The seven-year-old “electoral bonds” system in India, which permitted people and businesses to make unlimited, anonymous donations to political parties, has been abolished by the Supreme Court.

Under the system, a person or company can buy these bonds, in denominations ranging from 1,000 rupees ($12) to 10 million rupees ($120,000), from the State Bank of India (SBI) and donate them to a political party of their choice.

The bonds are then delivered to the party which can exchange them for cash.

The bonds which are exempt from tax, do not carry the name of the donor.

Since their introduction, electoral bonds had become a key method of political funding. While the donors are technically anonymous, critics fear the government could access data through the state-owned SBI.

Cash donations are still allowed, but carry no tax exemption.

The system of electoral bonds was challenged by opposition members and a civil society group on grounds that it hindered the public’s right to know who had given money to political parties.

On Thursday, February 15, 2024, a five-judge top court bench headed by Chief Justice DY Chandrachud, pronounced that the system is “unconstitutional.”

The court also directed the SBI to not issue any more of these bonds, to furnish identity details of those who bought them, and to provide information about bonds redeemed by each political party.

“Political contributions give a seat at the table to the contributor … this access also translates into influence over policy-making,” Chandrachud said.

Because of the close nexus between money and politics, it is possible that financial contributions “would lead to quid pro quo arrangements”, the court said as it reinstated corporate donation limits, saying that treating companies and individuals alike for this was “manifestly arbitrary.”

“The ability of a company to influence the electoral process through political contributions is much higher when compared to that of an individual … contributions made by companies are purely business transactions made with the intent of securing benefits in return,” said the top court’s order.

Supporters of the scheme argue that it makes the funding of political parties traceable and transparent while also protecting the identity of the contributor.

However, critics say that the bonds are not entirely anonymous since the state-owned bank has a record of both the donor and the recipient, making it easy for the ruling government to access details and “use” the information to influence donors.

Setback For Modi’s Party

Coming nearly two months before the general election, the court’s decision was perceived as a setback for Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP), which has been the largest beneficiary of the system it introduced in 2017.

So far, it is said that electoral bonds worth 165.18 billion rupees ($1.99bn) have been sold in 29 tranches.

According to the Association for Democratic Reforms (ADR), a non-government transparency watchdog working on election funding in India, undeclared individuals and companies bought such bonds up to November 2023.

It said between 2018 and March 2022, nearly 57 percent of these donations went to the BJP. In comparison, the opposition Indian National Congress party received only 10 percent.

ADR calculates that more than half of all donations received by political parties used the electoral bond scheme.

For years, critics condemned the election funding method as an opaque way to funnel “black money” to parties.

However, Modi’s government defended the policy, saying that it mitigates the use of cash or “black money” in political funding, allowing donors a confidential channel to contribute to any party’s funds.

The government also contended that it was necessary to keep the identity of donors confidential so that they would not face “any retribution from political parties.”