Electoral bonds

Also called: Electoral Bond Scheme 2018 · Topic: Electoral Reforms: Money, Criminalisation and Simultaneous Elections · NCERT: Beyond NCERT

Meaning

An electoral bond was an interest-free bearer instrument sold only by the State Bank of India (SBI). A bearer instrument pays whoever holds it, and no owner's name is written on it. Donors bought these bonds and gave them to registered political parties, and the public was never told who gave the money. The scheme ran from 2018 to 2024.

It matters because it is the biggest recent test of money power in Indian elections. In ADR v. Union of India (15 February 2024), a five-judge Constitution Bench struck the scheme down. The Court held that voters have a right to know who funds parties, and it ordered SBI to disclose the bond data [1][2].

Explanation

How the scheme worked

• Start: the scheme was announced in the Union Budget 2017-18 [3]. The Electoral Bond Scheme 2018 was notified on 2 January 2018 (Gazette Notification S.O. 29(E)) [3].
• Who could buy: an Indian citizen, or a body incorporated or established in India [3].
• Who sold and cashed them: only SBI could do both.
• Denominations: ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh and ₹1 crore [3].
• Validity: 15 days from the date of issue. If a bond was deposited after 15 days, no party received the money [3].
• Who could cash them: only a party that met both of these conditions [3]:
• it was registered under s.29A of the Representation of the People Act (RPA), 1951;

• it won at least 1% of the votes in the last Lok Sabha or state assembly election.

• One bank account: each party had to cash its bonds through a single account [1].

• Sale windows: bonds were sold only on days the government notified.
• A 7 November 2022 amendment changed these windows [3].
• The 29th phase ran from 6 to 20 November 2023 at 29 SBI branches [4].

The secrecy, and who could see through it

• The public: could not see who the donors were.
• The party: did not have to keep a record of donor names.
• SBI: knew every buyer through its customer checks.

• So the donor was hidden from voters, but not from the bank or the government that owns it.

• Scale: about ₹16,518 crore of bonds were sold in about 30 phases (2018-2024). Most of this money went to the ruling party at the Centre.

• Big-ticket bonds: petitioners told the Court that more than 94% of bonds by value were in ₹1 crore denominations. They said this showed the buyers were companies, not ordinary citizens [1].

The four laws changed to make it work (Finance Act 2017)

The changes came through the Finance Act 2017, which was passed as a money bill. A money bill deals only with taxes, government borrowing or spending, and the Rajya Sabha can delay it by only 14 days.

Law	What the 2017 change did	After 15 Feb 2024
RBI Act, 1934, s.31	Let a notified bank issue electoral bonds. Normally only the RBI may issue bearer instruments	Bond issue stopped [1]
RPA, 1951, s.29C	Parties no longer had to show bond donations in their contribution report, the yearly list of donations above ₹20,000 that parties file with the ECI	Struck down [1]
Income-tax Act, 1961, s.13A(b)	Parties did not have to record the names of bond donors	Struck down [1]
Companies Act, 2013, s.182	(a) Removed the cap on company donations of 7.5% of average net profit over the last 3 years; (b) companies had to show only the total amount donated, not the party's name	Both struck down. The 7.5% cap is back [1]

• The FCRA, 2010 was also changed, by the Finance Acts of 2016 and 2018. The Court did not decide this challenge, and it is pending as a separate case [1].

Warnings given before the scheme began

• RBI (letter of 14 September 2017):
• Letting a commercial bank issue bearer bonds would weaken public trust in the financial system and in the central bank [1].
• Shell companies could use the bonds for money laundering. A shell company exists only on paper and does no real business [1].

• If bonds were issued at all, they should be in electronic form [1].

• ECI (letter of 26 May 2017 to the Law Ministry):

• The changes would have a "serious impact on transparency" of party funding [1].
• Removing bond donations from s.29C reporting was a "retrograde step" [1].

• Removing the 7.5% cap could lead to shell companies being set up only to fund parties [1].

• Government's defence:

• In 2016-17, 81% of party income (₹580.52 crore) came as untraced "voluntary contributions" [1].
• After the scheme began, 47% of contributions came through bonds, which is regulated bank money [1].
• In the government's view, secrecy pushed donors away from cash and into the banking system [1].

In the Constitution and practice

The judgment: Association for Democratic Reforms v. Union of India (15 February 2024)

• Citation: (2024) 2 SCR 420 : 2024 INSC 113 [2].
• Bench: a unanimous five-judge Constitution Bench under Article 145(3). A Constitution Bench has at least five judges and hears major questions about the Constitution.
• The judges were CJI D.Y. Chandrachud and Justices Sanjiv Khanna, B.R. Gavai, J.B. Pardiwala and Manoj Misra.
• There were two concurring opinions: one by CJI Chandrachud for four judges, and one by Justice Khanna. A concurring opinion agrees with the result but may give its own reasons.

Holding 1: Voters have a right to know (Article 19(1)(a))

• The Court has long read a right to information into freedom of speech and expression.
• Voters need to know about party funding to make a real choice [1].
• Money can buy policy through quid pro quo ("something for something"), such as a donation given in return for a contract, licence or policy change.
• Hiding bond donations therefore broke the voter's right to information [1].

Holding 2: Secrecy failed the proportionality test

• The proportionality test asks four questions [1]: 1. Is the aim legitimate? 2. Does the measure help reach that aim? 3. Is it the least restrictive means, meaning the option that limits the right the least? 4. Is the harm to the right balanced against the gain?

• The Court accepted that curbing black money is a legitimate aim.

• The scheme failed step 3 [1]:
• for donations below ₹20,000, ordinary bank transfers were less restrictive [1];

• for donations above ₹20,000, electoral trusts were less restrictive [1].

• Electoral trust: a body that collects donations and passes them on to parties. It works under the Electoral Trust Scheme 2013, IT Act s.13B and Rule 17CA of the IT Rules [1].

• It must pass 95% of what it collects to parties registered under s.29A [1].
• It cannot take cash, and it reports its donors and the parties it paid to the ECI every year [1].

• Because one trust can pay several parties, outsiders cannot match a donor to a party. Donors keep some privacy, and voters still get some information [1].

• The scheme was not foolproof either. Clause 14 banned trading in bonds, but nothing in the scheme stopped it [1].

Holding 3: Privacy protects small donors, not big deals

• Informational privacy is a person's right to control information about themselves, including their political views (K.S. Puttaswamy, 2017).
• The Court used a double proportionality test. This test checks that each of the two clashing rights (information and privacy) is limited as little as possible [1].
• Privacy protects ordinary people who give small sums to show support. It does not protect large donations that are often made to influence policy.

Holding 4: Unlimited company donations are manifestly arbitrary (Article 14)

• A law that is manifestly arbitrary (clearly unreasonable, with no sound guiding principle) breaks Article 14 (Shayara Bano, 2017).
• Removing the 7.5% cap was manifestly arbitrary for three reasons [1]:
• loss-making companies could now donate, and they are more likely to give for a quid pro quo than for a tax benefit [1];
• companies and individuals were treated alike, although company money harms free and fair elections more [1];

• it went against the purpose of s.182. Since 1985, only companies more than 3 years old could donate, to keep shell companies out [1].

• Parliament may still cap donations by individuals. The Court said only that companies and individuals cannot be treated the same [1].

Orders of the Court [1][2]

• SBI had to stop issuing bonds at once.
• SBI had to give the ECI details of every bond bought since the interim order of 12 April 2019, showing the date, buyer's name and amount, by 6 March 2024.
• SBI also had to give details of every bond cashed by each party, with the date and amount.
• The ECI had to publish the data on its website by 13 March 2024.
• Bonds that were still valid but not yet cashed had to be returned, and SBI had to refund the buyers.

What happened next

• 11 March 2024: the Court rejected SBI's request for more time [2].
• 18 March 2024: the Court ordered SBI to give the unique bond numbers. These numbers let the public match each donor to the party that received the money [2].
• The ECI published the bond data in March 2024.
• Common Cause v. Union of India (2 August 2024): the Court dismissed four petitions asking for a court-monitored Special Investigation Team (SIT) to probe quid pro quo deals [2].
• When the bonds were bought, a law made by Parliament allowed them [2].
• A quid pro quo claim must first go through normal criminal law or to a High Court under Article 226. Coming straight to the Supreme Court under Article 32 was "premature" [2].
• Claims to recover money or reopen tax cases belong to the authorities set up by law, such as tax officers [2].

Don't confuse with

• Electoral trust: a trust names its donors and the parties it pays, and it reports both to the ECI every year. An electoral bond hid the donor from the public. The Court called trusts the less restrictive option for donations above ₹20,000 [1].
• Contribution report (RPA s.29C): this is the party's yearly list of donations above ₹20,000 filed with the ECI. Bonds were taken out of this report in 2017, and the 2024 judgment struck that change down [1].
• Money bill question (Article 110): this is a separate, undecided issue. The 2024 judgment struck down the scheme on Articles 19(1)(a) and 14. Whether the 2017 changes could be passed as a money bill is still before a seven-judge Bench [1].
• State funding of elections: here the government pays part of the cost of elections or of parties. Electoral bonds were private money passed through a bank. They were not public money.

Prelims Hooks

• Notified on 2 January 2018. Five denominations from ₹1,000 to ₹1 crore, valid for 15 days, sold and cashed only by SBI [3].
• Only a party registered under RPA s.29A with at least 1% of the votes in the last Lok Sabha or assembly election could cash bonds [3].
• Pair to remember: Article 19(1)(a) gives voters the right to know about party funding, and Article 14 (manifest arbitrariness) was used to strike down unlimited company donations [1].
• ADR v. Union of India (2024) struck down the changes to RPA s.29C, IT Act s.13A(b) and Companies Act s.182(3), and brought back the 7.5% company cap [1].
• Trap: the 2024 judgment did not decide (a) the money bill (Article 110) question or (b) the FCRA amendments [1].
• Common Cause v. Union of India (2 August 2024) dismissed the plea for an SIT probe. Petitioners were told to use normal criminal law or Article 226 first [2].

Mains Points

• Transparency vs privacy: the Court did not simply rank one fundamental right above another. It used double proportionality to give small donors privacy while requiring large corporate money to be disclosed. This is a useful model for any clash between the right to information and the right to privacy [1].
• Gaps left after the bonds:
• The RPA limits only a candidate's spending, and there is no limit on what a party spends.
• Donations under ₹20,000 still appear as income from "unknown sources".
• Cash is still used in elections, and the SIT probe was refused in 2024 [2].

• A full law on party finance is needed, covering audited accounts, ECI powers and real-time disclosure.

• Process and checks: the scheme was introduced through a money bill, which kept it away from full Rajya Sabha scrutiny. It also went ahead despite written objections from both the RBI and the ECI [1]. This links electoral reform to wider debates on parliamentary checks and on respecting expert institutions.

Related concepts

• Electoral bonds case
• Indrajit Gupta Committee (1998)
• State funding of elections

Read more

• Money power II: electoral bonds, the 2024 judgment and state funding