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Supreme Court on the Issue of Black Money for Electoral Financing: Transparency & Accessibility to Records

Electoral Bond Scheme was introduced to ensure that donations made to political parties were accounted for in the balance sheets without exposing the donor details to the public. The scheme is aimed to keep a tab on the use of black money for funding elections.

The Government of India had notified the Electoral Bond Scheme (the Scheme) in the year 2018. Under this scheme, bonds for contributions to political parties were allowed to be issued by the State Bank of India (SBI) by any donor with a Know Your Customer (KYC) compliant account. Electoral bonds were introduced to ensure that donations made to political parties were accounted for in the balance sheets without exposing the donor details to the public. They were introduced to keep a tab on the use of black money for funding elections.

The focus of the reforms in the Finance Act, 2017 (the Act) on cleaning of political funding has brought concerns regarding black money in politics back into focus. In 2019, the Supreme Court had passed an Interim Order which required all political parties in India that received donations through ‘electoral bonds’ to submit to the Election Commission of India in a sealed cover the following details:

  • Detailed particulars of the donors as against each Bond;
  • The amount of each such bond and the full particulars of the credit received against each bond;
  • The particulars of the bank account to which the amount has been credited and the date of each such credit.

Recently, the Supreme Court of India in the case of Association for Democratic Reforms v. Union of India dismissed the applications filed by the petitioners to issue a writ of declaration pronouncing certain provisions of the Act as being unconstitutional, illegal and void. The application filed also sought the Court to declare that no political parties would accept any donation in cash.

The applicants in the present case had argued that the Scheme allows the donors of political parties to maintain anonymity which is not healthy for a democracy. Although the Government is in a position to find out the names of the donors, as the Scheme operates through the State Bank of India via banking channels, the members of the public and political parties not in power, will not be able to find out. Moreover, the number of funds received by a party in power will normally be more, as it will be reciprocated with favours. Various letters written by the Reserve Bank of India (RBI) as well as the Election Commission were also taken into account to contend that they had serious reservations about the Scheme.

The opposite party contended by the said Scheme was intended to prevent unaccounted money from having sway in the elections and that under the Scheme the donors are obliged to operate only through banking channels. This curbed the menace of black money playing a huge part in the elections.

While analysing the legality of the Scheme at hand, the Supreme Court clarified RBI’s stand stating that the RBI had never opposed the Scheme in principle. RBI’s objection was to the issue of bonds in scrip form rather than in Demat form. What RBI wanted to achieve was the twin advantage of:

  • providing anonymity to the contributor; and
  • ensuring that consideration for transfers is through banking channels and not cash or other means.

RBI has called the Electoral Bonds as ‘an enduring reform, consistent with the Government’s digitization push’.

The Supreme Court further highlighted some features of the Scheme demonstrating the inclusion of recommendations of the RBI:

  • Only political parties registered under Section 29A of the Representation of the People Act, 1951 and secured not less than 1% of the votes polled in a previous general election to the House of the people or the legislative assembly would be entitled to receive the bond;
  • the bond can be encased by an eligible political party only through a bank account with the authorized bank;
  • the extant instructions issued by RBI regarding KYC norms and the bank’s customer would apply for the buyers of the bond and the authorized bank can also call for any additional KYC document;
  • the bond would be valid for 15 days from the date of issue and no payment will be made to any payee political party if the bond is deposited after the expiry of the validity period;
  • all payments for the issue of the bonds can be accepted in Indian rupees, through demand draft or cheque or electronic clearance system or direct debit of the buyers’ account;
  • the bond can be encashed only by depositing the same in the designated bank account of the eligible political party;
  • the face value of the bonds must be counted as income by way of voluntary contribution received by an eligible political party for exemption from income tax under Section 13A of the Income Tax Act, 1961 (ITA).

Why did the Supreme Court Rule in favour of the Scheme?

Even though the Scheme provides anonymity, the Scheme is intended to ensure that everything happens only through banking channels. While the identity of the purchaser of the bond is withheld, it is ensured that unidentified/ unidentifiable persons cannot purchase the bonds and give them to the political parties. Under clause 7 of the Scheme, buyers have to apply in the prescribed form, either physically or online disclosing the particulars specified therein. Though the information furnished by the buyer has to be treated confidentially by the authorised bank and it must not be disclosed to any authority for any purposes, it is subject to one exception, namely when demanded by a competent court or upon registration of a criminal case by any law enforcement agency. A non­-KYC compliant application or an application not meeting the requirements of the scheme is rejected.

The Supreme Court did not find any substance to the allegations made by the applicants that there would be complete anonymity in the financing of the political parties by corporate houses, both in India and abroad. If the purchase of the bonds, as well as their encashment, could happen only through banking channels and if the purchase of bonds were allowed only to customers who fulfil KYC norms, the information about the purchaser will certainly be available with the SBI which alone is authorised to issue and encash the bonds as per the Scheme. Moreover, any expenditure incurred by anyone in purchasing the bonds through banking channels will have to be accounted as an expenditure in their books of accounts. The trial balance, cash flow statement, profit and loss account and balance sheet of companies that purchase Electoral Bonds will have to necessarily reflect the amount spent by way of expenditure in the purchase of Electoral Bonds.

Addressing the Issue of Black Money for Electoral Financing: Transparency & Accessibility to Records

The financial statements of companies registered under the Companies Act, 2013 which are filed with the Registrar of Companies, are accessible online on the website of the Ministry of Corporate Affairs (MCA) for anyone. They can also be obtained in physical form from the Registrar of Companies upon payment of a prescribed fee. Since the Scheme mandates political parties to file an audited statement of accounts and also since the Companies Act requires financial statements of registered companies to be filed with the Registrar of Companies, the purchase as well as encashment of the bonds, happening only through banking channels, is always reflected in documents that eventually come to the public domain. All that is required is a little more effort to cull out such information from both sides (purchaser of bond and political party) and do some “match the following”. Therefore, it is not as though the operations under the Scheme are behind iron curtains incapable of being pierced.

One of the contentions raised before the Court was that though the first purchase may be through banking channels for a consideration paid in white money, someone may repurchase the bonds from the first buyer by using black money and hand it over to a political party. But this contention arises out of ignorance of the Scheme. Under Clause 14 of the Scheme, the bonds are not tradable. Moreover, the first buyer will not stand to gain anything out of such a sale except losing white money for the black.

The Court also clarified how the apprehension that foreign corporate houses may buy the bonds and attempt to influence the electoral process in the country, was also misconceived. Under Clause 3 of the Scheme, the Bonds can only be purchased by a person who is a citizen of India or incorporated or established in India.


Considering that the Scheme was notified to cleanse the system of political funding in the country, one of the many criticisms of the electoral bonds is how they try to alter the transparency regime of electoral financing. The scheme provides that the Electoral Bond would be a bearer instrument like a Promissory Note and an interest-free banking instrument. Any citizen of India or a body incorporated in India will be eligible to purchase the bond. One of the striking features of the Scheme is that it allows these bonds to be encashed by an eligible political party only through a designated bank account with the authorised bank.

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