What is India's controversial electoral bonds scheme under scrutiny at Supreme Court?

Critics say the scheme enables corruption and money laundering

India's Supreme Court is hearing petitions challenging the electoral bonds scheme that allows anonymous donations to political parties. AFP

India’s Supreme Court on Tuesday began hearing a batch of petitions challenging the legality of allowing political parties to receive funding through electoral bonds without public disclosure.

The law, which has come under heavy criticism, was drafted by Prime Minister Narendra Modi’s government and passed by the Indian Parliament in 2017.

It allows donors, including large corporations, to buy electoral bonds from state-controlled banks and finance political parties without their names being made public, which critics say contravenes democratic values.

The NGO Association for Democratic Reforms and the Communist Party of India (Marxist) filed petitions to the Supreme Court in 2018, arguing that the scheme facilitates corruption and money laundering.

The government said it was introduced to “cleanse the system of political funding in the country” and that it promotes adherence to tax obligations.

A five-judge bench led by Chief Justice of India Dhananjay Chandrachud will review the petitions that have remained in limbo for almost five years.

What are electoral bonds?

Electoral bonds are a financial instrument that allows donors to fund political parties. An individual is not required to publicly declare the amount donated.

The scheme was introduced through amendments to the Finance Acts of 2016 and 2017.

The new system removed capping that had restricted funding to 7.5 per cent of the corporate organisation's average net profit over the previous three-year period.

Cash donations from individual people was restricted to 2,000 rupees ($24).

The Finance Bill 2017 that legalised electoral bonds also courted controversy, as the government had been introduced the proposed legislation in parliament as a "Money Bill", marking it as draft legislation that would not require a vote in the upper house, where Mr Modi’s administration was in the minority.

How does it work?

A person or corporation can buy bonds of any value between 1,000 to 10 million rupees ($12 to $120,000) from the State Bank of India, but can donate numerous bonds to an eligible political party registered with the Election Commission, having at least 1 per cent of the votes polled in the last general and assembly election.

The parties can then cash the donated bonds within two weeks.

The bonds do not carry the name of the donor and even the political parties do not know of their identity, although banks would keep the information for auditing purposes and to ensure that such funding is legitimate.

Critics claim the government can easily access donor details from the state-controlled bank and target individuals and corporations that fund its political opponents.

Why the criticism?

Those opposed to the scheme say the anonymity of donors could lead to corruption and quid pro quo in forming government policies.

Prashant Bhushan, lawyer for the petitioners, on Tuesday argued that the “government has legalised kickbacks" through the bond scheme.

“The bonds are fashioned in a way that the money could secretly pass through several hands to reach the ultimate beneficiary political party, creating further layers of opaqueness and potential for money laundering,” Mr Bhushan told the court.

What is the government’s stance?

The government has said it is not a fundamental right of citizens to know the source of donated funds.

"The scheme in question extends the benefit of confidentiality to the contributor," attorney general AG R Venkataramani told the court on Monday, ahead of the hearing. "It ensures and promotes clean money being contributed. It ensures abiding by tax obligations. Thus, it does not fall foul of any existing right."

Why are parties funded?

Indian elections are on an enormous scale and are the world’s costliest.

There are 28 states in the country and at least one state election takes place every year.

An election typically features extravagant public rallies, events, social media campaigns and widespread advertisements, for which political parties need money and are thus becoming increasingly dependent on donations.

In 2019, a staggering 550 billion rupees ($8 billion) was spent during general elections, a report by the Centre for Media Studies indicated.

Mr Modi’s Bharatiya Janata Party, the richest political party in the country, spent roughly half of that total.

The BJP received 52.7 billion rupees out of a total of 92 billion rupees, or 57 per cent of the value of electoral bonds sold from 2018 to 2022, Election Commission data has found.

The main opposition Congress Party received 9.6 billion rupees or 10 per cent in the same period.