The FIR in Karnataka against finance minister Nirmala Sitharaman has brought political heat back on the electoral bonds issue
When the electoral bonds scheme was introduced in the Finance Bill, 2017—only a few months after the Narendra Modi government’s other grand, sweeping move to cleanse the country of black money overnight: demonetisation—it was touted as a move designed to “make political funding more transparent through the flow of clean cash”. So, whether you were an individual, an NGO or a corporate, you could purchase these interest-free, tax-exempt bonds from the State Bank of India (SBI) and contribute to the political party of your choice, which could then encash the same within a stipulated time-frame. The transparency, however, did not extend to the identity of the donors, who could remain anonymous. This, the then Union finance minister Arun Jaitley, the chief architect of the scheme, had reasoned was necessary to protect the donors from “any retribution from political parties”.
On February 15, in what is being hailed as a landmark verdict, the Supreme Court of India struck down the electoral bonds scheme as unconstitutional. Refusing to buy the government’s arguments on transparency, the five-judge constitution bench comprising Chief Justice of India D.Y. Chandrachud and Justices Sanjiv Khanna, B.R. Gavai, J.B. Pardiwala and Manoj Misra, in a unanimous 232-page verdict, held that unlimited contribution by companies to political parties was antithetical to the idea of free and fair elections because it allowed certain persons/ companies to wield their clout and resources to influence policy-making. This was violative of the principle of political equality captured in the value of “one person, one vote”. The ability of a company to influence the election process through political contribution was much higher than that of an individual, the judges ruled. The court also ordered the names of the donors to be made public by the Election Commission of India (ECI) by March 13.
The apex court’s judgment has once again thrown open the debate on the need for a clean political funding mechanism in India. Unaccounted-for money flowing into the coffers of political parties, more often than not for quid pro quo, has been at the root of corruption and electoral malpractices in the country. It is a moot question whether the abolition of the scheme, two months ahead of the general election, will lift the shroud of opacity that surrounds political finance in India. There is also no solution in sight, till at least the next government takes oath. “Given the kind of discretionary powers that the government and elected officials enjoy over the economic and business sectors,” says Niranjan Sahoo, senior research fellow at the Observer Research Foundation in Delhi, “they will continue to collect unaccounted-for money the way they want it. In the absence of a broader structural reform of politics and the electoral system, it is going to be business as usual for political parties and candidates.”
WHY CASH IS KING
General elections in India—touted as the biggest festival of democracy—have become highly expensive exercises, given the confluence, and influence, of money. Election expenditure during Lok Sabha polls has gone up sixfold in 20 years—from Rs 9,000 crore in 1998 to Rs 55,000 crore in 2019—according to a 2019 report by the Delhi-based Centre for Media Studies (CMS). Compared to this staggering figure—more than 90 per cent of that year’s budgetary allocation for MGNREGA—publicly known corporate donations to political parties constitute a minuscule share of the funds political parties receive.
And though electoral bonds were largely blamed for fast-tracking corporate money into Indian politics, given that they facilitated anonymous and unlimited flow of funds, the nexus between business and politics is by no means a recent phenomenon. Even before the electoral bond scheme was notified in 2018, corporate contributions formed a staggering 89 per cent of the total funds parties received through known sources of donations between 2012 and 2016. Between 2013, when electoral trusts were set up solely for the purpose of donating to political formations, and 2016, two years before the electoral bond scheme was notified, donations from these trusts accounted for a third of all funding that parties disclosed. After electoral bonds were issued, this became a less preferred route. In 2022-23, for instance, trusts donated Rs 366 crore to all parties, while bonds earned them Rs 2,665 crore.
Between 2018 and 2024, electoral bonds worth Rs 16,518 crore were sold. In the 10 years between 2013 and 2023, electoral trusts disbursed approximately Rs 2,558 crore to various political parties. Even if one assumes that all donors are corporates—90 per cent of the electoral bonds were of the highest denomination of Rs 1 crore—the entire 10-year corpus from bonds and trusts put together represents just 35 per cent (Rs 19,076 crore) of what was spent in just the 2019 Lok Sabha polls. And if political parties are to be believed, bonds are their biggest source of income. National parties said 55 per cent of their total income in 2021-22 came from bonds, while regional parties said the share was 70 per cent.
THE BLACK MONEY FLOOD
Yet, the declared election expenses of parties and candidates suggest the continued flow of unaccounted-for funds or black money into elections. An analysis by the Association for Democratic Reforms (ADR) found that every winning contestant in the 2019 Lok Sabha polls spent on an average Rs 58 lakh—Rs 12 lakh less than the then expenditure cap of Rs 70 lakh set by the ECI. If the losing candidates also spent the same amount, the total expenditure of all 8,048 candidates in the fray would amount to Rs 4,667 crore. Add the Rs 2,591 crore of expenditure the 32 national and regional parties did declare in the 2019 polls, and the money spent adds up to over Rs 7,000 crore. However, the CMS calculation had pegged campaign expenses by parties and candidates at Rs 47,000 crore (of the total Rs 55,000 crore estimated by the CMS, expenditure by the ECI accounted for 15 per cent or Rs 8,000 crore). So, where did the remaining Rs 40,000 crore come from? There is still no mechanism to trace the source of this money and, without it, the Indian electoral outcome cannot be thought to be free of the influence of corruption and black money.
The roots of the proliferation of unaccounted-for money in elections perhaps lie in the very structure of political funding in India, which allows parties to rig their books however they want. When political parties declare an income, a majority of it is shown as donation from unknown sources, be it ‘sale of coupons’, ‘relief fund’, ‘miscellaneous income’, ‘voluntary contributions’ or ‘contribution from meetings’. The details of such voluntary contributors are not made available in the public domain. In fact, most political parties showed a majority of their collected funds as cash receipts of under Rs 20,000—a limit reduced to Rs 2,000 in 2017—as there was no need to name donors who contributed less than that amount. For 11 years, the Bahujan Samaj Party had declared that it had not received any donations above Rs 20,000.
The income from such unknown sources accounted for 66 per cent of the funds of political parties between 2014-15 and 2016-17. The share jumped to 72 per cent between 2018-19 and 2021-22, though electoral bonds replaced cash. Take the BJP’s income, for example. In 2015-16, when there were no election bonds, the party declared a total income of Rs 571 crore, of which Rs 461 crore, or 81 per cent, came from unknown sources. In 2021-22, the party’s declared income touched Rs 1,917 crore, of which Rs 1,161 crore (or 60 per cent) was attributed to unknown sources. Electoral bonds accounted for Rs 1,034 crore, or 89 per cent, of the unaccounted-for sources of income. And while the BJP government claimed that bonds were introduced to incentivise the flow of clean money through banking channels, instead of bringing transparency, the extended legal apparatus surrounding electoral bonds simply brought to the formal economy the flow of money that would earlier change hands in the form of cash. “With bonds gone, parties will have to show more entries of less than Rs 2,000,” says a Congress leader.
ANONYMITY VS TRANSPARENCY
Transparency and accountability of political funding depend on the regulatory framework around donations, expenditure, and disclosure, backed by strict implementation. One of the reasons the Supreme Court struck down electoral bonds is because, in its opinion, such anonymous bonds violated the voters’ Right to Information under Article 19(1)(a) of the Constitution since they would not know to which political party the contribution was made. Such information is necessary to identify corruption and quid pro quo arrangements in governance, the bench said.
The court also observed that while the privacy of donors is important, transparency in political funding cannot be achieved by granting absolute exemptions. Holding that electoral bonds were not the only method available to combat black money, the court said the scheme’s purpose of curbing black money did not justify its infringement on the Right to Information. The bench also declared as arbitrary the amendment to Section 182 of the Companies Act, 2017, which had knocked off the upper limit of 7.5 per cent of a company’s profits on how much a company could donate to a political party through electoral bonds. Treating political contributions by companies and individuals alike violated the Right to Equality, as enshrined in Article 14 of the Constitution, the bench remarked.
Most experts concur that one cannot expect transparency in India as long as the provision of anonymous cash donation remains, however low the limit is. Professor Jagdeep Chhokar, founder member of ADR, says that the simplest and only way to make political funding clean is to stop cash payment to political parties. “Everything has to be through the digital mode of payment. The prime minister has been advocating cashless payments. Why exclude political parties?” asks Chhokar.
Most countries across the world have been struggling to strike a balance between transparency, which requires disclosure of the source of funds, and anonymity, which is required to protect donors from political retribution. One of the arguments in favour of electoral bonds was that the anonymity clause safeguarded against political coercion and retribution. In several countries, small donors are allowed to stay anonymous while large donations are required to be made public. In the UK, for instance, a party needs to report donations received from a single source amounting to a total of more than £7,500 (nearly Rs 8 lakh) in a calendar year. In Germany, it’s €10,000 (approx. Rs 9 lakh) for a party.
THE RISE OF DARK MONEY
The US experience is a serious reminder of why there should be a cap on the inflow of corporate funds, directly or indirectly. Political funding in the US has been witnessing a massive surge in “dark money”—anonymous political contributions—since 2010 when the Supreme Court declared the statute prohibiting the use of corporate money in elections as unconstitutional. Social welfare organisations and super political action committees (PACs, tax-exempt organisations that raise money privately to influence elections or legislation) have become major sources of “dark money” in federal campaigns as the donor identity often remains vague and outside public scrutiny.
Political funding in the US happens at the federal, state and local levels. Individuals, PACs and the government can contribute directly to electoral campaigns. PACs, in turn, can contribute funds directly to candidates and campaign committees. They can receive contributions of up to $5,000 per year from individual donors and give up to $5,000 to a candidate and $15,000 to a party committee per election. PACs can also make what is called ‘independent expenditure’—unlimited expenditure independent of a party or candidate. Campaign finance law at the federal level requires candidate committees, party committees and PACs to file periodic reports disclosing the money they raise and spend. The Federal Election Commission maintains this database and publishes the information about campaigns and donors on its website. However, such disclosures do not always reveal the actual source of the funds, since some contributions are made through “shell corporations”, whose owners remain hidden. PACs can collect unlimited contributions and spend unlimited funds. Their independent expenditure now accounts for the largest share of independent political funding. In the 2020 election, PACs accounted for 63 per cent of the $2.6 billion independent expenditure made by political parties and social welfare organisations.
CAPPING ELECTION FUNDS
One significant means to clean the electoral system is to place a limit on expenditure. Most countries have put such a cap on expenditure by political parties or candidates or both. In the UK, Canada and Israel, there is a limit on expenses by both. In the US, there are curbs on party expenditure but not on candidate expenses. In France and Japan, there is no limit on party expenditure, but candidates must spend within a specified amount. In Brazil, Germany, Norway and Sweden, there are no constraints either on party or candidate.
In India, the ECI has put a cap on expenditure by individual candidates during elections. In 2022, the ceiling on parliamentary poll expenditure was raised from Rs 70 lakh to Rs 95 lakh in bigger states and from Rs 54 lakh to Rs 75 lakh in smaller states. For assembly constituencies, expenditure limits have been enhanced from Rs 28 lakh to Rs 40 lakh in bigger states and from Rs 20 lakh to Rs 28 lakh in smaller states. The ECI mandates that candidates contesting elections must keep a separate and correct account of all expenditure incurred or authorised by them or their election agents. Within 30 days of the declaration of results, the contesting candidate must submit the account of his or her election expenses with the district election officer, failing which the ECI can disqualify the candidate from contesting polls for three years. For example, in 2022, 88 candidates, most of them independents, were disqualified for failing to submit reports.
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The ECI can take the same action if the expenditure account is found to be incorrect or untrue. The commission monitors candidate spending in every constituency and keeps an eye on unaccounted-for cash flow. In 2019, cash, drugs/ narcotics, liquor, precious metal (gold, silver etc.) and freebies worth Rs 3,456 crore—nearly 90 per cent of the amount the government officially spent in conducting the 2014 Lok Sabha election—were seized across the country. However, most ECs admit that such recoveries could be just the tip of the iceberg. The ECI’s power to seize anonymous funds comes into play only when the code of conduct is announced. But the cash flow begins much in advance. “Politicians know it becomes very difficult once the ECI’s code of conduct is in place. So, they move money well in advance, avoiding any scrutiny,” says former chief election commissioner (CEC) S.Y. Quraishi. Despite repeatedly complaining that the expenditure limit is very low, winning Lok Sabha candidates in 2019, on paper, spent only 83 per cent of the expense limit of Rs 70 lakh.
POLITICIANS’ LUKEWARM RESPONSE
Most poll observers say there should be a cap on expenditure not just of candidates but also of political parties to clean up electoral finances. “As there is no cap on party expenses, many a time, a candidate’s expenditure is shown in party accounts, helping them fudge expenditure reports,” says Om Prakash Rawat, who served as the CEC in 2010. One of his predecessors, Naveen Chawla, proposes that a CAG-appointed panel audits the accounts of political parties. Countries such as the US, UK, Canada and Israel impose a cap on party expenditure.
Political parties across the spectrum, however, are not enthusiastic about such proposals. The Union Minister for Environment, Forest and Climate Change Bhupender Yadav believes that putting a cap on expenses is unfair, as political parties have to disseminate their views and ideologies to every nook and corner of the country. Their apparent disdain for transparency was evident when all political parties rejected the Central Information Commission order of June 3, 2013, bringing them under the purview of the RTI Act.
The next year, the two national parties—the BJP and the Congress—showed unprecedented camaraderie on another contentious issue—the flow of foreign funds into domestic politics. The Delhi High Court had found both parties guilty of accepting donations from a foreign company, in breach of the Foreign Contribution Regulation Act (FCRA), 2010, the newer version of the now-repealed FCRA, 1976. In response, the BJP government, via a 2016 Finance Bill, passed an amendment with retrospective effect to validate any foreign funds received by any political party since 1976. The amendment now allows foreign companies that have a majority share in Indian companies to donate to political parties. “This provision is dangerous, because it opens our democracy to external influence,” says Rawat. “It could be a foreign country, or even a terrorist like Dawood Ibrahim, who can seriously jeopardise our national interests by exploiting this loophole.”
Flow of foreign funds in elections has been a controversial issue across the world. Former French president Nicolas Sarkozy is being investigated over allegations that Libyan dictator Muammar Gaddafi funded his 2007 campaign. Foreign influence in elections were in focus again when Russian interference was alleged in the 2016 US presidential election. According to the International Institute for Democracy and Electoral Assistance (International IDEA), a Stockholm-based intergovernmental organisation, 125 countries have imposed restrictions (full or partial) on foreign contributions.
THE PUBLIC FUNDING OPTION
One option often offered to eliminate corporate influence in elections is to abolish private funding altogether and introduce public funding instead for political parties. Most exponents say that public finance can help protect the political process from direct, quid pro quo kickbacks or corruption and create a level playing field for parties, candidates with less resources and new entrants. Direct funding of political parties is practised in 86 per cent of the countries in Europe, 71 per cent in Africa, 63 per cent in the Americas and 58 per cent in Asia.
There are different models of public funding. In some countries, only parties get the fund, not the candidates. In others, it’s the reverse. In India, four reports have looked into the viability of state funding of elections—the Indrajit Gupta Committee Report of 1998, the Law Commission of India Report of 1999, the National Commission to review the working of the Constitution Report of 2001 and the Report of the Second Administrative Reforms Commission in 2008. Three of them have recommended some form of state funding of elections, but only after some prerequisites, such as internal democracy in political parties and complete transparency in their financial affairs, are met.
According to E. Sridharan, academic director of the University of Pennsylvania Institute for the Advanced Study of India, state funding based on a transparent formula might encourage a shift towards broad-based, small-sum, grassroots financing of parties. Public funding should be introduced in parties in proportion to the amounts they raise openly from identified small-sum private donors. In the US, for instance, presidential candidates receive from the government an amount equal to the funds they raise on their own, subject to certain conditions.
Quraishi advocates the setting up of a National Election Fund to provide a fixed sum to a party for every vote secured. “Let’s fix Rs 100 for each vote. If a political party gets 10 million votes, it is entitled to state funding of Rs 100 crore,” he says. A study by International IDEA of 180 countries, including Germany, Belgium, Greece, Finland and Sweden, found that 71 countries followed the practice of giving state funds based on votes obtained. In Germany, for instance, a fixed sum is distributed every year to eligible parties—ones that have polled more than 0.5 per cent of the vote in a nationwide election or 1.0 per cent of the total valid votes for one of the 16 state legislatures during the current election cycle. There are two criteria for distribution: for each vote polled in the most recent state, federal and European election, the party is allocated 70 cents; each euro raised in small amounts during the previous year is matched by 38 cents of public money. In Japan, parties get 250 Yen for each vote polled. In Israel, parties that receive less than 1 per cent of the votes get no funding.
NO GUARANTEES
Some countries also have provisions for indirect public funding. According to International IDEA, more than 68 per cent of the countries offer some form of indirect subsidies to political parties or candidates. Even in India, parties have since 1996 been able to access free time on state-owned electronic media—Doordarshan and All India Radio. The other in-kind subsidies the Indian government provides parties are in the form of free supply of copies of electoral rolls and identity slips of electors to candidates.
“There is, however, no guarantee that public finance will reduce election expenditure or bring transparency and accountability,” says former CEC N. Gopalaswami. “State funding will make no difference unless the cap on election expenditure is strictly enforced.” Rawat says that state funding without any check on corporate donations and black money in elections won’t cleanse the system.
In countries like Italy, Israel and Finland, which have experimented with public funding, there has been no significant drop in expenses. Only a handful of countries like Germany, Canada, Sweden and Japan have been able to reduce their poll expenditure by any significant extent. “An effective public funding model has two elements: reducing the dependency on private money by strict restrictions on expenditure limits, strong regulations and disclosures, and infusing white money through state funding or incentivising other funding options, such as tax-free donation,” says Sahoo.
In India, however, there is no immediate possibility of public funding of elections, as the ECI is not in its favour. The commission has already told the Union government that it will not be able to prohibit or check candidates’ expenditure over and above the state’s provision, Union minister Anurag Thakur revealed in the Lok Sabha in March 2020. While the government has taken this assessment seriously, most of the ECI’s suggestions in the past 25 years on introducing reforms to bring in transparency in both funding and spending in the political arena have remained unimplemented. “It may be wise for India to revisit these recommendations as a panacea for the many problems that have mushroomed with the growth of ‘money power’ in the electoral arena,” says Chawla. Lack of political will has for long stymied the clean-up of political finance in India. The Supreme Court verdict on electoral bonds is a grim reminder that the next government has a long list of amendments to make—within the constitutional framework, of course.