Section 31 of the RBI Act stipulates that only the RBI or the Central Government authorized by the RBI Act shall draw, accept, make, or issue any bill of exchange or promissory note for payment of money to the bearer of the note or bond. The Finance Act amended the RBI Act by including Section 31(3) which permits the Central Government to authorize any scheduled bank to issue electoral bonds.

Financial contributions to political parties

To understand the context in which the legislative amendments were introduced, it is necessary to juxtapose the amendments with the regime on financial contributions to political parties.

The law relating to financial contributions to political parties focusses on

(a) contributions by corporate entities;

(b) disclosure of information on contributions; and

(c) income tax exemptions for donations.

Corporate Contributions

The Companies Act 1956 and the provisions of the RPA, when they were enacted did not regulate contributions to political parties by companies and individuals. The Companies (Amendment) Act 1960 included Section 293A to regulate contributions by companies.

The provision stipulated that companies cannot contribute to

(a) any political party; and

(b) to any individual or body for any political purpose, amounts exceeding twenty-five thousand rupees in a financial year or five percent of its average net profits during the three financial years immediately preceding the contribution, whichever is greater.

Companies were also required to disclose the amount contributed in a financial year in their profit and loss accounts and furnish particulars of the total amount contributed and the name of the party, individual or entity to which or to whom such amount was contributed. Companies defaulting in complying with the disclosure requirement were punishable with a fine which could extend to rupees five thousand.

Companies (amendment) act 1969

The companies (amendment) act 1969 amended Section 293A so as to ban contributions to political parties and for political purposes. Companies acting in contravention of the prohibition were punishable with a fine which could extend to five thousand rupees, and every officer who defaulted was punishable with imprisonment which could extend to three years, besides being liable to fine.

Companies (amendment) act 1985

The companies (amendment) act 1985 amended Section 293A to permit contributions to political parties and for political purposes once again. The explanation of the phrase “political purpose” included donations made to a person who in the knowledge of the donor is carrying out any activity at the time of donation which can be regarded as public support to a political party.

Further, the direct or indirect expenditure by companies on advertisements by or on behalf of political parties or publications for the advantage of a political party were also regarded as contributions for political purposes.

THREE OTHER RESTRICTIONS, in addition to the earlier restriction prescribing a cap on contributions and disclosure requirement were included.

First, the company (which is not a government company) should have been in existence for more than three years;

Second, contributions could only be made when a resolution authorizing the contributions had been passed at a meeting of the Board of Directors; and

Third, the penal consequences attached to the violations of the provision were made more stringent.

A fine extendable to three times the amount contributed could be imposed, and every officer of the company who was in default of the provision was punishable for a term which could extend to three years and be liable for fine.

Section 182 of the companies act 2013

SECTION 182 OF THE COMPANIES ACT 2013 substantively incorporated the provisions of Section 293-A of the 1956 Act, as amended in 1985. Section 182 enables a company to contribute any amount directly or indirectly to any political party. The provision bars a Government company and a company which has been in existence for less than three financial years from contributing to a political party.

The provisos to the provision prescribe THE FOLLOWING TWO CONDITIONS:

a. The aggregate of the amount contributed by the company in any financial year shall not exceed seven and a half per cent of its average net profits during the three immediately preceding financial years; and

b. A contribution can be made only if the Board of Directors issues a resolution authorizing the contribution at a meeting. Such a resolution shall, subject to the other provisions of the Section, be deemed to be a justification in law for the making and acceptance of the contribution authorized by the Board.

Sub-section (3) of Section 182 mandates every company to disclose in its profit and loss account any amount contributed by it to any political party during the financial year with specific particulars of the total amount contributed along with the name of the political party to which the contribution was made.

Section 182 of the Companies Act 2013 made TWO MODIFICATIONS from Section 293-A of the Companies Act 1956:

(a) the cap on the contributions which can be made by companies was increased from 5 % to 7.5% of their average net profits; and

(b) more stringent consequences for violation of were imposed.

The fine was extendable to five times (instead of three times prescribed in the earlier provision) of the contribution.

The Finance Act 2017

THE FINANCE ACT 2017 made three changes to Section 182 of the Companies Act:

a. The first proviso to Section 182(1) which prescribed a cap on corporate funding was omitted;

b. Section 182(3) was amended to only require a disclosure of the total amount contributed to political parties by a company in a financial year and excluded the requirement to disclose the particulars of the amount contributed to each political party; and

c. Sub-section 3A was introduced, by which a company could contribute to a political party only by a cheque, bank draft, or electronic clearing system.

The proviso to the sub-section states that a company may also contribute through any instrument issued pursuant to any scheme notified under any law for the time being in force for contribution to political parties.

Exemption from Income Tax

Taxation Laws (Amendment) Act 1978

The Taxation Laws (Amendment) Act 1978 included Section 13A to the IT Act exempting the income of political parties through financial contributions and investments from income tax. The objects and reasons of the Amending Act stipulated that tax exemption would increase disposable funds from “legitimate sources”.

However, to secure the benefit of exemption, the following conditions prescribed in the proviso were required to be fulfilled:

a. The political party was required to keep and maintain books of account and other documents which would enable the Assessing Officer to properly deduce its income;

b. The political party had to maintain a record of voluntary contributions in excess of twenty thousand rupees, along with the name and address of the person who made such contributions; and

c. The accounts of the political party were required to be audited by an accountant.

Election and Other Related Laws (Amendment) Act 2003

By the Election and Other Related Laws (Amendment) Act 2003, Sections 80GGB and 80GGC were inserted in the IT Act making contributions made to political parties tax deductible. The speech of Mr Arun Jaitley, the then Minister of Law and Justice while moving the Bill indicates that contributions were made tax deductible to “incentivize contributions” through cheque and other banking channels.

The Finance Act 2017 made the following amendments to Section 13A of the IT Act:

a. The political party was not required to maintain a record of contributions if the contribution was received by electoral bonds; and

b. The political party must receive a donation in excess of two thousand rupees only by a cheque, bank draft, electronic clearing system or through an electoral bond.


The Election and Other Related Laws (Amendment) Act 2003 amended the provisions of the RPA. Section 29C of the RP Act was introduced for requiring each political party to declare the details of the contributions received.

The treasurer of a political party or any other person authorized by the political party must in each financial year prepare a report in respect of the contributions in excess of twenty thousand rupees received by the party from a person or company other than Government companies in that financial year.

The report prepared must be submitted to the Election Commission before the due date for furnishing a return of income of that financial year under the IT Act. A political party which fails to submit the report shall not be entitled to any tax relief as provided under the IT Act.

The provision was amended by the Finance Act 2017 to include a proviso by which the political party was not required to disclose details of contributions received by electoral bonds.

The effect of the amendments introduced by the Finance Act to the above legislations is that:

a. A new scheme for financial contribution to political parties is introduced in the form of electoral bonds;

b. The political parties need not disclose the contributions received through electoral bonds;

c. Companies are not required to disclose the details of contributions made in any form; and

d. Unlimited corporate funding is permissible.

Objections of RBI and ECI to the Electoral Bond Scheme

On 2 January 2017, the RBI wrote a letter to the Joint Secretary in the Ministry of Finance on the proposal of the Government of India to enable Scheduled Banks to issue electoral bearer bonds for the purpose of donations to political parties before the Finance Act 2017 was enacted.

The RBI objected to the proposal on the ground that:

a. The amendment would enable multiple non-sovereign entities to issue bearer instruments. The proposal militated against RBI’s sole authority for issuing bearer instruments which has the potential of becoming currency. Electoral bonds can undermine the faith in banknotes issued by the Central Bank if the bonds are issued in sizable quantities;

b. Though the identity of the person or entity purchasing the bearer bond will be known because of the Know Your Customer requirement, the identities of the intervening persons/entities will not be known. This would impact the principles of the Prevention of Money Laundering Act 2002; and

c. The intention of introducing electoral bonds can be accomplished by cheque, demand draft, and electronic and digital payments. There is no special need for introducing a new bearer bond in the form of electoral bonds.

On 30 January 2017, the Finance Ministry responded to the observations of RBI and stated that:

a. RBI has not understood the core purpose of electoral bonds which is to keep the identity of the donor secret while at the same time ensuring that the donation is only made from tax paid money; and

b. The fear that electoral bonds might be used as currency is unfounded because there is a time limit for redeeming the bonds.

By a letter dated 4 August 2017, the Deputy Governor of the RBI stated that India can consider issuing the electoral bonds on a transitional basis through the RBI under the existing provisions of Section 31(1) of the RBI Act. The RBI recommended the incorporation of the following safeguards to minimize the inherent scope of misuse of the bonds for undesirable activities:

a. The electoral bonds may have a maximum tenure of fifteen days;

b. The electoral bonds can be purchased for any value in multiples of a thousand, ten thousand, or a lakh of rupees;

c. The purchase of electoral bonds would be allowed from a KYC compliant bank account of the purchaser;

d. The electoral bonds can be redeemed only upon being deposited into the designated bank account of an eligible political party;

e. The sale of electoral bonds will be open only for a limited period, may be twice a year for seven days each; and

f. The electoral bonds will be issued only at RBI, Mumbai.

The draft of the Electoral Bond Scheme was circulated to the RBI for its comments. The draft conferred notified scheduled commercial banks, apart from the RBI, with the power to issue electoral bonds. The RBI objected to the draft Scheme by a letter dated 14 September 2017. The RBI stated that permitting a commercial bank to issue bonds would “have an adverse impact on public perception about the Scheme, as also the credibility of India’s financial system in general and the central bank in particular.”

The RBI again flagged the possibility of shell companies misusing bearer bonds for money laundering transactions. The RBI recommended that electoral bonds may be issued in electronic form because it would

(a) reduce the risk of their being used for money laundering;

(b) reduce the cost; and

(c) be more secure.

Committee of the Central Board

The Electoral Bond Scheme was placed for deliberation and guidance by the RBI before the Committee of the Central Board. The Committee conveyed serious reservations on the issuance of electoral bonds in the physical form. The reservations were communicated by the RBI to the Finance Minister by a letter dated 27 September 2017. The reservations are catalogued below:

a. Issuance of currency is a ‘monopolistic function’ of a central authority which is why Section 31 of the RBI Act bars any person other than the RBI from issuing bearer bonds;

b. Issuance of electoral bonds in the scrips will run the risk of money laundering since the consideration for transfer of scrips from the original subscriber to a transferee will be paid in cash. This will not leave any trail of transactions. While this would provide anonymity to the contributor, it will also provide anonymity to several others in the chain of transfer;

c. Issuance of electoral bonds in the scrip form could also expose it to the risk of forgery and cross-border counterfeiting besides offering a convenient vehicle for abuse by “aggregators”; and

d. The electoral bond may not only be seen as facilitating money laundering but could also be projected (albeit wrongly) as enabling it.

Objection of Election Commission of India

On 26 May 2017, the Election Commission of India wrote to the Ministry of Law and Justice that the amendments to the IT Act, RPA, and Companies Act introduced by the Finance Act 2017 will have a “serious impact on transparency of political finance/funding of political parties.”

 The letter notes that the amendment to the RPA by which donations through electoral bonds were not required to be disclosed is a retrograde step towards transparency of donations:

“2(ii) It is evident from the Amendment which has been made, that any donation received by a political party through electoral bond has been taken out of the ambit of reporting under the Contribution Report as prescribed under Section 29C of the Representation of the People Act 1951 and therefore, this is a retrograde step as far as transparency of donations is concerned and this proviso needs to be withdrawn.

(iii) Moreover, in a situation where contributions received through Electoral Bonds is not reported, on perusal of the Contribution reports of the political parties, it cannot be ascertained whether the political party has taken any donation in violation of provisions under Section 29B of the Representation of the People Act 1951 which prohibits the political parties from donations from Government Companies and Foreign sources.”

Referring to the deletion of the provision in the Companies Act requiring companies to disclose particulars of the amount contributed to specific political parties, the ECI recommended that companies contributing to political parties must declare party-wise contributions in the profit and loss account to maintain transparency in the financial funding of political parties.

Further, the ECI also expressed its apprehension to the deletion of the first proviso to Section 182(1) by which the cap on corporate donations was removed.

The ECI recommended that the earlier provision prescribing a cap on corporate funding be reintroduced because:

a. Unlimited corporate funding would increase the use of black money for political funding through shell companies; and

b. Capped corporate funding ensured that only profitable companies with a proven track record could donate to political parties.

Electoral Bonds scheme has been declared illegal in a recent decision of Supreme court of India. (ADR & othr. V. Union of India (2023))