Electoral funding and electoral bonds

WHY IN NEWS?

The thirteenth tranche of electoral bonds, which was introduced in the 2017 budget to help political parties accept donations from individuals and corporations, was on sale recently.

ABOUT POLITICAL FUNDING

• Political funding implies the methods that political parties use to raise funds to finance their campaign and routine activities
• According to a study by the Centre for Media Studies (CMS) the 2019 Elections’ has termed as the “most expensive election ever, anywhere” with an estimated Rs. 55,000-60,000 crore spent in total.
• According to Association for Democratic Reforms, between FY 2004-05 and 2014-15, 69% of funds received by political parties were from unknown sources.

PROVISIONS IN REPRESENTATION OF PEOPLES ACT, 1951

• Section 29B: Entitles parties to accept voluntary contributions by any person or company, except a Government Company.
• Section 29C: mandates political parties to declare donations that exceed 20,000 rupees. Such a declaration is made by making a report and submitting the same to the EC. Failure to do so on time disentitles a party from tax relief under the Income Tax Act, 1961.
• Section 10A: All candidates are required to submit their expenditure statement to the poll panel within 30 days of the completion of the elections. An incorrect account or expenditure beyond the cap can lead to disqualification for up to three years of the Representation of the People Act, 1951. Candidates have to keep a separate account and file the election expenses with the Election Commission of India under the law.

• All registered political parties have to submit a statement of their election expenditure to the Election Commission within 90 days of the completion of the Lok Sabha elections.

HOW MUCH AMOUNT CAN BE SPENT IN ELECTIONS?

• Limits on campaign expenditure are meant to provide a level-playing field for everyone contesting elections.
• The Election Commission (EC) imposes limits on campaign expenditure incurred by a candidate, not political parties. 
• This includes money spent by a political party or a supporter towards the candidate’s campaign. However, expenses incurred either by a party or the leader of a party for propagating the party’s programme are not covered.

• Spending limit for Lok Sabha Elections:
  • The maximum limits of election expenditure vary from State to State. Bigger states of India are allowed to spend more than the smaller states.
    • A candidate can spend upto Rs.70 lakh, depending on the state they are contesting the Lok Sabha election from. Expenditure limit in the bigger states like Andhra Pradesh, Maharashtra, Madhya Pradesh, Uttar Pradesh, West Bengal and Karnataka etc. is Rs. 70 lakh. The limit for Delhi Lok Sabha election is also Rs. 70 lakh.
    • The expenditure limit in smaller states & UTs like; Arunachal Pradesh, Goa, Sikkim, Andaman and Nicobar Islands, Chandigarh, Dadar and Nagar Haveli, Daman and Diu, Lakshadweep and Puducherry was kept at Rs. 54 lakhs.
• Spending limit for Assembly Elections:
  • Expenditure limit in the Assembly Elections of the bigger Indian states like, UP, Maharashtra, Bihar, west Bengal and Andhra Pradesh is set to Rs. 28 lakhs
  • The limit is kept at Rs. 20 lakhs for smaller states like Arunachal Pradesh, Goa, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Puducherry.

ISSUES IN POLITICAL FUNDING:

• Opacity in donations: Political parties receive majority of their funds through anonymous donations (approximately 70%) through cash. Also, parties are exempted from income tax, which provides a channel for black money hoarders.
• Limited powers of EC: The EC had sought for more powers like insertion of a new section 58B to RPA, 1951 to enable it to take action against parties in matters such as bribing voters. However these demands have not seen light.
• Fear of crony capitalism: The maximum limit of 7.5% on the proportion of the profits a company can donate to a political party has been lifted by the 2017 Finance Bill, thus opening up the possibility of fly-by-night shell companies being set up specifically to fund parties
• Foreign funding: Amendment of the Foreign Contribution (Regulation) Act (FCRA) has opened the floodgates of foreign funding to political parties, which could lead to eventual interference in governance.
• Lack of transparency: Despite provisions under section 29 of RPA, 1951, parties do not submit their annual audit reports to the Election Commission. Parties have also defied that they come under the ambit of RTI act.
• Ciminalisation of Politics: The growing role of money has negatively affected competition at the level of candidature within parties. Due to the increasing need for money, most candidates chosen by parties are individuals who can finance themselves and do not need to rely on party funds for campaigning. This has led to the rise of wealthy candidates — and in certain cases, even criminals — contesting elections

WHAT ARE ELECTORAL BONDS?

• In 2017, Union Finance Minister introduced the electoral bonds through the Finance bill.
• Electoral bonds were pitched as an alternative to cash donations made to political parties and as a means of ensuring more transparency in political funding.
• They were introduced through amendments to the Reserve Bank of India Act 1934, Representation of Peoples Act 1951, Income Tax Act 1961 and Companies Act.
• Features:
  • Bearer Instrument: An electoral bond is designed to be a bearer instrument like a Promissory Note. It will be similar to a bank note that is payable to the bearer on demand and free of interest.
  • Accessibility: It can be purchased by any citizen of India or a body incorporated in India with a KYC-compliant account.
  • Diverse denominations: The bonds will be issued in multiples of Rs. 1,000, Rs. 10,000, Rs. 1 lakh, Rs. 10 lakh and Rs. 1 crore and will be available at specified branches of State Bank of India for a certain number of days in the year.
  • Stipulated timelines for purchase: The bonds will be available for purchase for a period of 10 days each in the beginning of every quarter, i.e. in January, April, July and October as specified by the Central Government. An additional period of 30 days shall be specified by the Central Government in the year of Lok Sabha elections.
  • Adequate scope for monitoring: The donor purchases the bonds, and then transfers them to the account of the political party in question. It can then be cashed in via the party's verified account within 15 days.
  • Protect donor’s identity: The bonds will not bear the name of the donor. The intention is to ensure that all the donations made to a party will be accounted for in the balance sheets without exposing the donor details to the public.
  • Eligibility:
    • Every party that is registered under section 29A of the Representation of the Peoples Act, 1951 and
    • has secured at least one per cent of the votes
  • Encourages participation: A donor will get a tax deduction and the recipient, or the political party, will get tax exemption, provided returns are filed by the political party
• BENEFITS:
  • Transparency:
    • The scheme envisages building a transparent system of acquiring bonds with validated KYC and an audit trail.
    • The electoral bonds will prompt donors to take the banking route to donate, with their identity captured by the issuing authority.
    • Encourage political donations of clean money from individuals, companies, HUF (Hindu Undivided Family), religious groups, charities, etc. and breaches the nexus between business and politics.
  • Reduce black money:
    • A limited window and a very short maturity period would make misuse improbable and eliminate its use as a parallel currency
    • Political parties will have to submit details regarding the quantum of money received through electoral bonds.
  • Non-disclosure:
    • Some element of secrecy introduced will ensure that donors are not affected by vindictive politics, i.e. from being harassed by one party for donating to its rivals.
  • Prevent tax evasion: Stringent eligibility clauses will discourage the tendency to form political parties on the pretext of tax evasion.
• CONCERNS:
  • Anonymity & opaqueness:
    • Neither the donor nor the political party is obligated to reveal whom the donation comes from. This undercuts a fundamental constitutional principle: the freedom of political information, which is an integral element of Article 19(1) (a) of the Constitution.
    • An amendment to income tax legislation removes the need to reveal the identity of the donor. Also, companies which donate to political parties no longer have to disclose this in their financial statements. This paves the way for anonymous donations.
    • Not only is the electoral bond scheme opaque, but it is asymmetrically opaque - because as the bonds are purchased through the SBI, the government is always in a position to know who the donor is. This asymmetry of information threatens to skew the process in favour of whichever political party is ruling at the time
  • Dilution of provisions:
    • Prior to the electoral bond scheme, political parties had to declare the source and the amount donated for all contributions above Rs. 20,000. Also, for companies, its contribution cannot be more than 7.5% of its average net profit in the three preceding years and parties cannot accept foreign contributions.
    • But through a cluster of amendments around electoral bonds, these provisions have been removed. To add to this, recently the FCRA was amended in a manner which opens the door to foreign funding of political parties.
    • This paves way for crony capitalism. Foreign companies, dying companies and shell companies can now anonymously donate unlimited sums to an Indian political party without the EC or the IT department ever getting to know. They can use the bonds as a means to exert influence on the political parties, gain favours or preferential treatment and do all these anonymously.
    • Also, companies no longer need to declare the names of the parties to which they have donated. So, shareholders will not know where their money has gone.

STATE FUNDING OF ELECTIONS, IS IT THE BETTER WAY?

• Various government reports have looked at state funding of elections in the past, including Indrajit Gupta Committee on State Funding of Elections (1998), Law Commission Report on Reform of the Electoral Laws (1999), National Commission to Review the Working of the Constitution (2001) and the Second Administrative Reforms Commission (2008). Except for the 2001 report, all other recommended for partial state funding.
• Here, the Government gives funds to political parties or candidates for contesting elections. Its main purpose is to make it unnecessary for contestants to take money from vested interests so that they can remain clean
• Arguments favouring state funding
  • Fair elections: As funds are equitably distributed among parties, it will bring a level playing field for all types of parties- be it old or new or small or large. Also, through state funding the demand for internal democracy in party, women representations, representations of weaker section etc can be encouraged.
  • Reduce crony capitalism and criminalization in politics: Public funding can limit the influence of interested money and thereby help curb corruption.
  • Transparency: Public funding can increase transparency in party and candidate finance and thereby help curb corruption.
  • Limited capacity of common man: In societies where many citizens are under or just above the poverty line, they cannot be expected to donate large amounts of money to political parties or candidates. If parties and candidates receive at least a basic amount of money from the State the country could have a functioning multi-party system without people having to give up their scarce resources.
  • Encourages Participative democracy: With state funds, people who desire to take on political roles can venture with better ease.
  • Already exists: Some form of state funding exists in India, which includes free air time on public broadcasters, subsidies, the exemption of registered parties in India from paying income tax etc.
• Arguments against state funding
  • Large fiscal deficit: The country already has a widening fiscal deficit, which could widen once state fundig is introduced. Also, it could reduce the resources available for social expenditures like welfare schemes and subsidies.
  • Inefficient use of Public fund: Through state funding of elections, the tax payers are forced to support even those political parties or candidates, whose view they do not subscribe to.
  • Weakens Party-People relations: State funding increases the distance between political leaders and ordinary citizens as the parties do not depend on the citizens for mobilization of party fund.
  • Control by ruling party: As it controls the public purse, the ruling party could have an undue influence on the process
  • Encourages passivity: Political parties tend to become organs of the state, rather than being parts of the civil society.
  • Creates ‘paper tigers’: It may lead to parties and candidates running for elections just for the sake of availing monetary benefits
  • Diversion of funds: There is a possibility of state funding being used as a supplement and not as a substitute of candidate’s own expenditure
  • Weak institutional setup: The EC at present has limited control over the political funding arena. Also, the internal audit mechanisms within political parties are virtually non-existant.
  • Global experience: Democracies such as France, Germany, Denmark, Israel, Italy, and Australia, among others, has shown that public funding does not necessarily reduce the expenditure of political parties.

WAY FORWARD:

• Given how political funding has been a route to whitewash illegal money, the government is right when it says that switching to electoral bonds was a quantum leap in ensuring clean political funding. With electoral bonds, the identity of a large donor is captured by the issuing bank. This means illegal wealth can be traced if it is being ploughed into political funding.
• Balancing between opacity and Privacy:
  • The present structure of electoral bond scheme is not conducive to clean up the funding process. The government’s argument that opacity is necessary to protect privacy of the donor is indefensible. Privacy in political funding can only breed corruption.
  • One immediate measure that can be adopted is switching to digital transactions. This ensures adequate transparency with reasonable privacy to the donor.
• Amendments that remove the need of disclosure should be done away. Donations above a certain limit needs to be made public to eliminate doubts over corporate-politico nexus.
• Adding foreign funding into the foray will only aggravate the situation. No mature democracies in the world, like the USA and UK, allow foreign funding in their political sphere. Hence, foreign funding for political parties should be banned.
• To supplement this, political parties must be brought under the ambit of the Right to Information act. But without pressure from the citizenry, it is unlikely to interest a political class hell-bent on insulating itself from public accountability.
• Former Chief Election Commissioner S.Y. Quraishi has suggested an alternative worth exploring: a National Electoral Fund to which all donors can contribute. The funds would be allocated to political parties in proportion to the votes they get. Not only would this protect the identity of donors, it would also weed out black money from political funding.

Practice Question

Q. Discuss the various provisions in RPA, 1951 that deals with electoral funding? What are the challenges before the Election Commission of India to ensure transparency in electoral funding in India?