Act, 1961[5]
Section 80GGB and 80GGC of the Income Tax Act, 1961allow political parties to claim 100% deduction on the money that is donated to the political parties. Tax Deduction means that the amount that is allowed to be deducted is subtracted from the gross taxable income. For example, if a company-Orange- has a total taxable income of Rs.500 Crore and it had previously donated Rs. 10 Crore to a political party, Orange has to pay tax on an income of Rs.490 Crore rather than its total income of Rs. 500 Crore.
Section 13A of the Income Tax is a special provision related to political parties. This provision allows the political parties to not include the income they have received via house property, capital gains and contributions, under total taxable income if certain conditions regarding maintaining of account books, auditing of books, maintaining of books for the funding in excess of Rs. 20, 000 other than such funding via electoral bonds are met, and have not received donations exceeding Rs. 2,000,otherthan by way of prescribed terms. This means, any donation to the party exceeding Rs. 2,000 has to, under this section of the law, to be done in prescribed means i.e., cheque or bank draft or electronic means. Along with this, the political party should maintain the record for contributions in excess of Rs. 20, 000 while it does not have to maintain any details of contributions via electoral bonds.
- Foreign Contributions Regulations Act, 2010 (FCRA)
One of the less spoken about legislation(s) when it comes to electoral funding –though it is often spoken about when it comes to the funding of the non-governmental sector– is the FCRA. FCRA was re-enacted in 2010 replacing the 1976 version. In both the versions of the act, a foreign source meant a company whose nominal share capital is owned by a foreign entity to the extent of more than 50%.[6]However, via the Finance Act, 2016- this definition was altered by inserting a provision saying if a company is compliant with the prescribed limits under the Foreign Exchange Management Act, 1992, it would not be under this law considered to be a foreign source despite its share capital being owned by a foreign entity to the extent of more than 50%. [7]
The change of definition has ramifications to the Representation of the People Act, 1951 (RPA). Section 29B of the RPA states that no political party shall accept funding from a foreign source. Yet now, via the Finance Act of 2016, the definition of foreign source has been amended as stated above. As a result of the Finance Act, 2016, any political party can accept a donation from any company that has more than 50% foreign control if it adheres to FEMA prescribed sectoral limits of investment.
FEMA- Foreign Exchange Management Act, 1999 was enacted to enable better management of foreign exchange. The act also deals with foreign securities such as bonds and shares of companies. The Indian government, under the powers conferred to it by FEMA, releases a Foreign Direct Investment (FDI) policy and the latest consolidated FDI policy was issued in 2020. The limits of foreign control are specified in the FDI policy, and these limits are also referred as ‘sectoral caps.’ For example, in the Defence sector, a company’s share capital can be held by a foreign entity upto the extent of 74% and post that mark, government’s approval is needed to increase the share ownership. In the sector of Uploading/Streaming of News & Current Affairs through Digital Media, the most a foreign entity can hold is 26%, that too, with the approval of government. This means that if a company adheres to the limits of investment under the FDI policy with respect to foreign control, it ceases to be a foreign source under FCRA irrespective of whether a foreign entity owns 100% or 50%, of such company and consequently becomes eligible to fund political parties under the Representation of the People Act, 1951.[8]
Electoral Bonds Scheme
The Central Government published a gazette notification dated January 2, 2018 which notified the Electoral Bonds Scheme. The Electoral Bond is in the nature of a promissory note and it is a bearer banking instrument. The bond does not contain the name of payee or the drawer. A feature of the Electoral Bonds is that they are only available at the prescribed branches of the State Bank of India. The denomination of this bond is from Rs. 1000 to Rs. 1, 00, 00, 000 and they are only issued for ten days in the months of January, April, July and October as may be specified by the central government and the government shall also specify an additions period of 30 days in the year of general elections. According to a report by Factly, from the Financial Year 2017-18 to Financial Year 2020-21, a staggering total of Rs. 6500 Crore worth Electoral Bonds have been redeemed by 19 parties across India in these three financial years alone.
Section 7(4) of the notification states that the information provided to the bank by those who purchase the bonds shall be kept confidential by the bank and the details shall not be released for any purposes except when demanded by a competent court or upon registration of criminal case by any law enforcement agency. The anonymity for the electoral bonds is also protected by the proviso to Section 29C(b) of the RPA. While Section 29C(b) states that the treasurer of a political party shall report any contribution in excess of twenty thousand rupees received by such political party from companies other than Government companies in that financial year, the same proviso also states that the report does not have to contain details of contributions that have been made via the Electoral Bonds Scheme.
Section 182 of the Companies Act, 2013 previously mandated that the companies will have to specify the identity of the political party that they have donated to whereas an amendment in 2017 has now cancelled this requirement. Companies usually now use Electoral Trusts to fund the political parties. Companies fund the electoral trusts, and the Electoral Trusts will in turn distribute the money to political parties. What this means is that no one will be able to know to whom the company has donated to, despite looking at its financials.
Impact of Electoral Bonds on Indian Democracy
To summarise the information above, companies – Indian and Foreign(adhering to prescribed limits under FEMA)- can donate any amount of money to political parties; do not have to be a profit-making, provided that they have been in existence for three years; do not have to disclose the identity of the political parties that they have donated to; and can claim 100 percent deduction, for the money that they have donated to political parties, from their total taxable income.
The political parties – must maintain books on donations necessary documents for the assessing officer to deduce where the money came from; must maintain details of voluntary contributions exceeding Rs. 20,000 including the name and address of the contributor; do not have to keep the details of any donations made via electoral bonds i.e., the sources of such donations.
Electoral Bonds essentially shield the electorate from the sources of funding for a political party. Political parties are vehicles of representation for the Indian people –the Indian Constitution makes the Indian people sovereign and not political parties of Government –and the Electoral Bonds Scheme takes away the right of people to know about the information related to political parties.
The Supreme Court in the case of Union of India vs. Association of Democratic Reforms elaborated on why the citizenry need to have information about the candidates who are contesting in an election. The court stated “In our view, democracy cannot survive without free and fair election, without free and fairly informed voters. Votes cast by uninformed voters in favour of X or Y candidate would be meaningless. As stated in the aforesaid passage, one-sided information, disinformation, misinformation and non-information all equally create an uninformed citizenry which makes democracy a farce. Therefore, casting of a vote by misinformed and non-informed voter or a voter having one-sided information only is bound to affect the democracy seriously. Freedom of speech and expression includes right to impart and receive information which includes freedom to hold opinions. Entertainment is implied in freedom of ‘speech and expression’ and there is no reason to hold that freedom of speech and expression would not cover right to get material information with regard to a candidate who is contesting election for a post which is of utmost importance in the democracy.”[9]
Although the Supreme Court in the ADR judgement noted about the importance of full information about the candidates in an election being available to people, it simply did not discuss the issue of identity of contributors to political parties being made public. In one of the cases, the court had remarked about the danger of black money finding its way to fund the elections, but it was not a substantial discussion on identifying the source of funding.[10]
There is, indeed, a clash of rights here between the right of the Indian people to know about the political parties participating in democracy and the right to privacy of people to associate themselves with a political party. However, to see it as such would be an observation without nuance. The Electoral Bonds Scheme has anonymity at its central core, and it has a KYC process with which, according to the government, the chance of black money entering the election process is diminished. The government has previously argued, in one of the hearings on the challenge to EBS, that the right to privacy of contributors is an extension of the right to privacy in voting.[11]The Right to Privacy, however, does not, however exist in any absolute sense and it too, has limitations. Political Partiesand the governments they form do not exist to perform a quid pro quo(simply put- a favour for a favour of tasks). Their existence is to achieve the welfare of all Indian people. Voting does not give rise to chances of political parties performing tasks of quid pro quo for the votes cast, unlike political funding. Since Political Parties have the knowledge of the contributors and the worth of their contributions, there is a potential chance of the parties performing quid pro quo tasks for their generous contributors. This differentiates the right to privacy of contributors and right to privacy in casting one’s vote. A combination of EBS itself with the definition of the foreign source under FCRA undergoing a seminal change, also means that money from out of India also can enter the political system and influence it without any transparency for the people to see or accountability, for the people to judge.
It remains to be seen how the Hon’ble Supreme Court will navigate this uneven balance of power, this conundrum.
(The author is a legal researcher currently giving his post graduate examinations)
Related:
BREAKING: SC refuses to stay the sale of electoral bonds
Is India’s democracy being sold through electoral bonds?
[1]https://www.thehindu.com/news/national/does-electoral-bonds-system-provide-from-where-the-money-comes-sc-asks-government/article66009637.ece
[2]S.O. 29 (E), https://incometaxindia.gov.in/Communications/Notification/NotificationSO29_2018.pdf
Dated 2nd January 2018.
[3]https://www.indiacode.nic.in/bitstream/123456789/2096/1/A1951-43.pdf
[4]https://ibclaw.in/section-182-of-the-companies-act-2013-prohibitions-and-restrictions-regarding-political-contributions/
[5]https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx
[6]Section 2(1) (j) of FCRA, 2010
[7] Entry 236, Finance Act, 2016. https://www.cbic.gov.in/resources/htdocs-cbec/fin-act2016.pdf
[8] Entry 5.2.6 and 5.2.7 of the Consolidated FDI Policy, 2020. https://dpiit.gov.in/sites/default/files/FDI-PolicyCircular-2020-29October2020.pdf
[9]2002 (3) SCR 294
[10]Common Cause vs. Union of India, https://main.sci.gov.in/judgment/judis/15749.pdf
[11]https://www.hindustantimes.com/india-news/privacy-of-electoral-bond-buyers-vital-centre-tells-supreme-court/story-Jygdc2y3k2arsvq1yw1eiM.html
