Supreme Court's Refusal To Stay Electoral Bonds Undermines Transparency In Electoral Process

The Supreme Court has dealt a severe blow to transparency in electoral process by rejecting applications seeking stay of electoral bonds ahead of assembly polls in various Indian states.

"The above application filed on 29.11.2019 could not be taken up for hearing" – this is how the Court described its non-consideration of the stay application for over one and half years.

It is to be kept in mind that the petitions challenging the electoral bonds scheme were filed way back in 2017 itself, soon after the Finance Act 2017 – which lays down the legal framework for the scheme- was passed. That is, even before the notification of the Electoral Bonds Scheme in January 2018, the petitions challenging the statutory amendments were filed. Even the supporters of the scheme would find it tough to disagree that the petitions raise several fundamental constitutional issues touching upon the voters' right to information, transparency in political funding and also the issue of abuse of money bill provision by introducing electoral bonds through Finance Bill.

If one checks the case history, effective hearings in the case have happened only twice – on April 2, 2019, shortly before the Lok Sabha polls of 2019 and on March 24 this year, few days ahead of the assembly polls in few states. Meanwhile, applications seeking stay and early listings were filed, which remained in a limbo.

The Court's refusal to treat the issue with promptitude facilitated the release of bonds in different cycles from 2018 to 2020.

So, it is quite disturbing to note that the Supreme Court has cited the release of electoral bonds in 2018, 2019 and 2020 "without any impediment" as a reason to reject the stay on the release of the next tranche of bonds. On reading this justification given in the last paragraph of the order, one might get reminded of legal maxim 'a person cannot take advantage of his own wrong', though it is debatable if this principle applies to courts.

This order delivered by a bench comprising CJI SA Bobde, Justices AS Bopanna and V Ramasubramaniam is problematic for other reasons as well.

What is disconcerting is that the order tends to trivialize concerns regarding the anonymity of the bonds, ignoring several issues flagged by the Election Commission of India and the Reserve Bank of India.

ECI's concerns not addressed.

In 2019, the Election Commission of India made an astonishing move by filing a counter-affidavit in the case expressing its serious reservations about the electoral bonds scheme. The ECI called the anonymous bond scheme a "retrograde step as far as transparency of donations is concerned"

However, the Supreme Court's 20-page order refusing stay does not make even a single reference to the ECI's concerns. While it is true that the ECI's lawyer opposed stay in his brief two-minute submissions before the bench, he did not abandon the concerns regarding anonymity.

Without seriously engaging with concerns expressed by the Election Commission in its affidavit, the Supreme Court makes observations to the effect that the allegations of complete anonymity of the bonds may not be sustainable.

According to the Court, since the law mandates political parties to file audited statement of accounts and 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 which are accessible to the public.

The bench said that the donor information could be obtained by doing a "match the following" on the basis of public records of companies and parties.

"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", the order said.

With due respect, this is an over-simplistic conclusion made by the Court without considering the impact of the complex web of amendments made by the Finance Act 2017 to the Representation of Peoples Act, Companies Act, Income Tax Act and the Foreign Contributions Regulation Act.

The Court failed to take into account that :

1. Political parties need not report to the ECI the contributions received through electoral bonds by virtue of the amendment made to Section 29C of the Representation of People Act by the Finance Act 2017. In its affidavit in SC, the ECI said that if contributions are not reported, it will not be possible to ascertain if political parties have taken donations from prohibited sources, such as government companies and foreign sources, violating Section 29B of RPA.
2. Companies need not separately specify in their profit and loss accounts the contributions made by them to different parties after the Finance Act 2017. Before the Finance Act 2017, Section 182(3) of the Companies Act mandated that companies, while disclosing their political contributions, must specify the details of the contributions made to the different parties. Post 2017, this requirement to show contributions to different parties has been taken away and the profit and loss account need only show the total political contributions, without mentioning the parties. The ECI had said that this change in law  would "compromise transparency" and could lead to the "increased use of black money for political funding through shell companies".
   

Therefore, there is no data available in the public domain to do "match the following" to pierce the anonymity of the bonds. The Court omitted to consider the amendments to Section 29C RP Act and Section 182(3) of the Companies Act while making this observation.

These amendments have to be understood in the light of the fact that the political parties were otherwise obliged to disclose to the Election Commission cash donations exceeding Rs.20,000. However, electoral bonds, which go up to the denomination of Rupees one crore, are totally exempted from such disclosure to the ECI.

The Court discarded the arguments of the petitioner that the scheme will pave the way for increased foreign influence in Indian elections by saying :

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

This conclusion has been made without taking note of the amendments made by the Finance Act 2017 to the Foreign Contributions Regulation Act, which were also flagged by the ECI.

The said amendment allows donations to be received from foreign companies having majority stake in Indian companies, provided that they follow the FEMA guidelines pertaining to foreign investment in the sector in which they operate. This is a change from the previous law which barred donations from all foreign sources as defined under the Foreign Contribution Regulation Act. Notably, this amendment was given retrospective effect from 1976.

Regarding this amendment, the ECI said in its counter-affidavit "This would allow unchecked foreign funding of political parties in India which could lead to Indian policies being influenced by foreign companies".

Unfortunately, the Apex Court's order does not discuss these aspects.

Brushing aside of RBI's concerns

The Supreme Court acknowledged that the Reserve Bank of India had "some reservations" about the scheme, but brushed them aside by saying that the RBI was not opposed to the scheme in principle. According to the Court, the RBI was only opposed to the form of the bonds and not its substance.

This finding of the Court is based on a paragraph in a correspondence by the RBI Governor which urged the Centre to issue electoral bonds in demat form instead of physical scrip form.

However, this is a selective and peripheral reading of the RBI Governor's correspondence. An examination of why the RBI insisted demat form instead of scrip form would have clinched the issue, and given an adequate answer to the doubts raised by the court in paragraph 26 of the order.

Para 26 of the order said :

"One of the contentions of the petitioners is 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 sale except losing white money for the black".

Now let us see why the RBI was insisting on demat form.

In a letter written by former RBI Governor Urjit Patel to the then Finance Minister Arun Jaitley on 27.09.2017, it was said :

"Issue of EBs in scrip form is fraught with serious risk of money laundering, as consideration for transfer of scrips from the original subscriber to a transferee and thereafter, till it is eventually given to the political party for encashment, will be paid in cash. This will leave no trail of the transactions and in the process of providing anonymity to the contributor to the political party, anonymity will be provided to several others in the chain of transfer of the EBs. This can render the scheme open to abuse by unscrupulous elements. If RBI agrees to issue EBs in scrip form, it will be accused of acquiescing in the process in spite of the risk that it would almost inevitably result in money laundering. This would seriously dent the image and reputation of the RBI".

This means that the RBI had apprehensions that the issuance of bonds in physical forms will allow transferability without trail, facilitating money laundering. Therefore, the RBI had insisted that the bonds be issued in electronic form, which will enable a tracking of the trail of transactions.

Without reflecting an understanding of this grave possibility of misuse flagged by RBI about the bonds in physical form, the Supreme Court instead chose to see the suggestion of RBI for bonds in demat form as an endorsement of the scheme.

The Court has not yet sought the response of the Central Government on whether the prohibition on trading in bonds has been strictly complied with. It has not confirmed that there has been no breach of this provision. Without any such probing, the Court ruled out the possibility of bonds changing hands.

The Court also did not consider the prevalence of benami transactions while observing, "the first buyer will not stand to gain anything out of such sale except losing white money for the black".

Safeguards in place?

The order also mentioned that the Supreme Court has added "certain safeguards" as per order dated April 12, 2019. What are those 'safeguards'?

In April 2019, after observing the case raised certain "weighty issues", a bench headed by the then CJI Gogoi directed the parties to share the information about the contributions received through electoral bonds till May 15, 2019, with the ECI in sealed cover.

The bench also ordered the deletion of 5 days from the schedule of issuance of bonds for the year 2019.

It is incomprehensible how these directions can constitute 'safeguards'. Firstly, the directions pertain only to the bonds issued till Lok Sabha polls of 2019. Secondly, what is the point in merely keeping the information with the ECI if no further action is taken on it for nearly two years.

It would have been understandable if the Court had at least said that the parties should share the information about the contributions received till now with the ECI. In fact, the petitioner sought for this interim relief as an alternate prayer during the hearing. But the Court did not consider it.

The effect of the order is that the electoral bonds scheme will continue, without any effective safeguards against the various concerns flagged by ECI and RBI, while several 'weighty issues', including the 'money bill issue'(which is now referred to a constitution bench), await adjudication by the Supreme Court.

It is also to be noted that the Supreme Court did not address the issue from the standpoint of a voters' right to know. A voter has a fundamental right to know if big businesses and corporate houses are funding political parties with the expectations of return favours. This information is crucial for a voter to make the best judgment. Unfortunately, the order does not discuss this vital issue, which undermines a voters' right to know and vitiates the sanctity of the electoral process.

Click here to read/downloand the counter-affidavit of ECI

Click here to read/downliad the ECI letters to Centre expressing concerns about the bonds