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Electoral bonds

What is the Electoral Bonds Scheme?

  • The Finance Bill, 2017 introduced “electoral bonds” — interest-free bearer bonds (like Promissory Notes) that can be purchased from specified branches of the State Bank of India in a designated 10-day window in every quarter of the financial year.
  • The scheme, which was notified on January 2, 2018, allows individuals and domestic companies to present these bonds — issued in multiples of Rs 1,000, 10,000, 1 lakh, 10 lakh, and 1 crore — to political parties of their choice, which have to redeem them within 15 days.
  • Buyers of the bonds have to submit full KYC details at the time of buying. But the beneficiary political party is not required to reveal the identity of the entity that has given it the bond(s).


On what grounds has the scheme been challenged in court? 

  • The petitioners have stated that the Electoral Bonds Scheme has “opened the floodgates to unlimited corporate donations to political parties and anonymous financing by Indian as well as foreign companies which can have serious repercussions on the Indian democracy”.
  • The scheme, they have said, has “removed the caps on campaign donations by companies and have legalised anonymous donations”.
  • This poses a “serious danger to the autonomy of the country and are bound to adversely affect electoral transparency, encourage corrupt practices in politics, and have made the unholy nexus between politics and corporate houses more opaque and treacherous and is bound to be misused by special interest groups and corporate lobbyists”.

The petitioners have raised four major objections:

  1. Ordinary citizens will not be able to know who is donating how much money to which political party, and the bonds “increase the anonymity of political donations”.
  2. The requirement to disclose in the profit and loss account the name of the political party to which a donation has been made, has also been removed.
  3. With the removal of the 7.5% cap on the net profits of the last three years of a company, corporate funding has increased manifold, as there is now no limit to how much a company, including loss-making ones, can donate. This opens up the possibility of companies being brought into existence by unscrupulous elements primarily for routing funds to political parties through anonymous and opaque instruments like electoral bonds.
  4. The contribution received by any eligible political party in the form of electoral bonds will be exempt from income-tax as per Section 13A of the Income Tax Act.

Does the Election Commission agree?

Not entirely. But it has its own concerns about the scheme. What are they?

  1. Certain provisions of the Finance Act, 2017 and corresponding amendments carried out in the Income-Tax Act, the Representation of the People Act, and the Companies Act will have serious repercussions/ impact on the transparency aspect of political finance/ funding of political parties.
  2. Any donation received by a political party through an electoral bond has been taken out of the ambit of reporting under the Contribution Report and if information on the money received through such bonds is not reported, it cannot be ascertained whether the political party has taken any donation in violation of provisions of the Representation of the People Act, which “prohibits the political parties from taking donations from government companies and foreign sources”.
  3. Then there is also the issue of laws being changed to allow political parties to receive contributions from foreign companies, which would “allow unchecked foreign funding of political parties in India which could lead to Indian policies being influenced by foreign companies”.

What are the government’s arguments on these issues?

The government has been defending the scheme on the ground that it limits the use of cash in political funding, thus bringing more transparency, and provides a shield to donors by granting them anonymity.

  • The introduction of the scheme “has brought in a marked shift from the old electoral system which suffered from many lacunas” as “massive amounts of political donations were being made in cash, by individuals/corporates, using illicit means of funding” and identity of the donors was not known and “the ‘system’ was wholly opaque and ensured complete anonymity”.
  • All payments made for the issuance of the electoral bonds are accepted only by means of a demand draft, cheque or through the Electronic Clearing System or direct debit to the buyers’ account. No black money can, therefore, be used for the purchase of these bonds.
  • Buyers will have to comply with KYC requirements, and the beneficiary political party has to “disclose the receipt of this money and must account for the same”. Also, limiting the time for which the bond is valid “ensures that the bonds do not become a parallel currency”.
  • According to the government, “non-disclosure of the identity of the donor is the core objective of the scheme… in order to safeguard the donor from political victimisation”, and “the records of the purchaser are always available in the banking channel and may be retrieved as and when required by enforcement agencies”.
  • Donations through bonds received from a domestic company having a majority stake is permitted, subject to its compliance with KYC norms and FEMA guidelines. Therefore, the electoral bonds attempt at bringing greater transparency, ensuring KYC compliance and keeping an audit trail in comparison to the earlier opaque system of cash donations.

Current Affairs 2020

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