• The Supreme Court scrapped the Centre’s electoral bonds scheme of anonymous political funding, terming it “unconstitutional” and ordering disclosure of the names of the purchasers, value of the bonds and their recipients.

• Holding that the 2018 scheme was “violative” of the constitutional right to freedom of speech and expression and right to information, a five-judge constitution bench headed by Chief Justice D.Y. Chandrachud did not agree with the Centre’s contention that it was meant to bring about transparency and curb black money in political funding.

• The bench said the deletion of a provision in the Companies Act permitting unlimited corporate contributions to political parties was “arbitrary and violative” of Article 14 (right to equality) of the Constitution.

• Holding that information about funding to a political party was essential for a voter to exercise their freedom to vote in an effective manner, the bench said the scheme does not fulfil the least restrictive means test.

What is the electoral bonds scheme?

• Electoral bonds were pitched as an alternative to cash donations made to political parties as part of efforts to bring transparency in political funding. 

• The government of India notified the electoral bonds scheme in January 2018. Under this scheme, bonds for contributions to political parties were issued by the State Bank of India.

• Sale of the first batch of electoral bonds was held from March 1-10, 2018.

• Electoral bonds could be purchased by a person, who is a citizen of India or a body incorporated or established in India. 

• It was issued in the nature of a promissory note which shall be a bearer banking instrument. It will not carry the name of the buyer.

• The bonds were issued in the denomination of Rs 1,000, Rs 10,000, Rs 1,00,000, Rs 10,00,000 and Rs 1,00,00,000. 

• The State Bank of India (SBI) was authorised to issue and encash electoral bonds through its select branches.

• Only the political parties registered under Section 29A of the Representation of the People Act, 1951 and which secured not less than 1 per cent of the votes polled in the last General Election to the House of the People or the Legislative Assembly of the state, were eligible to receive the electoral bonds.

• Electoral bonds were introduced through the Finance Act, 2017.

Finance Act, 2017 made several amendments

• The Finance Act, 2017 made several amendments to the Companies Act, 2013, Income Tax Act, 1961, Reserve Bank of India Act, 1934, the Representation of the People Act, 1951, and the Foreign Contribution Regulation Act, 2010. 

• These changes were brought in to allow contributions/donations through electoral bonds.

The Finance Act, 2017 made three changes to Section 182 of the Companies Act:

a) The first proviso to Section 182(1) which prescribed a cap on corporate funding was omitted.

b) Section 182(3) was amended to only require a disclosure of the total amount contributed to political parties by a company in a financial year and excluded the requirement to disclose the particulars of the amount contributed to each political party.

c) Sub-section 3A was introduced, by which a company could contribute to a political party only by a cheque, bank draft, or electronic clearing system. The proviso to the sub-section states that a company may also

contribute through any instrument issued pursuant to any scheme notified under any law for the time being in force for contribution to political parties. 

• On May 26, 2017, the Election Commission wrote to the ministry of law and justice that the amendments to the IT Act, Representation of the People Act, and Companies Act introduced by the Finance Act, 2017 will have a “serious impact on transparency of political finance/funding of political parties”.

• Referring to the deletion of the provision in the Companies Act requiring companies to disclose particulars of the amount contributed to specific political parties, the EC recommended that companies contributing to political parties must declare party-wise contributions in the profit and loss account to maintain transparency in the financial funding of political parties. 

• Further, the EC also expressed its apprehension to the deletion of the first proviso to Section 182(1) by which the cap on corporate donations was removed.

• The EC opposed the amendment and suggested that the government reconsider its decision on the ground that it would open up the possibility of creating shell companies. 

• The SC bench said that the deletion of the proviso to Section 182(1) of the Companies Act permitting unlimited corporate contributions to political parties is arbitrary and violative of Article 14.

Article 14

• Article 14 of the Constitution provides that the State shall not deny to any person equality before the law or the equal protection of laws within the territory of India. 

• Article 14 is an injunction to both the legislative as well the executive organs of the State to secure to all persons within the territory of India equality before law and equal protection of the laws.

• Traditionally, Article 14 was understood to only guarantee non-discrimination.

Article 14 consists of two components:

• “Equality before the law” which means that the law must treat everybody equally in the formal sense. 

• “Equal protection of the laws” signifies a guarantee to secure factual equality.

Violation of the principle of free and fair elections

• After the amendments to the Companies Act, companies similar to individuals, can make unlimited contributions and contributions can be made by both profit-making and loss-making companies to political parties. Thus, in essence, it could be argued that the amendment is merely removing classification for the purpose of political contribution between companies and individuals on the one hand and loss-making and profit-making companies on the other.

• One of the reasons for which companies may contribute to political parties could be to secure income tax benefits. However, companies have been contributing to political parties much before the Indian legal regime in 2003 exempted contributions to political parties. 

• Contributions are made for reasons other than saving on the income tax. The chief reason for corporate funding of political parties is to influence the political process which may in turn improve the company’s business performance.

• The amendment now allows a company, through its Board of Directors, to contribute unlimited amounts to political parties without any accountability and scrutiny. Unlimited contribution by companies to political parties is antithetical to free and fair elections because it allows certain persons/companies to wield their clout and resources to influence policy making.

• The amendment to Section 182 by permitting unlimited corporate contributions (including by shell companies) authorises unrestrained influence of companies on the electoral process. This is violative of the principle of free and fair elections and political equality captured in the value of “one person one vote”.

• The amendment to the Companies Act when viewed along with other provisions on electoral funding, seek to equalise an individual and a company for the purposes of electoral funding. 

• The ability of a company to influence the electoral process through political contributions is much higher when compared to that of an individual. A company has a much graver influence on the political process, both in terms of the quantum of money contributed to political parties and the purpose of making such contributions. Contributions made by individuals have a degree of support or affiliation to a political association. However, contributions made by companies are purely business transactions, made with the intent of securing benefits in return. 

• Companies and individuals cannot be equated for the purpose of political contributions.

• Further, companies before the amendment to Section 182 could only contribute a certain percentage of the net aggregate profits. The provision classified between loss-making companies and profit-making companies for the purpose of political contributions and for good reason. The underlying principle of this distinction was that it is more plausible that loss-making companies will contribute to political parties with a quid pro quo and not for the purpose of income tax benefits. 

• The provision (as amended by the Finance Act 2017) does not recognise that the harm of contributions by loss-making companies in the form of quid pro quo is much higher. 

• Thus, the amendment to Section 182 is also manifestly arbitrary for not making a distinction between profit-making and loss-making companies for the purposes of political contributions.

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