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In defence of electoral bonds: Why it’s a positive step & critics are wrong

Modi government’s electoral bonds scheme has several benefits that its critics ignore. But even their criticisms are without merit.

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The Supreme Court has kicked the can on electoral bonds further down the road, with its recent interim order asking political parties to disclose the amount and donor details by 30 May — a week after the 2019 Lok Sabha elections. From Supreme Court advocates to former election commissioners to journalists, many have weighed in on the electoral bonds, calling them “a threat to Indian democracy” and “means for furthering crony capitalism”. But the Narendra Modi government has repeatedly advertised the scheme it had introduced in 2017 Budget as one that fosters “transparency in political and electoral funding” — a claim contested by the Election Commission of India.

But many of the criticisms directed at the electoral bonds are without merit, and overlook the purpose they serve in furthering electoral finance reform in India.

Electoral bonds are a bearer banking instrument exempt from tax and do not pay interest. The ministry of finance had laid out following conditions for the purchase and encashment of the electoral bonds in a notification last year:

  • · The donor may purchase these bonds from specified branches of the State Bank of India (SBI) through a non-cash payment method via a KYC compliant account.
  • · Political parties can encash the bonds only through their officially designated SBI account.
  • · The bonds will not carry the name of either the buyer or the payee.

The criticisms — and our response to them

1) Anonymity of donor’s identity: “voters have a right to know” who is donating [to which political party]

One of the principal criticisms made against the electoral bonds scheme pertains to the anonymity accorded to the buyer of the bonds (aka the donor of the political party). Critics appear to have relied on the Supreme Court ruling in PUCL v. UOI where the SC read the “right to secure information about the candidate” as part of Article 19 (1) (a) of the Constitution. Critics extend PUCL holding to the electoral bonds scheme and contend that the scheme, by not disclosing the identity of the donor to the public, violates their right to know.

In our view, critics appear to be wrong in their aforementioned contention.

Their crusade for transparency and reliance on the Supreme Court’s view in PUCL ignores one of the pre-eminent payment systems known to humans — cash — and disregards one of the fundamental principles of applied policy — the law of unintended consequences. Political funding (as opposed to criminal antecedents, which the Supreme Court was concerned about in PUCL) has hitherto been routed using cash that is not auditable, that transfers ownership bilaterally between parties, and that does not require a centralised ledger.

If the logic underlying PUCL is extended to the electoral bonds scheme, most donors, when faced with the risk of harassment (which mandatory disclosure of identity would bring) from political adversaries, would prefer the anonymity of cash, thereby defeating one of the principal reasons of the reform measure. Notably, the formal channels of political funding already extant before the scheme was notified received scant response considering they engendered disclosure of identity of the donor.

The lesson of the prohibition-era United States should be educating. In that case, the Baptists who crusaded for the temperance movement and the Volstead Act, unintentionally played into the hands of bootleggers who thrived on smuggled liquor business (because the Act pushed consumption of liquor underground). Similarly, the “Baptists” who crusade for transparency unintentionally aid the “bootleggers” who use political funding to launder money.

Also read: Supreme Court has contradicted itself in its interim order on electoral bonds

2) The government of the day knows the donor’s details because the SBI is a “sovereign surrogate

As Section 7 (4) of the notification on the scheme states: “The information furnished by the buyer shall be treated confidential by the authorised bank and shall not be disclosed to any authority for any purposes, except when demanded by a competent court or upon registration of criminal case by any law enforcement agency”.

In other words, the donor’s identity shall be disclosed only if a court or law enforcement agency, as part of a criminal case, demands for it. This ensures that in the normal course of events, not even the Reserve Bank of India (RBI) or the finance ministry, shall be made aware of donor’s identity.

On the other hand, and positively, electoral bonds and the anonymity they confer on the donor can promote contestability in a duopolistic political market. Think about a rising political party/a challenger. With absolute donor transparency, they would potentially find it hard to raise funds because donors and supporters would fear a backlash from the entrenched political elites they are fighting against. Electoral bonds level the playing field for such challengers and new entrants.

3) Electoral bonds are instruments for laundering money

Prashant Bhushan has argued that by channelling monies through a bank account, electoral bonds may facilitate money laundering. This criticism originates from a flawed understanding of implications of the RBI’s Know Your Customer (KYC) norms. The electoral bonds scheme is subject to the RBI’s KYC regulations. Legal and natural citizens intending to donate to the political party of their choice have to adduce documentation evidencing their identity (PAN/TAN/Aadhaar card) to the authorised bank.

Furthermore, Clause 11 of the electoral bonds scheme clearly stipulates that the donor may only use banking channels, like cheque or ECS (electronic clearance service), which fully preserve auditability and leave a trail.

The provisions cited above must be further read with Section 11(I)(d) of the Finance Act, 2017 which amends Section 13A of the Income Tax Act, 2013 to limit cash donations to Rs 2,000. These scheme features and KYC directions have been created to prevent money laundering and preserve auditability of funds. They are a non-trivial barrier to any money laundering risk.

4) Electoral bonds ease quid pro quo dealing between parties and donors

Critics of the scheme have argued that donor anonymity creates an opacity which facilitates quid pro quo dealing between large corporate houses and political parties.

However, as defined in Clause 2 (a) of the scheme, electoral bonds “… shall not carry the name of the buyer or payee”.

The anonymity makes it impossible for parties to sell influence through donations. In fact, by preserving donor anonymity, electoral bonds shield corporates from potential rent-seeking by political parties.

As the electoral bonds are issued as bearer bonds that need to be delivered, we acknowledge the limitation that the scheme does not totally mitigate the risk of quid pro quo dealings. Nonetheless, the electoral bonds offer two significant gains in our view. First, they push the needle on weeding out unaccounted cash from campaign finance. Second, they create channels of funding for challengers who would have received scant monetary support in a system of mandated transparency.

Also read: Congress manifesto promises to scrap electoral bonds, amend anti-defection laws

Mandar Kagade is a Policy Consultant. Raghav Katyal is an undergraduate student at Ashoka University. Views are personal.

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  1. 1) Anonymity of donor’s identity: “voters have a right to know” who is donating [to which political party]
    Counter claim : Donors right to privacy > voters right to information.
    Donors would face harassment if their identities are revealed, or choose cash donations to remain anonymous.

    It does not address the Supreme Court’s own precedent on how the voter’s right to information is integral to free and fair elections. Identities of donors is part of that information.
    Neither does it address the dangers of legalizing corporations using anonymous donations to lobby for certain policies for self profit.

    2) The government of the day knows the donor’s details because the SBI is a “sovereign surrogate”
    Counter claim : They don’t, details will only be revealed in case of criminal cases. Anonymity will lead to fairer contestability, help newer parties get donations more fairly.

    Ignores the reality of how ruling govts often override the autonomy of supposedly independent orgs like SBI, CBI, EC, CVC etc for their own favor. In light of this, electoral bonds provide ruling govts access to information that they can use to target opposition parties and donators.

    3) Electoral bonds are instruments for laundering money
    Counter claim : Donations happen under RBI’s KYC norms, with donors providing id. Amendment made to limit cash donation to Rs 2000 will prevent money laundering.

    Corporations using tax havens and shell companies to legalize and utilize their black money is a standard practice. The same can easily be done for political donations, also giving them tax exemptions in addition.
    Limiting cash donations (which is anonymous in the first place) though positive, is easily evadable. The limitless anonymity of bonds would turn lobbying through cash into an antiquity in any case.

    4) Electoral bonds ease quid pro quo dealing between parties and donors
    Counter claim : Conceding that the scheme does not really mitigate the risk of quid pro quo dealings. Reiterating counter claims from point 1.

    This point is the core of the criticism of Electoral Bonds, and the authors admit to its legitimacy. Donors and parties can easily communicate in private, share and confirm bond number and amount, and scratch each others backs.

    Overall, the counter arguments are in support of anonymity (not transparency), use singular examples where it might help, and concede the most important point of the criticism. While not addressing the details of specific amendments in Finance Bill 2017 which most of the criticism is based on. Or taking in account the difference between the scheme on paper vs in practice.

    Just like maybe GST, Electoral Bonds as an idea is not inherently bad. The point of creating new schemes and policies is to remedy issues. But if you come up with a new scheme like Electoral Bonds under the promise that it’ll tackle crony capitalism, and bring about more transparency, and then have amendments which instead facilitate those issues more effectively, what you’re doing is just switching and encouraging the mode of corruption from cash to bonds.

    Coming to the criticism of the Electoral Bonds, it’s important to note that major concerns came from the EC, after controversial amendments were made in the Finance Act 2017.

    *Amendment of Sec 29C of the Representation of the People Act, 1951*
    The government amended the act to the effect that now political donations made through electoral bonds need not be declared to the Election Commission.
    The EC also pointed out that the amendment of 29C will possibly lead to violation of Section 29B of the Act, which “prohibits the political parties from taking donations from Government Companies and Foreign sources”.

    *Amendment of Section 182 of the Companies Act, 2013*
    The amendment removed the limit of 7.5 percent of net profit in the preceding three financial years for companies to donate to political parties. Now companies are free to donate any amount to parties.

    The Bill also exempted electoral bonds from *Section 13T of the Income Tax Act* , according to which parties need to maintain and make public records of names, addresses of all donors who contribute more than Rs 20,000.

    Additionally, the requirement that a corporation ought to have been in existence for at least three years before it could make donations — a system that was meant to stop shell concerns from being created with a view purely to syphoning money into politics — has also been removed.

    In addition, the bonds now have have hidden, unique alphanumeric code, which enables the ruling govt to track donors if they so wish.

    As a consequence of all these amendments, corporations no longer need to use cash to hide their donations, as bonds provide them the similar insulation. In addition, the amendments encourage creation of shell companies, while also ensuring that the ruling party has access to donor details, while taking away from the EC their power to monitor party donations.

    As of now the Electoral Bonds seem to be overwhelmingly favoring the ruling party. How much of it is because of their actual popularity, and how much of it is because of the possibility that the scheme by design does so, is something that needs to be studied.

  2. Like the political parties in the USA the congress and the BjP must have five lakhs dinner parties openly and publish the names of the particilpants.
    Even in a small city like Jodhpur I know how even small scale industrialists used to pay ransom to the Congress and to the BjP and by all means to the communists who could disrupt their production.POLITICIANS CANNOT FOOL ALL THE PEOPLE ALL THE TIME.

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