Electoral Bonds Put A Premium On Opacity, Have Serious Deficiencies; Do It In A Proportional Manner: Supreme Court Tells Union [Day 3]

On the final day of arguments in the case pertaining to the Electoral Bonds Scheme case, the Supreme Court asked the Union Government if it was planning to amend the Companies Act to reintroduce a profit percentage-based limit on donations by Companies. The court also remarked that while it was not asking the government to go back to a cash-based system, it was asking the scheme to be made in a proportional, tailor made manner which took care of the serious deficiencies arising out the current scheme. The Constitution Bench comprising Chief Justice of India DY Chandrachud, Justices Sanjiv Khanna, BR Gavai, JB Pardiwala and Manoj Misra discussed various aspects of the scheme, including its impact on transparency and the potential for corruption. The bench also reserved its judgement. 

The discussion started on the objective of maintaining transparency in political donations and discouraging shell companies from contributing large amounts. The SG argued that the amendments aimed to encourage clean money to enter the system and to avoid cash transactions. However, CJI DY Chandrachud underlined that before the scheme was introduced, companies could only donate 7.5% of their net profit of last three financial years. Per contra, post the introduction of the scheme, any company regardless of its profit or loss situation could contribute. The Solicitor General stated that a company which was not running in profit could not donate. Providing reason for the same, he added– "Because then a shell company can donate. That defeats the objective.”

The CJI asked the Solicitor General:

"So what will you do? You'll bring an amendment in Companies Act?...Is the government making a statement that we will amend the Companies Act to bring back the position that donations will be a percentage of profit?"

The SG responded in a negative and stated that he was only asserting that a profit making company alone could donate.

 The CJI then questioned the rationale behind allowing a company to donate its entire profit, whether it was 1 Re or 100 Rs, without any proportional limit. He asked–

"Assuming it is profit making - it may have a 1 Re profit or 100 Rs profit - if you don't have a percentage, why would a company, for what possible reason would it donate 100% of its profits? The reason why these caps were introduced and they stood the test of time was for a very legitimate reason- because you're a company- your purpose is to carry business, not to donate to political parties. And if your purpose is not to donate, you must donate small amount."

SG explained that past experiences had revealed that some companies in certain sectors wished to donate more than the 7.5% limit, leading them to create shell companies to circumvent the cap. To address this issue and discourage the formation of shell companies for political donations, the government chose to eliminate the cap entirely, he said. Further, he added that the decision was made to allow companies to decide the extent of their contributions, as long as they were profit-making entities and the objective was to disincentivize shell companies. To this submission, the CJI stated–

"By having narrowly tailored provisions that you must carry on business for certain years, you must have a certain turnover, asset base- these are usually accepted yardsticks to prevent shell companies from carrying out business, We don't have to go into motives of the government at all. We entirely respect that process. The point is not that. We don't want to go back to a cash only system. All we are saying is that do it in a proportional, tailor made manner which takes care of the serious deficiencies of this."

He further asked–

"Would that be valid- if a company was to donate even 100% of its revenue? Is that guided by altruistic motives?"

Scheme Has Sufficient Safeguards: SG Mehta 

SG highlighted that the objective of the Electoral Bonds Scheme was to discourage the use of shell companies and cash transactions in political donations. He argued that the scheme aimed to bring transparency to political funding by channeling clean money into the system. The SG noted the significant role the commercial sector had played in the country's development and referred to the ongoing case involving the largest public sector bank in India, emphasizing the need for robust regulation in this area. He further explained that the scheme had introduced various measures to ensure transparency, such as the requirement for both donors and political parties to have designated accounts and branches. SG justified the 1% vote threshold for political party eligibility, stating that it was intended to prevent the formation of fake parties solely for the purpose of claiming exemptions. To address concerns about anonymous donations, SG explained the KYC (Know Your Customer) requirements, which included providing Aadhar numbers and addresses. He also addressed concerns about potential aggregators, stating that the system would require donors to find multiple aggregators if they wanted to donate significant sums, which was not easy as it would involve multiple transactions of high value sums, exposing several persons . Even it there is some potential for misuse, that is not a ground to strike down the scheme, he added, highlighting that no system can be completely foolproof.

SG then highlighted that the bonds had a validity of only 15 days from issuance, emphasizing the importance of this short time frame. SG asserted that the 15-day limit reduced the potential for quid pro quo deals as donors were required to give the bonds within this period. To further minimize the risk, he mentioned that if the bonds were not encashed within the stipulated timeframe, the amount would go to the PM Relief Fund, and the donor would not recover it. This ensured that donors had an incentive to ensure the timely deposit of the bonds by the political parties.

Confidentiality was another aspect discussed by SG. He argued that maintaining the secrecy of donors was essential and that the bonds were designed with stringent confidentiality measures. Breaching this confidentiality would leave digital footprints and result in criminal liability for those involved. He said that the investigative agencies could access the details only with a court order.

Aim Of The Scheme Is To Ensure Transparency: SG Mehta

In his arguments, SG Mehta asserted that no scheme could last unless the donor's details were made confidential as without confidentiality, a donor would always opt to donate through cash. He added that the Electoral Bonds Scheme had been framed in such a manner that it ensured the confidentiality of the donor entirely until the court ordered otherwise. As per the Solicitor, only the party that had been donated to would get to know the details of the donor and this would prevent retribution and victimisation of the donor from any other political party. 

At this juncture, Justice Gavai asked– "What about voters' right?"

The SG responded by stating that the voter's right was merely to to know what party got what information. He suggested that it was not realistic to expect voters to make decisions solely based on campaign contributions from specific individuals or organizations. Instead, voters based their decisions on factors like ideology, principles, leadership, and the efficiency of a political party. He added that businesses may support political parties that create a favorable environment for their operations, but this doesn't necessarily involve a quid pro quo arrangement where financial contributions lead to political favors. He said–

"Purity of election is supreme over the right to vote. Voter votes not based on which party is funded by whom, voter votes based on ideology, principle, leadership, efficiency of the party." 

SG clarified that the intention of the scheme was not to enable the ruling party to have insight into campaign contributions. He stated that the aim was transparency and fairness rather than facilitating political advantage.

At this juncture, the CJI asked–

"Is it your contention that under this scheme, the ruling party doesn't know who donors are?"

To this, the SG stated that every political party was aware of its own donors. Confidentiality regarding donors was mainly for other parties. While he mentioned the possibility of a party pretending ignorance about the source of a donation, using the example of someone claiming they received a large sum of money anonymously in their postal box, the SG implied that such a scenario was not realistic because substantial political donations were not typically made anonymously.

Justice Khanna remarked– "If this is so, why not make it open? As it is, everyone knows. The only person who is deprived is the voter." 

This was followed by remarks from the CJI who outlined five crucial considerations in the realm of electoral financing. These considerations included the imperative to reduce the reliance on cash in the electoral process, the promotion of authorized banking channels for campaign contributions, the incentive of confidentiality for donors using these channels, the paramount need for transparency in electoral financing, and the prevention of any form of kickbacks or quid pro quo between those in power and financial benefactors. The CJI stressed that finding a balanced system was essential, one that could effectively address these factors without fostering opacity or misuse, in order to preserve the integrity of the electoral process. He added–

"It's not that there is an either or- that either you do this or go back entirely to cash. You can design another system which doesn't have the flaws of this system- they put a premium on opacity. You can still design a system which balances out in a proportional way. How it is to be done that's up to you, that's not our arena."

Right To Informational Privacy Must Be Ensured: SG Mehta

The SG then referred to the KS Puttaswamy judgment, in which the court had recognized the fundamental right to informational privacy. SG emphasized the need to balance the right to know and the right to informational privacy, arguing that the right of informational privacy could be asserted against the general right to know. He asserted that while the public had a right to know, it should be limited to cases of genuine public interest, and curious or prying inquiries should not infringe upon an individual's privacy. The Solicitor General contended that the legitimate state interest in disclosure should be linked to public interest. He pointed out that information about which company had purchased how many bonds and which political party had received how many bonds was already in the public domain. Any additional disclosure beyond this might encourage a cash-based economy, which would not be in the legitimate state's interest.

He added–

"Secrecy per se is not antithetical to free and fair elections. Sometimes it enhances free and fair elections. Like the present case. This scheme enhances free and fair elections. It shifts donations from cash to banking channels." 

Advocate Kanu Agarwal, supplementing the SG's submissions stated that the scheme had prevented donations less than Rs 20,000, which he termed as "dubious contributions". 

Unintended Consequence Cannot Be Reason To Strike Down Law: AG

This was followed by the submissions of the Attorney General for India R Venkatramani who described the global canvas on election funding as a kaleidoscope. AG noted that the challenge had raised concerns about the scheme violating various articles of the Constitution, such as Article 14, Article 19, Article 21 and even undermining the basic structure of the Constitution. He urged the court to focus on substantial questions of constitutional interpretation and not the broad "political debate". He said–

"There has to be something very precise, direct and not broad statements which may resemble a political debate...What is the end that I would put to use by way of accessing this information? General political debate or determining which party would do better? What concrete purpose would this information be relevant for?"

He further added that an empirical analysis had not been presented before the court. Stating that the government was moving from an unregulated system to a regulated system, he aded that one cannot say that they would look at each statute in isolation and call them into question.

The AG further argued that the scheme doesn't violate any existing right of any person. He said–

"We cannot accept a theory that a peripheral right which facilitates the exercise of a named fundamental right or gives it substance is itself a guaranteed right included with the named fundamental right."

To this, the CJI remarked–

"This logic has undergone a change after Puttaswamy. Puttaswamy is 9 judges. There is no right to privacy expressly recognised under Constitution but we read it in Right to life, dignity, preambular values etc...Declaring an aspect as a part of a declared right does not impinge on separation of powers. For instance, we have said that sexual orientation is implicit in Article 15. That doesn't impinge on separation of powers. If the court were to lay down a legislative remedy, that impinges on separation of powers. Finding a right in the Constitution we can. We said that the right to education was a right even before it became a part of the Part III. We have a framework today. We're not creating a framework. We're testing the validity of the framework."

The attorney argued that even if there were undesirable outcomes, those outcomes were not intended and that an unintended consequence cannot be reason to strike down the law.

Rejoinder Submissions

This was followed by the rejoinder submissions. 

Bhushan pointed out that the amendment had not effectively limited cash donations to political parties and had left open cash channels. He argued that the reduction of the income tax exemption limit from 20,000 to 2,000 rupees did not make a practical difference because political parties only declared donations above 2,000 rupees, rendering donations below that amount effectively anonymous.

However, the CJI responded that the main objective of the scheme was to enhance transparency by channeling political contributions through regular banking channels.

Justice Khanna highlighted the intention behind the scheme, emphasizing that it aimed to ensure money came through regular banking channels with Know Your Customer (KYC) requirements, which was not the case with cash donations. He also pointed out that the scheme aimed to protect the identity of donors for various reasons.

Bhushan contended that the scheme defeated citizens' right to know who contributed to political parties, which is recognized under Article 19(1)(a). He argued that even though cash donations were not barred, introducing an anonymous channel through Electoral Bonds was not justified.

CJI responded by emphasizing that the validity of the scheme was not necessarily linked to its success in reducing black money and that the main objective was to enhance transparency. He said–

"On a constitutional level, this argument will not stand. The fact that they have been unable to or they did not dry all cash sources - is not a ground to challenge the validity of the scheme."

Bhushan argued that the scheme promoted corruption by allowing companies to give anonymous kickbacks to parties in power. He contended that the right to privacy could not override the citizens' right to information and that information available to the government could still allow victimization of companies.

In his submissions, Senior Advocate Kapil Sibal vehemently criticized the Electoral Bonds Scheme, characterizing it as unconstitutional, undemocratic, and unfair. Sibal argued that the scheme undermined the basic structure of the constitution and did not promote free and fair elections, which are integral components of the democratic process. Sibal contended that the scheme was unfair because it placed undue pressure on industrialists to donate, and the ruling party disproportionately benefited from it. He noted that there was no direct correlation between the scheme and the election process because candidates, not political parties, contested elections. He further argued that there would be no retribution for donations, as industrialists would contribute to multiple parties, including the ruling party.

The senior advocate criticized the lack of transparency in the scheme, asserting that it provided protection for corrupt transactions by keeping donor information private. Sibal raised concerns saying–

"You are giving protection to corrupt transactions by not putting that information in public domain. I can't file FIR because I'll get sued of defamation. I can't go to court as I won't have any data. So what court order are we talking about? This is the surest way to ensure political perpetuity. There is no uneven playing field. The only reason the information is unknown is because of structural design of the system. I don't want to say anything more."

Sibal concluded by questioning the public interest served by withholding donor information. He argued that the scheme protected those in power, leading to political perpetuity, and suggested that the court should advise the government to address these issues transparently.

Advocate Shadan Farasat emphasized the importance of public disclosure in preventing quid pro quo in political funding and promoting transparency.

Farasat contended that the foundation of the scheme rested on the non-public disclosure of donor information. He referred to a statement by the US Supreme Court, which highlighted that knowing a political party's funding sources was crucial for determining its true intentions. He argued that public disclosure was essential to prevent quid pro quo, distinguishing between policy influence, legislative influence, and corruption.

Senior Advocate Vijay Hansaria and Advocate Nizam Pasha also submitted their contentions in the rejoinder.