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Indian Supreme Court Scraps PM Modi’s Controversial Party Funding Scheme

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Indian Supreme Court Scraps PM Modi’s Controversial Party Funding Scheme

The apex court declared the opaque electoral bonds scheme, which benefited the BJP the most, to be unconstitutional.

Indian Supreme Court Scraps PM Modi’s Controversial Party Funding Scheme
Credit: Depositphotos

On February 15, India’s Supreme Court scrapped the electoral bonds scheme, a controversial funding mechanism for political parties introduced by the Narendra Modi government in 2017. In its 232-page judgment, the five-judge bench headed by Chief Justice D.Y. Chandrachud declared the scheme as “unconstitutional’ as it legalized anonymous donations to political parties.

Thursday’s judgment is a big blow to the ruling Bharatiya Janata Party (BJP). The party receives more than half of its funds through electoral bonds, making it India’s wealthiest party.

This is the first time that Modi has emerged as an active enabler of political corruption. The verdict provides a shot in the arm for Congress Party leader Rahul Gandhi, who has consistently been calling out the Modi government’s nexus with big business.

Incidentally, within a day of the verdict, the Congress party found that its bank accounts had been frozen. Party treasurer Ajay Maken said that the Income Tax department had frozen the accounts of both the Congress and the Youth Congress. “Democracy has been frozen,” he said.

“The unconstitutional money collected by the BJP would be utilized by them for elections, but the money collected by us through crowdfunding shall be sealed!” Congress President Mallikarjun Kharge observed. As per latest reports, in an interim relief for the party, it has been allowed to access its frozen accounts.

The Supreme Court’s verdict has come just months before India votes in general elections. Whether and how it will impact the upcoming elections remains to be seen.

In addition to scrapping the electoral bond scheme, the apex court has also directed the government-affiliated State Bank of India (SBI), the designated bank in the scheme, to disclose within three weeks the names of all donors since April 2019. The Modi government has consistently supported this opaque scheme on the rationale that it protects the privacy of donors.

Expectedly, opposition parties hailed the court verdict, with Gandhi accusing the “corrupt Modi government” of making electoral bonds “a medium of taking bribe and commission.” The Congress had repeatedly accused the Modi government of “undermining democracy” and disrupting the level playing field of electoral politics through the scheme.

In an earlier article for The Diplomat, I highlighted that the electoral bond scheme was bad in law and must go. Contrary to the government’s claims of hailing it as a “major electoral reform” that will bring in “transparency” and replace the shady cash donations for political funding, the scheme is in fact shrouded in secrecy.

Since its introduction in 2017, there have been 30 rounds of sale of electoral bonds with the latest on January 2 this year. Bonds were usually sold at specified times of the year, often before elections to state assemblies and Parliament.

Electoral bonds are like promissory notes. They were issued by select branches of the SBI, and could be bought by individuals or corporate organizations. Political parties, who received these bonds could subsequently cash them through a bank account within a stipulated period. Significantly, the name and details of the donor were not disclosed on the bond.

This gave scope for the electoral bonds to be bought by an individual with a verified bank account and then transferred to an “anonymous” donor.

The Supreme Court struck down the bond scheme because the secrecy it entailed violated the citizen’s right to know. It said that information about the funding of parties is essential for voters to make informed decisions. The citizen’s right to information was paramount and superseded the corporate entity’s (donors) right to privacy, the court said.

The court ruling has been welcomed by Right to Information (RTI) activists. Since 2014, when it came to power the Modi-led BJP government has consistently worked toward weakening the rights-based legislation, the RTI. The RTI law empowers citizens with information and the right to demand accountability from the authorities.

The apex court’s landmark ruling came on petitions filed in 2018 by four organizations, including the Association for Democratic Reforms (ADR) and the non-profit Common Cause. The petitioners had alleged that the scheme opens the “floodgates” to legitimizing political corruption on a large scale.

Despite ADR urging the court to put on hold the sale of electoral bonds on the eve of the 2019 general elections, and then again before state assembly elections in 2021, the court refused. It finally reserved its judgment in November last year after a three-day hearing of the matter.

Reacting to Thursday’s judgment, Jagdeep Chhokar of the ADR told The Diplomat that while he was “surprised” at the electoral bond ruling, it would help “restore the faith of the Indian people in democracy, in rule of law and the Supreme Court itself.”

Indeed, the “historic” decision of the Supreme Court has surprised many as several recent judgments of the apex court saw it toeing the government line.

According to many observers, the court’s long delay in deciding on the matter not only facilitated but boosted this opaque means of political financing and created an unfair playing field. As per available data between 2017 to 2022, the BJP cornered  $623 million or 52 percent of its total funding through electoral bonds. Meanwhile, all the other parties together received only $213 million. Therefore, the BJP received three times the amount that the seven parties received.

Incidentally, the Communist Party of India-Marxist (CPM) was the only party that refused to accept electoral bonds.

Importantly, the Modi government had strongly defended the electoral bond scheme and categorically stated that citizens do not have the right to know the source of political funds. Indeed, in a written affidavit, Attorney General R. Venkatramani said that citizens do not have a general right to know “anything and everything.” He had asserted that confidentiality was built into the scheme to protect donors so that their identities are not revealed to all political parties.

It is precisely this anonymity clause that the Supreme Court has struck down now. It has pointed out that financial contributions to political parties could lead to quid pro quo arrangements, which could be in the form of policy changes or granting licenses. Recognizing the close nexus between money and politics, the court said, this vital information about political funding would enable the voter to assess if there is a connection between policymaking and financial contribution.

The court rejected the government’s arguments that bonds checked the flow of black money in politics. Rather the court said that legal means of money transfer such as cheques and drafts existed and it was only to ensure the “anonymity” of the donor that electoral bonds had been brought in. Moreover, it drew attention to “selective anonymity” as the SBI is under the government and the government has access to all information.

Significantly, the court has struck down amendments to several laws that were brought in by the Modi government to legalize financing through electoral bonds. This included the Companies Act 2013, the Income Tax Act 1961, the Foreign Contributions Regulation Act 2010 (FCRA), and the Representation of the People Act 1951. These changes exempted corporations and companies from disclosing political donations in their profit and loss accounts. It also enabled foreign companies with subsidiaries in India to fund political parties.

Restoring the original provisions in these acts, the court said that political parties will now be required to inform the Election Commission about contributions that exceed 20,000 Indian rupees ($249). Also, political parties would once again be required to maintain a record of donations received through electoral bonds.

Business entities also have to abide by certain restrictions. They can donate only 7.5 percent of their average net profits over the previous three financial years. This puts a cap on unlimited funding and funding by loss-making corporate houses for political favors.

The BJP government bulldozed these amendments in the face of stiff protests from the opposition by describing them as money bills or finance bills. Since the government lacked the majority in the upper house of Parliament, it got these bills passed in the lower house, which has the exclusive right to pass finance bills.

Particularly disturbing was the Election Commission’s shift in stance on the electoral bond scheme. It initially termed it as “opaque” and was apprehensive that the bonds could be misused by shell companies.  Over the past year, it reversed its stand to support the scheme. Significantly, the Election Commission has been silent since the Supreme Court announced the historic verdict.

Former Reserve Bank of India Governor Urijit Patel had formally voiced his objections to the electoral bonds scheme, warning that it could be misused for money laundering. The Modi government overruled his objections.

The BJP’s response to the adverse court ruling has been rather subdued. Senior leader Ravi Shankar Prasad said that the bonds were a sincere effort to make elections transparent.

The response of opposition parties has been one of cautious jubilation. Over the past decade, the government has made a habit of overturning unfavorable verdicts through executive ordinances.