Electoral Bonds Deemed Unconstitutional: Granular Electoral Finance Reforms Needed?

[Bhaskar Vishwajeet and Abhinav Shankarraman are final year law students at Jindal Global Law School]

The recent judgement of the Supreme Court in Association for Democratic Reforms v. Union of India has stirred the hornet’s nest on electoral financing in India. At the heart of this judgement lay the controversy surrounding unlimited corporate funding of political parties. The judgment of the Court struck down the Electoral Bonds Scheme, 2018 (EBS Scheme) introduced through the Finance Act, 2017. The EBS Scheme is the culmination of interlinked amendments made to the Income Tax Act (for deductions), Representation of Peoples Act (for receipts), Reserve Bank of India Act (allowing issuance), and the Companies Act (specifying disclosure requirements).

The cumulative effect of these amendments was to provide a window for corporations to make political contributions. The Court, however, struck down this scheme on account of the degree of opacity it provided to political parties and corporates alike. The Court invoked the principles of ‘double proportionality’ and ‘manifest arbitrariness’ to test the vires of the amendments. In doing so, it concluded that the amendments and the resulting scheme not only had a detrimental impact on the right to information of voters but also arbitrarily equated corporate and individual financing.

The authors argue that the Court’s decision is a welcome step in building the Indian jurisprudence of electoral finance reforms. However, they further suggest that both judicial scrutiny and policymaking must not centre around notions of unlimited corporate financing; rather, emphasis must be laid on comprehensive disclosures to cultivate an informed electorate.

Decoding the Judgement

At the heart of the judgment’s reasoning lies the legislative history of section 182 of the Companies Act, 2013 (2013 Act). The current section has its roots in section 293 of the Companies Act, 1956 (1956 Act). The 1956 Act, in its original form, placed no framework to regulate corporate financing of political parties. The Companies (Amendment) Act 1960 included section 293A, that allowed political funding by corporates but placed a cap linked to their ‘average net profits’. Additionally, the section placed a disclosure requirement in the profit and loss statement, requiring the contributing corporate to name the sum and the political outfit to which the fund was donated.

Subsequently, the Santhanam Committee submitted a report in 1969, citing rampant corruption and recommended prohibiting corporate funding altogether. The same was accepted and requisite changes were made through the Companies (Amendment) Act of 1969. The position shifted once again in the Companies (Amendment) Act 1985. The amended section allowed for political financing but placed certain guardrails in so for as it mandated a minimum number of years a company should be in existence and penal consequences for violating procedural requirements in the sections.

Subsequently the provision underwent substantial changes through the Finance Act, 2017. The caps imposed through the concept of ‘average net profits’ were done away with, thereby creating a scenario where a loss-making entity or a shell company – a company that does not have any actual business – could simply fund political campaigns and influence policy. Further, the amended section 182(3) only required the disclosure of total political contributions to be captured and not the particulars. Along with section 29C of the Representation of Peoples Act (RPA), this allowed for the donor (corporate bodies) and the recipients (political parties) to operate behind a veil of secrecy.

The Court rightly pointed out that the new legislative framework for electoral financing had a dissonance with its stated objective of reducing black money and increasing transparency in electoral financing. This led the Court to strike down the amendments made to section 182 for being manifestly arbitrary.

While the concerns raised by the Supreme Court on the pitfalls of opacity in the EBS and the effect the same can have on entrenching corruption are valid, it leaves open the question of having a suitable and functional electoral financing mechanism; after all, corporate funding in a democracy is a political reality that society has to contend with. While the Court has cited the idea of using electoral trusts – which are tax-exempt trusts created for electoral financing – due to the rigidities associated with its creation and functioning, it may be wise to look at other jurisdictions to find a model(s) that might reconcile the right to information of voters with the informational privacy of donors.

Electoral Campaign Financing and Private Contributions

Electoral financing is the act of providing financial capital to important entities in the electoral process. These entities range from political parties to political interest groups that exercise influence in a country’s electoral-politics. The inherent logic behind this method concerns the ‘incumbency conundrum’ in a country’s electoral politics. Mancinelli observes that democracies need to provide choices to voters to accurately represent a demography’s changing interests. This idea of the ‘shifting electorate’ birthed a need to counter the incumbent’s ability to consolidate mass financial resources when elected term after term, an important consideration for challengers to the incumbent’s position – as they are not equally strong financially.

Contributions in this realm can be made by either private individuals or entities or through public programmes. To elaborate, private entities may comprise companies, advocacy groups or interest-based associations, while public programmes involve the allocation of government funds to subsidise and support electoral ventures.

That said, private financing of electoral aspirants makes up a significant chunk of the global campaign financing pie. In the United States, for instance, the Federal Election Campaign Act of 1971 (FECA) regulated campaign financing by introducing limits on contributions by individuals and Political Action Committees (PACs). PACs are formed by corporations, labor unions, membership organizations, or other groups, and can donate money directly to candidates’ campaigns up to a certain limit. For our comparison however, we are concerned with a less restrained version of PACs, i.e., ‘super PACs’.

The landmark US Supreme Court ruling in Speechnow.org v. FEC, held that outsider groups (super PACs) could accept unlimited contributions from individuals and corporations as long as they did not give to the candidates directly. This solidified the position of super PACs which gathered critical mass in the wake of the decision in Citizens United v. Federal Election Commission, where the US Supreme Court ruled that electoral spending by corporates is a form of protected speech under the First Amendment to the US Constitution and that corporations and unions cannot be restricted from spending money to support parties and candidates in elections. As a result, super PACs can raise unlimited amounts of money from corporations, unions, individuals, and other groups, to advocate for or against candidates. Future Forward, the biggest super PAC for the Democratic Party for example, is planning on spending $250 million only on advertisements for President Biden’s re-election campaign.

Unlike electoral bonds in India however, contributions to super PACs are subject to stringent disclosure requirements by the Federal Election Commission (FEC), meaning that the identities of donors, the purpose of the contribution and the amounts they contribute are publicly disclosed on a monthly or semi-annual basis, depending on the year. Contributions over $200 from any individual, corporation, labor organization, or other political committee are also reported. All of this data is displayed for prospective voters by the FEC on a campaign finance database. This is how one can peruse, for instance, Make America Great Again Inc.’s campaign finance receipts for a particular year.

The Judgement’s Influence and Calling for Detailed Disclosures

The Indian Supreme Court in Association for Democratic Reforms observed that the law does not bar electoral financing by the public in India. However, a dichotomous situation has arisen by which where only contributions to parties and expenditure by individuals were regulated. The Court’s scrutiny rested on the regulation of contributions to parties, resulting in a striking down of the overarching EBS Scheme itself.

At the outset, we can see that restrictions on unlimited corporate financing and an emphasis on disclosure requirements are two competing first principles that can occupy the cornerstone of the Indian electoral financing regime. It is the authors’ contention that the latter must be the driving philosophy when a new legal framework is enacted. The foundational problem with a donor-centric limitation is that it incentivises parties to find loopholes through which donation ceilings can be circumvented. The emergence of shell companies and cash-based funding for parties is a direct product of such limitations.

We note that the bench observed there is no justification to remove contribution limits as they were instituted to deter shell companies from contributing to political campaigns in the first place. Moreover, after the removal of contribution limits no adequate reporting mechanisms were put in place to identify the ownership or business structuring of donors. In the United States, making an electoral-financial contribution through a shell company that conceals the true contributor’s identity is illegal. This was evidenced by the wide reporting on W Span LLC, a super PAC that allegedly received money from a shell company (that shut after contributing) to fund Mitt Romney’s campaign in 2011. Closer home, the judgement notes that the Election Commission had raised a similar concern with the amendment to section 182 in 2017, stating that the removal of limitations on contributions could lead to a proliferation in shell companies that are set up for the sole purpose of making such electoral disbursements.

Rather than chasing pursuits of keeping corporate financing out or limited, regulators must focus on formulating robust and granular disclosure mechanisms for electoral financing. The underlying goal of electoral financing regulation must not be to curb the capacity of donors, rather it must create an accessible pool of information concerning party finances and channels of contributions from which voters can draw their conclusions. Germany, which has the most comprehensive data on party funds in modern democracies through a 1984 constitutional amendment, is an example in this domain. Wood and Grose have researched the impact of campaign/electoral finance transparency and concluded that audits and disclosures provide more information to voters, who can then decide the behavioural influence on elections, deciding crucial outcomes like governance standards, policymaking and displays of character in electoral contests. This ties back to Mancinelli’s hypothesis that caters to the changing interests of the electorate, thereby enhancing participatory democracy.

Bhaskar Vishwajeet & Abhinav Shankarraman

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