Context:

• This article is based on an Editorial “How political funding influences electoral outcomes: what studies say” which was published in Indian Express. The Supreme Court’s recent hearing on the constitutionality of electoral bonds has brought critical attention to a core aspect of Indian democracy, the funding of political parties.

Understanding Political Funding: Legal Framework and Mandatory Disclosures in India

• Political funding is the crucial means through which political parties secure financial resources to support their day-to-day operations and election campaigns. 
• Legal Framework for Political Funding in India:
  • Entitlement under RPA: As per Section 29B of the Representation of the People’s Act (RPA), political parties have the right to accept voluntary contributions. These contributions can be from individuals or companies, excluding government entities.
  • Mandatory Declaration under Finance Bill Act: Section 29C of the Finance Bill Act mandates political parties to disclose donations exceeding Rs. 20,000. 

Political Funding in India: Exploring Individual Donations and Public Funding Methods

• Individual Donations: Political parties can accept donations from individuals, governed by Section 29B of the RPA-1951.
  • Taxpayers can claim a deduction for 100% of their donation to a registered electoral trust or political party under section 80-GGC of Income tax.
• Public or State Funding:
  • Direct Funding: The government provides direct funds to political parties for election-related expenses. Tax-based direct funding is prohibited in India.
  • Indirect Funding: Parties seek support through access to media, public spaces for rallies, and subsidized transport facilities, permitted in a regulated form.
• Corporate Funding:
  • Donations from corporate entities are regulated by the Section 182 of Companies Act, 2013. Conditions for Corporate Donations:
    • The company must be at least three years old.
    • Approval from the board of directors is mandatory.
• Electoral Trusts Scheme: Electoral trusts established after 2013 must declare details of funds received and disbursed, following Election Commission guidelines.
  • Formation Criteria: Under the scheme, any company registered under Section 25 of the Companies Act, 1956, is eligible to form an electoral trust.
  • Eligibility for Donation: As per Section 17CA of the Income-tax Act, 1961, any citizen of India, a company registered in India, or a firm, Hindu Undivided Family, or association of persons living in India can contribute to an electoral trust.
• Electoral Bond Scheme: First announced during the Union Budget session in 2017. They are interest-free “bearer instruments”, which means that they are payable to the bearer on demand, similar to a promissory note.
  • It allows Indian citizens or a body incorporated in India to purchase bonds, enabling anonymous donations to political parties.

Comparing Electoral Bonds and Electoral Trusts: Funding Dynamics in Indian Politics

• Both schemes were meant to facilitate donations to political parties by corporates and individuals.
• Donation under Electoral Bond Scheme: In the five years since the electoral bonds scheme was introduced, more than half, or 57%, of the funds extended through bonds have gone to the BJP. The party, as per its declarations to the Election Commission, received Rs 5,271.97 crore via bonds between 2017-2022. 
• Donation under Electoral Trust: The electoral trusts have reported a total donation of Rs 2,268.6 Crores during the period, with the number of registered trusts ranging from three in 2013 to 17 in 2021-22. 

Legal Timeline of Electoral Bonds: Court Proceedings and Judgments

• April 12, 2019: A three-judge SC bench issues an interim order directing political parties receiving donations through electoral bonds to submit details of the bonds to the Election Commission of India (ECI).
• March 2021: The SC, dismisses a plea to stay the sale of fresh electoral bonds, disputing the petitioner’s claim of “complete anonymity” for bond purchasers. The court mentions that operations under the scheme are not beyond scrutiny and highlights previous orders for safeguards.
• April 2022: The SC assures petitioners that the Court would take up the matter to hear the constitutional challenge to the electoral bonds scheme. 
• Nov 2023: The Supreme Court reserved its judgment in response to a batch of pleas challenging the validity of the electoral bonds scheme.

Supreme Court’s Concerns and Directives on Electoral Bonds: November 2023

• Anonymity Concerns: The court expressed concerns about influential entities setting up individuals for anonymous political donations through electoral bonds.
• KYC and Anonymity: Chief Justice Chandrachud noted that individuals with KYC accounts could maintain anonymity while purchasing bonds, raising issues of potential quid pro quo arrangements.
• Anonymity and Opposition Donors: The court discussed how anonymity might benefit donors contributing to Opposition parties without facing ruling regime repercussions.
• Data Disclosure by Election Commission: The Supreme Court also directed Election Commission of India (ECI) to produce data on electoral bonds’ contributions till September 30, 2023.

Electoral Bonds Dominate Political Funding Landscape: 2016-17 to 2021-22

• Between 2016-17 and 2021-22, a total donation of ₹9,188.35 crore from Electoral Bonds was received by seven national and 24 regional parties. 
• Out of this sum, the BJP secured ₹5,271.9751 crore, while the remaining national parties collectively amassed ₹1,783.9331 crore, according to the report by the Association of Democratic Reforms (ADR).
• The total donations received by the 31 political parties analysed during the six-year period was ₹16,437.635 crore.
• Overall Composition:
  • 55.90% from Electoral Bonds
  • 28.07% from the corporate sector
  • 16.03% from other sources

Challenges in India’s Political Funding Framework

• Donation and Expenditure Limits in India:
  • There are no donation limits on individuals, and the Finance Act, 2017 removed official contribution limits on companies.
  • There is no legal expenditure limit for political parties at the national or state level, allowing unrestricted spending on campaigns.
• Disclosure Requirements and Electoral Bonds:
  • Parties must disclose donations exceeding Rs 20,000, except for those made through electoral bonds.
  • Parties often split large donations into smaller amounts below Rs 20,000, avoiding disclosure.
• Issues with the Electoral Bond Scheme:
  • Anonymity:  The electoral bonds do not bear the name of the donor. Thus, the political party might not be aware of the donor’s identity.
  • The ability of the party in power to access the information about donors of other parties (through law enforcement agencies) undermines the scheme of electoral bonds on its own terms, i.e., to prevent victimization of donors.
• Changing Landscape of Indian Electioneering:
  • Political engagement has expanded beyond parties and candidates, involving consultancies, campaign groups, and civil society organizations.
  • In the US, lax regulation of third-party expenditure has led to shadow campaigns influencing political outcomes outside traditional regulatory scopes.
  • The evolving political landscape challenges the assumptions underlying India’s 20th-century political funding framework.

The Nexus Between Political Funding and Electoral Outcomes

• High Costs of Elections:
  • The 2019 Lok Sabha elections were labeled the “most expensive election ever,” with an estimated expenditure of Rs 55-60,000 crore, with around 45% spent by the BJP.
  • In the 2014 national elections, candidates reported a median wealth of Rs 23.8 lakh, approximately 27 times the nominal per capita income of India in that year.
• Linear Relationship between Funding and Outcomes:
  • Modern research suggests wealthier candidates from competitive parties reported four times greater wealth on average and were about 10 percentage points more likely to win.
  • 97% MLAs crorepatis in Karnataka’s new Assembly, (ADR report).
• Global Correlations:
  • A research on US congressional elections shows a well-approximated relationship between money and votes for major parties from 1980 to 2018.
  • In another study on legislative elections in Taiwan from 2008 to 2016 demonstrates a significantly positive association between political donations and election outcomes.

Way Forward – Revamping Political Funding 

• Regulation of Donations
  • Some entities, like foreign citizens or companies, may face bans on making donations.
  • Donation limits are essential to prevent undue influence by a few large donors.
  • Example: The US federal law imposes different contribution limits on different types of donors. Some other countries, such as the UK, do not impose contribution limits, but instead, rely on expenditure limits.
• Expenditure Limits
  • Expenditure limits aim to prevent a financial arms race among political parties.
  • Relieve parties from excessive fundraising pressure, allowing them to focus on voter engagement.
  • Example: In the UK, parties are restricted to spending £30,000 per seat contested.
• Public Financing
  • Broadly, there are two ways of implementing public funding. The most commonly used method around the world is to set predetermined criteria.
  • Example: In Germany, parties receive public funds based on their importance in the political system, considering past votes, membership fees, and private donations.
    • German “political party foundations” receive special state funding for their policy-related work.
  • An experiment in Seattle, US, involves “democracy vouchers” where eligible voters receive vouchers to donate to their preferred candidate.
  • However, some recent studies have pointed out that while this system may be more egalitarian, it may also promote more extremist candidates.
• Disclosure Requirements:
  • Disclosure requirements offer a less intrusive way of regulating political funding.

• • Instead of preventing donations, disclosures aim to influence voters against politicians engaged in quid pro quo arrangements.
  • The assumption is that information supply and public scrutiny can impact politicians’ decisions and voters’ choices.
  • The electoral bonds case revolves around finding a balance to reap the benefits of anonymity while preventing quid pro quo arrangements.
  • An experiment in Chile aimed for “complete anonymity” of party funding.
• Striking a balance between transparency and anonymity: Many jurisdictions achieve this by allowing anonymity for small donors while mandating disclosures for larger contributions. 
  • For instance, in the UK, political parties must report donations exceeding £7,500 in a calendar year from a single source. Similar limits in the US and Germany are $200 and €10,000, respectively. 
  • This approach aims to protect small donors from potential victimization and address concerns about quid pro quo arrangements with larger contributors.

Conclusion: 

• There is a need for effective regulation of political financing along with bold Electoral reforms to break the vicious cycle of corruption and erosion of quality of democratic polity.