On Day 2 of the hearings on the constitutionality of the 2018 electoral bond scheme, Solicitor General for India Tushar Mehta argued that striking down the 2018 electoral bond scheme will take the country back to the 2018 regime when it was struggling to curb black money.
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ON Day 2 of the hearings in a batch of petitions challenging the constitutionality of the 2018 electoral bond scheme, senior advocate Vijay Hansaria began his arguments by tracing the amendments made to the Companies Act, 1956.
A Supreme Court Constitution Bench headed by Chief Justice of India Dr D.Y. Chandrachud and also comprising Justices Sanjiv Khanna, B.R. Gavai, J.B. Pardiwala and Manoj Misra are hearing the matter which senior advocate Prashant Bhushan said “goes to the very root of our democracy” on Day 1 of the hearings yesterday.
The first change was made to the Companies Act, 1956 in 1960 with the insertion of Section 293A.
As per the amendment, a corporate donation to a political party or to any politician would not exceed a cap of 5 percent of the net profit of the corporation or ₹25,000 in the financial year. Corporations were also obliged to disclose the amount they had donated to political parties or individual politicians.
In 1969, corporate donations were completely prohibited. This ban was removed through an amendment in 1985.
Hansaria pointed out that before the 1969 amendment, the field of corporate donations to politicians and political parties was not regulated.
Post the 1985 amendment, he pointed out that some conditions were put on corporate donations. For example, a company which has an existence of less than three years could not donate.
He said: “You cannot create a shell company and contribute. It has to be at least three years old.”
Moreover, he pointed out, donations cannot exceed 5 percent of the average profit during three preceding financial years.
In 2013, Section 293 was replaced by Section 182. Section 182 increased the donation amount to 5 percent to 7.5 percent. The party must disclose the particulars of the amount and name of the political party.
Hansaria argued that the substituted Section (after 2017) omits the requirement of giving particulars of the amount and the name of the party which has contributed. It also deletes the 7.5 percent cap on the amount.
So, the company is only obliged to disclose the total amount contributed.
Hansaria also pointed out similar amendments to the Income Tax Act, 1961.
He pointed out that in 1978, Section 13A of the Income Tax Act was introduced. It allowed political parties who received contributions to be exempted from paying taxes.
Hansaria said: “The exemption was provided to address the issue that such taxation reduces disposable income [,thereby] affecting their financing.”
Hansaria explained that the amendment worked together with a requirement that political parties keep and maintain a book of accounts and other documents which could enable an income tax officer to properly calculate their income.
In 2003, another requirement was added that political parties must maintain the name and address of persons making donations to them. This amendment also exempted donors from paying taxes on political donations.
Hansaria then pointed out that in 2009, the scheme of electoral trust was introduced. Under this, five different companies could form an electoral trust and donate it to the trust. Any donation to the political party through the electoral trust is exempted from taxes.
To this, the CJI asked: “Was there any restraint on how the electoral trust could contribute?”
He further asked: “Could an electoral trust say they are going to give money only to one political party?”
Solicitor General Tushar Mehta, answered this query. He said that there was no restriction. He said: “Instead of five people donating separately, they could donate through a trust. Like-minded people could come together and give [money]”.
Hansaria then took the court to the argument that while candidates are required to disclose the amount donated to them, political parties do not have the same obligation.
To this, the CJI said: “Originally, our law did not speak of political parties at all. The law spoke of a [political] party after the Tenth Schedule was introduced in the Constitution.”
Hansaria added that political parties play a central role in the democratic set up.
“Your Lordship had asked what is manifestly arbitrary… An artificial distinction is being made between a bank transfer by an honest corporate who wants to show that yes, I have made this contribution and another who wants to be anonymous. There is no intelligible differentia,” Hansaria added.
The CJI offered some of his observations on this. He said that electoral bonds are bearer bonds. The actual contributor may not necessarily be the person who actually purchased the electoral bonds.
Hansaria quoted a study conducted by the Council of Europe. He pointed out that anonymity of corporate funding is considered a difficult subject internationally.
Hansaria, summarising his arguments, told the court that throughout the amendments made to different legislations, the political fundings have been required based on different conditions like the amount and disclosure.
Submissions by Sanjay Hegde
Senior advocate Sanjay Hegde, representing a shareholder of a public-listed company, reiterated that he supports the arguments of the petitioner and asked for the court to pass directions to reduce opacity in the political funding process.
In the context of corporate donations, Hegde told the court that many companies do not even put their profit-loss statements. Now the law allows them to make donations in crores.
Dalit Panther Party’s submissions
An advocate, representing the Dalit Panther Party, argued that the electoral bonds scheme is discriminatory because it states that only political parties that have received at least 1 percent of votes in Lok Sabha or the legislative assembly of the respective state can get donations.
He argued that this has a disparate and severe impact on the party because more than any other political party, they espouse the cause of marginalised people.
He said: “That way, this is a hostile discrimination… There is no rational nexus [why a party needs to get 1 percent vote to be eligible for donations].”
Justice Gavai said: “There is a rational nexus. A political party must have at least 1 percent votes. Tomorrow, you may have [merely] two persons [supporting you] and [still you] may claim donations.”
The CJI pointed out that a party with less than 1 percent votes could still receive donations. The court clarified that the current issue pertains to the constitutionality of the electoral bonds scheme and the petitioner is free to approach the appropriate high court.
Mehta’s submissions
Mehta presented his submissions for the Union government. He began his arguments by stating that India continues to grapple with the issue of black money. In pursuance of this, the 2018 electoral bond scheme was a “deliberate attempt” to ensure that the funding received by political parties is clean money.
He said: “The scheme so far as possible eradicates unclean and black money in elections.”
Mehta argued that the electoral scheme is one of the several schemes enacted by the government to curb the menace of black money. One of the other schemes is the digitisation of payments, he pointed out.
He said: “Your lordship would recall that when the digitisation drive started, the government was being mocked. People said, what is this? This is a utopian idea. Would a vegetable vendor accept digital payment? Now, a vegetable vendor selling vegetables in a gunny bag is accepting digital payments.”
Mehta added: “This is something as an Indian we should be proud of. Our digital payment is seven times more than that of the United States and European Union put together. It is three times that of China.”
He continued that the next step taken by the government to curb unclean money from the market is the de-registration of shell companies.
Mehta quoted statistics from a shell source and said: “Between 2018 and 2021, the government of India identified 238,223 shell companies… This is one of the vehicles used to transport unclean money.”
He warned the court that if the constitutionality of the electoral bond scheme is challenged, India will be back to the 2018 regime.
In this context, Mehta claimed that one of the petitioners, the Association for Democratic Reforms (ADR), placed all reports before the court, except one, which he termed as “extremely crucial in this case”.
According to Mehta, this report compiles the data on political funding from the financial year 2004–05 to 2014–15.
He pointed that according to the data, during those 11 years, 83 percent of the total income to a particular political party amounting to ₹332.39 crore and 65 percent of the total income of another political party amounting ₹2,125 crore came from unknown sources.
Of the 51 regional parties, at least 45 parties have not submitted their donation statement for at least one financial year. There are twelve regional parties that have never submitted their donation statements, Mehta continued.
The income of national parties from unknown sources increased by 313 percent from ₹274.13 crore during the financial year 2004–05 to ₹1,130 crore during the financial year 2014–15, Mehta informed the court.
He continued that the income of regional parties from unknown sources increased by 652 percent from ₹37 crore during 2004–05 to ₹281 crores during 2014–15.
Mehta told the court that it must ask petitioners what benefit they will get if the court goes back ten steps.
The data compiled by the ADR is based on the data collected by the Election Commission of India.
Mehta: Anonymity helps keeping the donor safe
Mehta continued referring to the ADR data and claimed that it is a norm that the ruling party gets a substantial amount of donations.
When the CJI asked Mehta to justify why that is a norm, the latter said the donor keeps his interest in mind too.
He said: “By and large, they decide as per their interest. They are not doing charity… It is market driven.”
Mehta also explained why the anonymity part helps in political funding. He said that if a donor decides to donate to a political party and that party did not form a government, then he may face victimisation.
The CJI pointed out that the problem with the scheme is that it provides selective anonymity. Explaining his observations, he said that it is not the case that the bank is unaware of who the donor is.
Continuing from this, he said: “It is not confidential to the State Bank of India. It is not confidential to the law enforcement agency. So, a donor would never take the risk of buying electoral bonds for the purpose of donating it to the political party.
“All that the large donor has to do is to disaggregate the donation, get people who will purchase electoral bonds in large amounts which will be purchased through official banking channels and not through cash.”
“A large donor will never put his or her head on the line by being in the books of account of the State Bank of India,” the CJI averred.
The CJI also pointed out that the respondents’ argument that striking the constitutionality of the 2018 electoral bond scheme is not valid.
He said: “We are not precluding the government from coming out with a transparent scheme or a scheme which has a level-playing field.”
On the argument of victimisation of donors, Justice Khanna said: “Victimisation and retribution is normally by the parties in power. Not by the party which is in opposition.”
What has happened so far?
Yesterday, senior advocate Prashant Bhushan challenged the amendments brought in through the Finance Bill, 2017 to the Representation of the People Act, 1951, Income Tax Act, 1961, the Companies Act, 2013 and Foreign Contribution (Regulation) Act, 2010 through which the electoral bond scheme was introduced.
He challenged these amendments on the grounds that first, they violate Article 19(1)(a) of the Constitution because access to information is a fundamental right and the electoral bonds scheme goes against it.
Second, electoral bonds promote corruption as they are opaque and anonymous. The public does not know the source of the donation and its beneficiary.
Third, Bhushan claimed that the electoral bonds scheme “destroys and disturbs democracy in the country”.
Explaining this submission, he said: “The bonds do not allow a level-playing field between political parties which are ruling versus political parties which are in the Opposition or between political parties and independent candidates.”
Bhushan presented another statistic here. He said: “The contribution by way of electoral bonds to just one party [Bharatiya Janata Party or BJP] is more than ₹5,000 crore in a period less than five years.”
He claimed that since the scheme was introduced in 2017, the contributions made to the political parties through electoral bonds have exceeded any other method of donation.
Senior advocate Kapil Sibal warned against allowing corporations to fund political parties.
He said: “The moment you allow the corporate sector to donate, whether with transparency or without transparency, it is inconsistent with the concept of a corporate sector which is in the business of doing business”.
According to Sibal, this goes against the memorandum of association, especially when the donation is without the consultation or consent of the shareholders.
However, the CJI pointed out that the court is not dealing with the legality of corporate donations.
The CJI added that the court can still consider the ‘consultation or consent’ aspect of the corporations donating to political parties.
Sibal argued that there is nothing in the scheme that shows that the donation has anything to do with the electoral process. He also pointed out that there is no cap on the amount of money that can be donated to political parties.
Advocate Shadan Farasat, appearing for the Communist Party of India (Marxist), began his arguments by stating that his is the only political party in this case.
He said: “Despite being a ruling party, we have taken a principled stance to not accept any electoral bonds. We have not taken a single rupee through the electoral bonds in the last five-and-a-half years at much cost to us”.
He argued that the 2018 electoral scheme fails to pass the test of arbitrariness of Article 14 because the scheme takes away non-anonymous money and puts it as anonymous money.
Advocate Nizam Pasha also argued that the scheme is manifestly arbitrary. He told the court that since there is no possibility of taking cash while purchasing electoral bonds, the question of black money coming in the market does not arise.
What is the scheme of the electoral bonds?
According to the 2018 scheme notified by the Union Ministry of Finance, an electoral bond is defined as: “A bond issued in the nature of a promissory note which shall be a bearer banking instrument and shall not carry the name of the buyer or payee.”
The scheme was notified by amending Section 31 of the Reserve Bank of India Act, 1934.
As per the scheme, the bonds can be issued in the denominations of one thousand, ten thousand, one hundred thousand, ten hundred thousand and one crore rupees.
Under the scheme, only those political parties registered under Section 29A of the Representation of the People Act, and who have secured not less than 1 percent of the votes polled in the last general election to the House of the People or the legislative assembly, shall be eligible to receive the bond.
