One of the oft-repeated criticisms of the Supreme Court’s decision to outlaw the electoral bonds scheme is that it replaced a semi-opaque scheme of political funding with a completely opaque one.
According to this view, the Supreme Court judgment has left Indian politics in an overall worse condition that before.
Before we examine the merits of this argument, we first need to understand the two types of funds that flow from companies to political parties.
The first comprises what can be called genuine funding. This is money that the company pays out as part of its corporate social responsibility mandate to parties. The aim of this funding is to contribute to the overall democratic process of the country. This is better done in public so that voters also know who is funding the party that seeks their votes.
The second type of funds that move from companies to parties comprise kickbacks and bribes. This is gratification paid to parties in exchange for illegal favors, such as the suspension of an ongoing investigation, the award of a large construction contract, or the dilution of a regulatory provision that makes business easier.
Legitimate Donations
First, let us look at genuine donations made by parties as part of their CSR mandate.
While ideally, there should be no secrecy associated with this form of funding -- after all, it is altruistic in nature -- the votaries of the electoral bonds system believe that companies should have the option of keeping this data secret.
They argue that the current system of open donations – in which a company can donate to political parties only through open and transparent channels such as trusts – can expose the company to vindictive action by rival parties, particularly the one in power.
Since all the donation data is out in the open, parties can compare their numbers with those of others, and feel aggrieved that they got less.
This, they argue, can lead to vindictive measures – including raids by investigative agencies such as Enforcement Directorate, and higher scrutiny of tax returns – especially if it is the party in power which is feeling disgruntled.
By replacing open donation with anonymous donation, they argue, Electoral Bonds protect the donors from such eventualities. This is especially so for opposition parties, they point out, as it is the party in power that has the most power to harass and coerce donor companies.
Hence, they point out, the secrecy afforded by electoral bonds benefit the opposition more than the ruling front.
The problem, however, is that electoral bonds provide cover only from the eyes of the opposition parties and the public, not from those of the ruling party or the government.
This is because donor information can leak to the government from either of two sources – the bank which handles these transactions, and investigating agencies like ED, CBI and Income Tax Department.
First, let’s take the case of the bank, SBI. While it does not enter all the information about electoral bonds into its core banking system used by all employees, it does store it in a separate database accessible to a select few.
Given that SBI officials work closely with the government, there is a chance of the information leaking.
In this context, Reporters' Collective, an online news portal, has given instances where the bank worked closely with the finance minister, even going so far as to seek advice on clearing a particular bond that was submitted after due date.
The second source from which the ruling party may get information about who’s giving how much money to which party is investigating agencies.
Section 7(4) of the Electoral Bonds scheme says that the bank will share the entire transaction data -- including the identity of the sender and the amounts -- to “any law enforcement agency” if demanded by the agency as part of an investigation into a registered criminal case.
Hence, we can see that the so-called veil of secrecy is only an illusion as far as protecting the data from the ruling party is concerned.
But that is not all.
Not only does the ruling party get to know the donor list of the opposition parties, the electoral bonds scheme denies a similar right to the opposition parties, creating information asymmetry. It also keeps this crucial information from the voters.
While the current open donation – through cheques and bank accounts – puts everyone’s donor list out for scrutiny, the government's bond system gives an edge to the ruling party alone.
This also creates a strategic disadvantage for the opposition parties and compromises their ability to raise funds. With the information at its disposal, the government can choke off the supply of funds to its rival parties by intimidating those who donate money to the opposition -- exactly the situation that the scheme was supposed to avert.
Hence, as far as genuine donations are concerned, not only does the electoral bonds system fail to live up to its primary purpose of protecting donors from victimization by government agencies, it puts the public – and the opposition parties – at a considerable disadvantage in information access, and gives an unfair edge to the ruling party.
Bribes & Kickbacks
The second argument used by critics and the government is that electoral bonds prevented money from sinking into the ‘black’ economy.
While estimates vary, it is believed that 35-50% of India’s economy is ‘black’ or untaxed. Traditionally, smaller businesses and traders have kept two books – one for the tax authorities and another for themselves – to reduce tax outgo.
In the political scenario, the so-called ‘black money’ plays an important role – as a conduit for companies to send bribes and kickbacks to political parties in exchange for illegal favors, such as rigging government tenders, making investigations go away, and watering down regulations.
In fact, it is believed that most of the funds raised by political parties are illegitimate – consisting mostly of kickbacks and bribes from companies.
Before electoral bonds, companies had no anonymous way to transfer these bribes and kickbacks to political parties from their declared incomes.
If they sent such payments from their official bank accounts, media and watchdogs would try to make a connection between various favors – such as the award of a large railway contract or the dilution of a regulatory provision – and the ‘donation’.
As such, they were forced to keep slush funds purely for the purposes of bribing political parties.
Moreover, they were not the only ones grappling with the problem of storing and handling black money. Once the ‘black money’ is handed over by the companies to the parties, it becomes the headache of the parties.
Thus, as far as bribes and kickbacks were concerned, the pre-electoral bonds era was fraught with dangers for both companies and parties.
This is where government's electoral bonds system truly shined. Once the bonds were introduced, the companies no longer had to maintain separate black funds for bribing and kickbacks, and could simply send the bribe money to the concerned party, disguised as a donation.
Similarly, after bonds were introduced, the political party too did not have to maintain its funds in the black. Since the money has come from the company’s bank account as a donation, it could be declared in the assets of the party and managed easily.
India's largest political party, for example, had assets of Rs 893.25 crore in 2015-16, which -- over the next six years -- increased to Rs 6,046.81 crore in 2021-22 -- the last year for which records are available.
Arguing in the Supreme Court, the advocate representing the central government, Solicitor General Tushar Mehta, said the electoral bonds scheme had done much to curtail the use of black money.
“Our case was that we want to curb the black money. A criminal may have paid the donation, but ultimately, the donation comes in the white economy, but we could not persuade your lordships,” Mehta pointed out, after the judges had pronounced their verdict.
On the face of it, this looks like a plausible argument, after all, who would not want the ‘scourge’ of black money to go away.
But this line of reasoning ignores the reason why black money exists. It exists because of two main reasons – to save tax, and to carry out criminal activities.
As Mehta pointed out, allowing companies and individuals to use their official funds for everything -- including questionable transfers of funds to political parties – can definitely bring down the use of black money. But, the question is, at what cost?
For example, suppose a company could get a Rs 1000-crore construction contract by sending a ‘donation’ of Rs 100 crore to the party in power. If it is able to send this money using the anonymous bond route -- with no risk of any ED or CBI inquiry -- from its official accounts, there is a much higher chance that it would do so than if it had to use the cumbersome and illegal black money route.
In other words, facilitating questionable transactions using banking channels can definitely bring down the use of black money, but it also risks making such transactions the norm, rather than the exception.
It is worth noting that a recent analysis by TNIE found that nearly all of the top donors under the electoral bonds system were companies that depended heavily on government contracts to carry out their business, such as those in construction and mining.
There have also been several reports that have pointed out that many companies transferred money through electoral bonds immediately after they were raided by agencies like the Enforcement Directorate and Income Tax Department.
Hence, allowing companies and individuals to make secret payments to political parties for illegal activities from their official accounts will definitely reduce the use of black money, but it will have far greater consequences in the form of facilitating such criminal activities.
In conclusion, therefore, it can be seen that neither of the two key arguments raised in favor of electoral bonds -- protecting those who make donations to political parties from vindictive actions of the government, and curbing the use of black money -- hold water on a close examination.
The way to tackle the use of black money in criminal proceedings is not to facilitate criminals to use anonymous donations to transfer funds, but to heighten the surveillance of black money to track down the criminals.