Electoral Bonds Explained: What Are They and Why Did Supreme Court Ban It?

Can anonymity buy democracy? Let us unpack the complexities of Electoral bonds, a financial instrument masked in secrecy that raises questions about transparency, accountability and the foundation of democratic trust.

Let us explore the heated debate through today’s blog.

Overview

Electoral Bonds were a mode of funding for political parties in India. Introduced in the Union Budget of the year 2017-18, these bonds functioned like promissory notes. They were purchased by Indian citizens or entities registered in India from designated branches of the State Bank of India. These bonds could then be donated to any registered political party, encashing them through their electoral accounts.

The Electoral Bond Scheme was introduced to bring transparency and anonymity to political funding. However, it faced lashes from various quarters stating that the electoral bonds question the integrity of the electoral process.

Before we dive deeper into the story, let us have a quick read on the features of the bond.

Features

1. These bonds are bearer instruments like promissory notes, meaning whoever possessed the bond could redeem it, making it difficult to track the donor.
2. The bonds were available in denominations of INR 1000, INR 10,000, INR 1,00,000, INR 10,00,000 and INR 1,00,00,000 and can be purchased by a person who is a citizen of India. The buyer does not receive any interest on these bonds.
3. Individuals or companies could buy them from specified branches of the State Bank of India.
4. To purchase these bonds, a buyer was required to apply to the authorised bank, and the authorised bank could ask for additional KYC documents.
5. The payments for the issuance of Bonds were made in Indian rupees through demand draft, cheque, ECS or direct debit to the account of the buyer.
6. Political parties (parties that were registered under Section 29A of the Representation of the People Act, 1951) and received at least 1% of the votes polled in the last general election were eligible to receive the bond.
7. Electoral bonds were valid for 15 days from the date of issue and are not tradeable on the stock exchange.
8. The bonds were issued to the buyer on a non-refundable basis 
9. One of the most controversial features of the bond was that the donors were not required to disclose their identity to the political party or the public.

Did you Know?

To pave the way for the Electoral Bonds Scheme, the government introduced amendments to four acts, namely the Representation of the People Act, 1951; the Companies Act, 2013; the Income Tax Act, 1961; and the Foreign Contributions Regulation Act, 2010 (FCRA), through the Finance Acts of 2016 and 2017.

Why were Electoral bonds banned?

On February 15, 2024, the Supreme Court banned the Electoral Bond.

Here are the major reasons behind the ban

1. The court ruled that the anonymity provided by these bonds violated the Right to Information Act, highlighted in the Indian Constitution. Voters have a right to know the source of the funds political parties receive to make informed voting decisions. This feature hindered transparency and scrutiny.
2. Allowing multiple entities to issue bearer instruments, like electoral bonds will challenge the RBI’s authority and risks undermining the public confidence in the official currency. The misuse of the bonds in large quantities could further harm trust in the Indian financial system.
3. Existing payment methods like cheques, drafts and digital transfers already facilitate transparent contributions to political parties. Offering electoral bonds, which may raise opacity concerns is unnecessary.

Data Analysis

Before the issuance of the electoral bonds scheme in FY 2016-17, political parties received 81% of the contributions through voluntary contributions. However, after the introduction of the EBS, 47% of the contributions were received through electoral bonds.

According to the annual report submitted by the Electoral Trust, for the financial year 2021-22, the Trust received contributions of a total of Rupees 4,64,83,00,116 from seventy contributors including individuals and companies. The contributions were unequally distributed to the Aam Aadmi Party, All India Congress Committee, Bhartiya Janata Party, Goa Congress Committee, Goa Forward Party, Indian National Congress, Punjab Lok Congress, Samajwadi Party, Shiromani Akali Dal, Telangana Rashtra Samiti.

Party-wise donations received through the Bonds from 2017- 18 to 2022-23

We can say that the majority of contributions through Bonds have gone to political parties which are ruling parties in the Centre and the States.

Graphical Representation of the above table is as follows.

Party-wise donation by corporate houses to national parties

The data shows that the party-wise donation by the corporate houses has been more or less stagnant from the years 2016-17 to 2021-22

Graphical Representation of the above table is as follows.

Data of denomination/sale of Bonds during the 27 phases from March 2018 to July 2023

Interesting inferences that can be drawn from the table above are

• Anonymous donations to political parties skyrocketed, reaching 72% during the years 2018-19 to 2021-22 as compared to 66% during the years 2014-15 to 2016-17.
• National parties saw a massive increase in unknown income, from INR 2550 crore in 2014-15 to a whopping INR 8489 crore in 2021-22.
• Between the years 2019-20 to 2021- 22, the Bond income has been 81% of the total unknown income of national parties.

Conclusion

The ban on electoral bonds has left several key effects. The government has yet to propose an alternative scheme. The ban reignited the debates about transparency in political funding with limitations on donor privacy. How the ban will affect funding patterns across different political parties is quite uncertain. The consequences of electoral bonds and their ban will likely continue to unfold in the months and years to come.

Frequently Asked Questions (FAQs)

1.  What are electoral bonds?

Ans. These bonds are bearer instruments used to donate to the registered political parties in India.

2.  How do Electoral Bonds work?

Ans. Individuals or companies bought bonds from the specified branches of SBI. Donors remained anonymous to parties. However, KYC norms applied. Parties could redeem bonds in their bank accounts.

3.   Why were these bonds controversial?

Ans. The anonymity sparked concerns about hidden influences and misuse. It was argued that the bond violated transparency.

4.   What is the impact of the ban?

Ans. The future of political funding in India is uncertain after the ban on electoral bonds.

5.   Will electoral bonds ever come back?

Ans. It is difficult to say if the bonds will return in the future. The government may propose alternatives.

Disclaimer: The securities, funds, and strategies mentioned in this blog are purely for informational purposes and are not recommendations.