The Electoral Bond Scheme and Free & Fair Elections in India

Vaidushya Parth

Law Associate to Dr Subramanian Swamy, and Retainer Counsel for the State Election Commission

Political outcomes in India are influenced by three features of constitutional design: (a) The framework of political contestation based on representative democracy, structured by constitutional rules mandating a parliamentary form of government that is unitary but with some devolution of power to states, representing its quasi-federal nature; (b) the federal government is administered centrally by a Council of Ministers headed by a Prime Minister, who advises the President, the constitutional head of the nation (a similar structure exists in states, headed by a Chief Minister with a Governor as an agent of the President); and, (c) there are periodic free and fair elections, generally every five years, but with some exceptions.

For the purpose of this post, the third feature is in question. Free and fair elections undergird the legitimacy of Parliament as representing the “will of the people”. Without a level playing field, the electoral process is distorted, and asymmetrically skewed in someone’s favour at the cost of others’ disadvantage, before even a single vote gets cast and at the stage of election campaigning itself.

Following a discussion of the need for free and fair election, I shall analyze the Indian Supreme Court’s judgment in the Electoral Bond Scheme [“EBS”] against the backdrop of constitutional principles and democratic conventions.

The need for a “free & fair” election

Sir Winston Churchill­ once remarked that: “At the bottom of all tributes paid to democracy is the little man [the voter], walking into a little booth, and with a little pencil, making a little cross on a little bit of paper. No amount of rhetoric or voluminous discussion can possibly diminish the overwhelming importance of this act.” The electoral process, however, needs to be free, fair, and transparent: the Legislature (elected through elections) represents the real ‘will of the people’ only if it is the result of an untainted electoral process. Without the ‘freedom and fairness’ in the electoral process, the elections are reduced to but a chimera. The process of elections in a functioning democracy needs to be not only actually ‘free and fair’ but also perceived as such by the public. Even the suspicion of illegality and unfairness—direct or peripheral—can taint the entire process.

The dominant view today regarding Indian elections is that although they are free (except for occasional voter suppression), they are not fair. Freedom refers to political freedom which is guaranteed by the Constitutional text whilst fairness concerns just, reasonable, and fair-minded procedure which is a vehicle for the material facilitation of that guaranteed ‘political freedom.’ The recent V-Dem report on democracy has termed India as 'one of the worst autocratisers' signalling a significant erosion in the democratic values including lack of 'clean elections'.

The Electoral Bond Scheme

An ‘electoral bond’ as per the EBS is defined as “a bond issued in the nature of [a] promissory note which shall be a bearer banking instrument and shall not carry the name of the buyer or payee.” Its passage was facilitated through amendments to four legislations: the Reserve Bank of India Act, the Representation of the People Act 1951, the Companies Act 2013, and the Income Tax Act 1961, via the Finance Act 2017 as a “Money Bill”, bypassing the Rajya Sabha. The Electoral Bond Scheme was adopted to facilitate opaque political party funding sans any oversight mechanism in the face of the then imminent Assembly elections in some states of India.

Following a brief hearing on March 26, 2021, the Supreme Court of India declined to stay the sale of Electoral Bonds. Accordingly, Electoral Bonds have been present around several elections since 2017. However, on February 15, 2024, after a three-year-long period, the Supreme Court, in a five-judge Constitution Bench, unanimously struck down the EBS.

Analysing the EBS judgment

The decision of the Court to strike down the EBS was based on four pillars: First, the government led by PM Modi introduced EBS as a “Money Bill”. In so doing, as a “Money Bill”, the EBS circumvented the Rajya Sabha (i.e., the upper house) where Modi’s party, the BJP, does not have a majority and therefore avoided legislative scrutiny. Electoral Bonds fit nowhere in any of the components of Article 110 of the Indian Constitution to consider a Bill as a Money Bill and therefore it was a blatant misuse of the provision to commit fraud by making parliament privy to the dubious scheme.

For the sake of clarity, it is essential to understand the law regarding Money Bills. Article 109 of the Constitution prescribes a special procedure for Money Bills, while Article 110 sets strict criteria for categorizing a Bill as a Money Bill: Clause (1) defines what constitutes a Money Bill. However, according to Clause (2), merely including “some provisions” related to the matters listed in Clause (1) does not transform an Ordinary Bill into a Money Bill.

Consider, for example, a five-page Bill 'A' that is entirely unrelated to the nature of a Money Bill. If the draftsman includes one of the several elements classified under Clause (1) of Article 110 in just one-fourth of one page, the Bill, which is otherwise an Ordinary Bill, may be misleadingly presented as a Money Bill. In the Indian Parliament this has become a recurring practice, where Ordinary Bills are misrepresented as Money Bills. This trend poses a serious threat to the principle of bicameralism, and by extension, to the separation of powers and the system of checks and balances [see e.g., here, here.]

The second pillar based on which the EBS’ unconstitutionality stood was fiscal transparency: the Court opined that EBS could increase the risk of cross-border counterfeiting and unchecked foreign funding—something that the Reserve Bank of India and the Election Commission of India cautioned about [see here and here]. According to the Court, this risk was overlooked without following due internal institutional processes.  

Third, the EBS removed caps on corporate donations and eliminated the requirement that limited corporate funding to 7.5% of a company's net profit over the past three years. According to the Court, this incentivized the creation of shell companies for the funnelling of undisclosed funds into political parties. By permitting unprofitable businesses to channel funds to political parties and enabling companies to inject unlimited funds into political parties without restrictions, the EBS established an architecture where securing corporate support became the primary objective for political parties striving to succeed in elections, thus significantly distorting the principles of fairness and freedom in elections. [see here and here]

Fourth, the information regarding the source of funds to political parties was made opaque by the instrument of Electoral Bonds, which could only be issued by the State Bank of India. Consequently, the ruling party in government had exclusive access to the data held by the SBI, making the information accessible only to the government and, by extension, the political party in power.

The Supreme Court held that the cumulative effect of these amendments was a serious blow to “free and fair” elections, thus breaching the Basic Structure of the Constitution. In Kihoto Hollohan v. Zachillhu & Ors, the Supreme Court of India noted: “Democracy is a part of the basic structure of our Constitution; and rule of law, and free and fair elections are basic features of democracy.” It would, consequently, suffice to say that the “freedom” and “fairness” cannot be separated from the electoral process by an Act of parliament (EB Scheme, in this case).

The scheme was also not in sync with citizens’ Fundamental Right to Information and undermined the sanctity of an ‘informed vote’ in a democracy. According to the Court’s own jurisprudence, the right to vote includes, as a corollary, the right to know about the public conduct of political parties and the candidates thereof. The Court duly acknowledged that “free and fair” elections in the absence of transparency in political funding could lead to policy-making by the government that favored its donors—in a quid pro quo fashion—instead of serving the public interest.

In these four major ways, the asymmetrical ground for the conduct of electoral process (including election campaigning by the political parties) by unfolding a skewed political funding regime in favour of the ruling party was paved.

The government’s sole defence

The government’s only defence was that the electoral bonds addressed concerns around ‘black’ money (i.e., illicit or illegitimate money) since contributions go through ‘Know-Your-Customer’ checks. The Supreme Court, however, found that such defence fell short of the test of proportionality, especially the necessity enquiry. That is to say, the State could have used another, less restrictive, measure to achieve its purpose of curbing black money in electoral processes. The State failed this enquiry and thus collapsed the Electoral Bond Scheme.

The timing of Supreme Court decisions often impacts their effectiveness and overall repercussions in a constitutional democracy. The Supreme Court’s judgment, in the case challenging the constitutionality of the Electoral Bonds, coming just before the scheduled general election has widely been welcomed by those who work to reduce corruption in public sphere. With this decision, the Court has sought to reduce the distortion of the level playing field in election campaigns that was produced by the introduction of the EB Scheme.

Vaidushya Parth is a Delhi-based Lawyer, Law Associate to Dr Subramanian Swamy, and Retainer Counsel for the State Election Commission (Uttar Pradesh)

Suggested Citation: Vaidushya Parth, ‘The Electoral Bond Scheme and Free & Fair Elections in India’ IACL-AIDC Blog, (11 June 2024) The Electoral Bond Scheme and Free & Fair Elections in India — IACL-IADC Blog (blog-iacl-aidc.org)