SYNOPSIS

On February 15, 2024, in Association for Democratic Reforms & Anr. v. Union of India, a five-judge constitution bench of the Hon’ble Supreme Court of India (“Supreme Court”) unanimously held the Electoral Bond Scheme, 2018 (“Scheme”) as unconstitutional, resulting in scrapping of a system that previously allowed individuals and corporations to anonymously fund political parties by purchasing electoral bonds from the State Bank of India (“SBI”). In the landmark judgment, along with addressing numerous challenges pertaining to the legality of the Central Government’s electoral bond scheme, the Supreme Court of India (“Supreme Court”) concluded that voters possess ‘right to information’ regarding political parties and their funding sources, while holding the electoral bond scheme to be violative of Article 19(1)(a) of the Indian Constitution, which guarantees all citizens this ‘right to information’.

BACKGROUND

• The Ministry of Finance, Government of India had on January 02, 2018, notified the Scheme which enabled individuals and corporations to make anonymous political contributions by purchasing electoral bonds, a form of promissory note which did not carry the name of the purchaser.
• The Petitioners challenged the constitutional validity of the Scheme which introduced anonymous financial funding to political Parties and the provisions of the Finance Act, 2017 (“Finance Act”) which, among other things, amended the following legislations (collectively, “Finance Act Amendments”): –

a) Section 31 of the Reserve Bank of India Act, 1934 (“RBI Act”), thereby permitting the Central Government to authorize any scheduled bank to issue electoral bonds.

b) Section 29C of the Representation of the People Act 1951 (“RPA”), thereby exempting political parties to disclose details of contributions received by way of electoral bonds.

c) Section 13A of the Income Tax Act, 1961 (“IT Act”), thereby (i) exempting political parties from maintaining record of contributions received by way of electoral bonds; and (ii) permitting political parties to receive donation in excess of two thousand rupees through electoral bonds.

d) Section 182 of the Companies Act, 2013 (“CA”), thereby (i) removing the cap on funding that can be made by corporates; (ii) exempting corporates from disclosing details of contributions made to each political party, and (iii) enabling corporates to contribute through instruments issued pursuant to a scheme notified for contribution to political parties (such as electoral bonds under the Scheme).

• The Reserve Bank of India (“RBI“) and Election Commission of India (“ECI”) Objections to the Scheme: The Supreme Court noted that while the Scheme was introduced by the Central Government with the intention to keep identity of the donor anonymous and to ensure that donation is only made from legitimate financial sources; the Scheme was objected to by RBI inter alia on the ground that: – (i) issuance of currency is a ‘monopolistic function’ of the central authority, and no person other than RBI can issue bearer bonds; (ii) there is an inherent risk of money laundering as there is no mechanism to track the transaction trail; and (iii) the issuance of electoral bonds in script form could expose it to risk of forgery and cross border counterfeiting. The ECI also expressed its reservations with the Finance Act Amendments by stating that it will have serious impact on transparency pertaining to political funding.

KEY HIGHLIGHTS OF THE JUDGMENT 

• Scheme and Finance Act Amendments relate to electoral process and NOT economic policy: The Respondent (Union of India) contended that the challenge to the Scheme and the Finance Act Amendments relate to economic policy and thus there is a need for the Supreme Court to exercise judicial restraint while adjudicating on such challenge. However, upon examination, the Supreme Court formed a view that the Scheme and the Finance Act Amendments in fact did not pertain to economic policy, but rather to the electoral process. The Supreme Court based this conclusion on the fact that the true essence of the Finance Act Amendments did not indicate any connection to economic policy as they particularly relate to –(i) provisions mandating non-disclosure of information on electoral financing; and(ii) provisions permitting unlimited corporate funding to political parties, both of which relate to electoral process and not economic policy.

• Presumption of Constitutionality: Presumption of constitutionality is based on two premises – first, legislators are elected representatives who are aware of the needs of the citizens and are best placed to frame policies to resolve them and second, legislators are privy to information necessary for policy making which the Courts as an adjudicating authority, are not. However, the policy underlying the legislation must not violate the freedoms and rights which are entrenched in inter alia, Part III of the Constitution. The Supreme Court held that given the presumption principal, it is important to prove that the law infringes constitutional provisions, after which the onus would shift to the State to justify the infringement.
• Importance of the nexus between money and politics: Money can act a tool for influencing electoral outcomes through (i) vote buying; (ii) incurring electoral expenditure for political campaigns; (iii) creating entry-barriers to politics by limiting the kind of candidates and political parties which enter the electoral fray. The Supreme Court observed that the challenge to the Scheme and the Finance Act Amendments cannot be determined in isolation without recognising the influence of money on politics.
• Scope of Article 19(1)(a) of the Constitution extends to information about political contributions: The Scheme and the Finance Act Amendments were challenged on the ground that non-disclosure of information about political contributions is violative of the right to information of the voter contained under Article 19(1)(a) of the Constitution.

The Supreme Court observed that previous judgments delivered by it on ‘right to information’ can be divided into two categories: –

1. Right to information is imperative for good governance, transparency, and accountability. The Supreme Court relied on its previous judgments that dealt with the jurisprudence of right to information for democratic governance and held that citizens have a duty to hold the government accountable for their actions and inactions, and they can effectively fulfil this duty only if the government is open and not clothed in secrecy.
2. Right to information is imperative to form views on social, cultural, and political issues, and participate in and contribute to discussions. The Supreme Court recognised the importance of information to form views on social, cultural, and political issues, and participate in and contribute to discussions and that freedom of speech and expression includes the right to acquire information which would enable people to debate on social, moral, and political issues.

It has also been held that fundamental freedom and the Constitution as a whole seek to secure conditions for self-development at both an individual and group level and therefore the right to information is not restricted to information about State affairs (which is considered public information) but will also include information which would be necessary to further participatory democracy. Therefore, this right to information is an instrumental tool in facilitating the realization of democratic goals, considering the freedom of speech and expression includes the right to acquire information.

• Right to information of a voter: Reliance was placed on the judgments passed by the Supreme Court in Union of India v Association for Democratic Reforms (2002) 5 SCC 294 (“ADR Case”) and PUCL v Union of India (2003) 4 SCC 399 (“PUCL Case”), wherein it was held that – (i) any information which fosters democratic participation must be provided to citizens and must be disclosed, even it if may violate the right to privacy; and (ii) because voting is one of the foremost forms of democratic participation, voters have a right to information which would enable them to cast their votes rationally and intelligently.

Candidate vs. political party. The decisions in the ADR Case and the PUCL Case recognise the right to information of a voter vis-à-vis a candidate. It was, therefore, important to analyse if the ratio decidendi of the said judgments can also extend to political parties, in the current matter. In this regard, the Supreme Court observed that the decision of voting is not solely based on the individual candidate’s capabilities, particularly in view of the design of the electoral voting machine which has a list of the names of the candidates who are contesting the election from the constituency along with the symbol of the political party which is fielding the candidate. It was also observed that voters cast their votes based on capability of the candidate being representative of and the ideology of the political party. Accordingly, it was concluded that political parties are a “relevant political unit in the democratic electoral process“ in India, and information about funding of political parties would help voters determine if there is any link between policymaking and financial donations.

• Infringement of the Right to Information of voter – not justified: The Supreme Court relied on the proportionality standard to determine if the violation of the fundamental right is justified. This proportionality standard requires the violative legislation or Scheme to – (i) have a legitimate goal; (ii) be a suitable means for furthering the goal; (iii) be least restrictive and equally effective; and (iv) not have a disproportionate impact on the right holder.

The Supreme Court examined the purpose of the Scheme and the Finance Act Amendments in light of the aforesaid proportionality test and held as under: –

• Legitimate goal: The Supreme Court emphasised that the right to information contained under Article 19(1)(a) of the Constitution can only be restricted on the grounds already provided under Article 19(2). While one could argue that the purpose of the Scheme and the Finance Act Amendments, which was to curb black money, could be traced to ‘public order’ which is one of the grounds for imposition of reasonable restrictions under Article 19(2), the Supreme Court observed that previous judicial interpretations have interpreted ‘public order’ to mean ‘public safety and tranquillity’ and ‘disorder involving breaches of local significance in contradistinction to national upheavals, such as civil strife, war, affecting the security of the State’, and hence the purpose of curbing black money is not traceable to any of the grounds enumerated under Article 19 (2) of the Constitution.
• Means for furthering the goal: The Supreme Court also assessed whether the means, if realised, would increase the likelihood of curbing black money to which it answered in the affirmative, basis the assumptions that non-disclosure of information about political expenditure has a rational nexus with the goal, that is, curbing black money or unregulated money.
• Least restrictive means: The Supreme Court also held that the least restrictive means test of the doctrine of proportionality is not satisfied and that there are means other than electoral bonds to achieve the purpose of curbing black money. It was also held that the earlier regime on electoral funding involving contributions through cheques, bank draft, or electronic clearing system and electoral trusts were sufficient for achieving the purpose of curbing use of black money.

The Supreme Court concluded that the Scheme is not the least restrictive means of curbing black money in the electoral process.

• The balance between right to information and right to informational privacy: When faced with the issue of balancing of two fundamental rights, i.e. right to information and to informational privacy, the Supreme Court acknowledged that there is no constitutional hierarchy between the conflicting fundamental rights. It applied the double proportionality test to determine if the means used are suitable, necessary, and proportionate to the State interest such that the infringement of fundamental rights is justified. The Supreme Court decided in negative and while doing so, it rejected the Respondent’s argument that the Scheme balances the above-mentioned rights. The Supreme Court observed that mandating non-disclosure of information about political funding does not share a nexus with the purpose of the Scheme and held that the Respondent has failed to establish that the measure adopted in clause 7(4)(1) of the Scheme is the least restrictive measure, thereby failing the double proportionality test.

(a)        Basis the above observations, the Supreme Court held the amendments to the IT Act and the RPA to be unconstitutional as well. As a result, considering the anonymity of the contributor is intrinsic to the implementation of the Scheme and the Scheme not being distinguishable from other modes of contributions (such as through cheques, bank draft, or electronic clearing system along with electoral trusts) for which the considerations of disclosure of information of political contribution outweighed the considerations of informational privacy, even the anonymity component of the Scheme was struck down. The Scheme was consequentially struck down as unconstitutional.

(b)        Additionally, Section 154 of the Finance Act, which amended Section 182(3) of the CA, was held unconstitutional. As per the Supreme Court, this is because, the intention behind requiring companies to disclose their contributions was not solely to combat illegal funds in electoral financing, but also to ensure transparency in financial transactions between companies and political parties. Further, the deletion of the mandate of disclosing the particulars of contributions by companies violates the right to information of the voter since they would not possess information about the political party to which the contribution was made.

(c)        Since the amendment to the CA not only applies to contributions made through electoral bonds but through all modes of transfer and the only purpose of amending Section 182(3) of the CA was to bring the provision in tune with the amendment under the RPA exempting disclosure requirements for contributions through electoral bonds, the amendment to Section 182(3) of the CA becomes unconstitutional.

• CA amendment allowing unlimited corporate funding and no political party-specific disclosure held as unconstitutional: Having referred to various rulings and judicial precedents, the Supreme Court summarized that the doctrine of ‘manifest arbitrariness’ can be imposed to strike down a provision. Section 182 of the CA was enacted to curb corruption in electoral financing, however, the amendments permitted companies to contribute unlimited amounts to political parties and furthermore, did not require companies to state the name of the recipient political party. The Supreme Court was of the view that this resulted in unrestrained influence of companies in the electoral process, thus violating the principle of free and fair elections and political equality. The Supreme Court has ruled the deletion of maximum cap on donation limits by way of the 2017 amendment to the CA as “violative” of the Constitution and “manifestly arbitrary” for (i) treating political contributions by companies and individuals alike; and (ii) treating contributions made by profit-making and loss-making companies to political parties alike.

DIRECTIONS OF THE SUPREME COURT

• SBI is restricted from any further issuance of electoral bonds.

• Electoral bonds that are within the validity period of 15 days but have not been encashed by the political parties must be returned by the political party to the purchaser and SBI shall refund the amount to the purchaser’s account.

• SBI must submit details of (i) electoral bonds purchased since April 12, 2019 till date, including the date of purchase of each electoral bond, the name of the purchaser of the bond and the denomination of the electoral bond purchased; (ii) political parties which have received contributions through electoral bond since April 12, 2019 to till date; and (iii) each electoral bonds encashed by the political parties including the date of encashment and the denomination of electoral bond, to the ECI by March 6, 2024. Such details will be published by the ECI on its website by March 13, 2024.

CONCLUDING REMARKS

• The findings laid down in the judgment will impact the mechanics of political contributions that can be made to political parties. To clarify, political donors (whether individuals or corporate entities) can continue to use the routes otherwise available for making political contributions, such as paying the political party directly or through an electoral trust, however, they can no longer contribute through purchase of electoral bonds.
• Some corporate donors have been concerned with the implications of this decision, given that the 2017 amendment to Section 182(1) CA has been held as violative of Article 14 of the Constitution and thereby declared unconstitutional. It may be noted that striking down of these provisions does not have a retrospective effect, and any political contributions made in accordance with the erstwhile provisions and procedures set out under the CA, will continue to be valid and compliant under applicable law on such date.
• However, for corporate donors, it is important to make note of the following:

(a)        the details of the electoral bonds purchased by corporate donors from April 12, 2019, till date, will be published by the ECI on its website by March 13, 2024, thereby doing away with the complete anonymity afforded by the Scheme. It may be noted that as per the CA, the amount of electoral bonds purchased by a corporate donor was anyways required to be disclosed in their profit and loss account for the financial year when such bond had been purchased; and

(b)        Entities who are unable to meet the criteria set out under the proviso to Section 182(1) of the CA, i.e. where companies were restrained from making any aggregate contributions in excess of 7.5% of their average profits of its average net profits during the three immediately preceding financial years, will no longer be eligible to make political contributions. In other words, loss making entities cannot make political contributions, as a result of the holding of this judgment.