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Funding Mechanisms for Political Entities

Updated: Jun 14

Authored by Shubhika Jain (Intern), a 2nd-year Law Student at Hidayatullah National Law University, Raipur

Funding Mechanisms for Political Entities
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The funding of political parties is an important facet of democratic governance since it influences the political landscape and how election systems work. It includes the many sources of financial assistance that political parties use to carry out their activities, from campaigning and outreach to day-to-day operations. Political parties receive income from a variety of sources, including private donations from citizens and organisations, governmental funding from state treasuries, membership fees, and fundraising activities. The processes and laws controlling these contributions varied greatly between nations, reflecting differing political cultures and legal systems.

What is Political Funding?

It is a method by which parties raise their funds for their campaigns or any other activity. Political parties can raise funds through individual, and corporate donations, state subsidies, and fundraising events.  Political parties raise funds through various methods to support their campaigns and other activities, one significant method being electoral bonds.  Electoral bonds are money instruments introduced in 2017 and were implemented in 2018 by then finance minister Arun Jaitley in the union budget as a means of making political donations more transparent. These are interest-free bearer bonds that can be purchased by any company or individual from the branches of the State Bank of India.


  1. SBI offers bonds in the following denominations: “Rs 1,000, Rs. 10,000, Rs. 1,00,000, Rs. 10 lakhs, and Rs. 1 crore.” It could be bought individually or jointly. Businesses and political funding have always worked hand in hand.

  2. To receive donations, political parties must be registered under section 29 A of the Representation of the People Act, 1951, and have received at least 1% of the votes in the previous Lok Sabha or legislative assembly election. 

  3. The bonds should be encashed within 15 days or else they will go directly to the prime minister's relief fund. 

  4. Electoral bonds can only be purchased through cheques or digitally and not by cash as it would create more chances of having black money. 

  5. For accountability and transparency, the political parties have to disclose their bank accounts to the Election Commission of India. The companies have secured their anonymity. 

  6. There is no limit/ restrictions on bond purchase quantity.

Report of Association Democratic Reform 

The “Association for Democratic Reforms (ADR)” is an Indian non-governmental organisation founded in 1999 in New Delhi. It is a prominent civil society organisation dedicated to promoting transparency and accountability in the Indian political system. 

The findings of these reports are as follows:

This is the party-wise data on the denomination of electoral bonds which was encashed between 2019-2024.

  1. “A total of 28,030 electoral bonds worth Rs. 16,518 crores have been sold from March 2018 to January 2024”.

  2. The papers released by SBI show that the BJP has been the top beneficiary of the electoral bonds with the funding of Rs. 6060 crores. BJP alone has a share of 47.5 percent of the total bonds.

  3. AITC (All India Trinamool Congress) is second and then Congress. 

Association For Democratic Reforms and Anr. vs. Union of India

The Supreme Court on 15th February 2024 passed a judgment that the electoral bonds are unconstitutional.

It was held that:

  1. Electoral bonds are violative of Article 19 (a) of the constitution. DY Chandrchud said that the “information about the funding of political parties is essential for the effective exercise of the choice of voting”. The Supreme Court stated that it violated the right to information of citizens, which creates its effect on free speech and expression. Citizens have a right to know who is donating funds, how much, and to which party. 

  2. The donor's privacy shouldn’t serve as a quid pro quo as political parties could use extortion to get more funding from the companies. 

  3. Unlimited corporation donations violate free and fair elections which hinders our democracy. Before 2017 the companies could contribute up to 7.5 percent of their annual net profit over the past three years but when it became unlimited it opened opportunities for shell companies. Or maybe any rich country could donate and influence our country’s election 

Justice Sanjiv Khanna's Test 

Khanna J. reached the same conclusion but with a separate opinion. He relied on the test of manifest arbitrariness to strike an appropriate balance between the objective of restriction and the fundamental right. Khanna J outlined a four-pronged test of proportionality: the legitimacy of purpose, rational connection, necessity, and balancing of rights.

He scrutinised the legitimacy of the restriction's aim, asserting that retribution against political donors is an abuse of power and lacks validity. He emphasised that transparency, not secrecy, is crucial for democratic governance. He examined the rational connection between the restriction and its aim. He argued that the fear of reprisal due to the anonymity of donors undermines this connection, as does the lack of relevance between curbing black money and donor anonymity. He assessed the necessity of the restriction, advocating for the electoral trust arrangement as a less restrictive alternative. This arrangement ensures transparency in contributions, aligning with the voters' right to know. He addressed the balancing of conflicting fundamental rights. He prioritised the voters' right to information over privacy concerns and the incentive for donations through banking channels, asserting that transparency in political funding is essential for fair elections.

Additionally, he discussed the right to privacy, indicating that it must yield when the dissemination of information serves the public interest.

He also referenced the 255th Law Commission Report, highlighting concerns about financial superiority influencing elections and the dangers of quid pro quo corruption. He emphasised the importance of informed public opinion in curbing misgovernment.

Regarding corporate privacy claims, Khanna J. restricted such claims to protecting individuals responsible for conducting corporate affairs, asserting that corporate affairs should be open to shareholders and the public.

In furtherance of this judgment, SBI shall stop the issuance of electoral bonds and disclose the information. The Supreme Court on 11th March dismissed the application of the State Bank of India for the extension of time to provide the details. Justice DY Chandrchud stated that they have not asked for them to do the matching exercise but just to disclose the information.

Positive impact of the ruling.

Transparency helps to deter corruption by making it more difficult for political parties to receive and use illicit funds. “When funding sources are disclosed, it becomes harder for parties to engage in corrupt practices without detection”.

Public disclosure of funding sources holds political parties accountable to the electorate. Voters can see who is financially supporting a party and assess whether those donors might have undue influence over the party’s policies and decisions. 

Transparency in funding can increase public trust in the political process. When voters are aware of where parties get their money, they are more likely to believe that the political system is fair and that parties are acting in the public interest.

Overall, transparency in political party funding strengthens the democratic process by promoting openness, accountability, and fairness.

The potential adverse effect of the ruling is that donors will be reluctant to contribute if their information is made public. “The reputation of the donors would be tainted which would lead to a decrease in their brand value. It may also lead to a situation where donors are courted or targeted by multiple parties or factions within a party”.

This may further lead to an arms race in fundraising where parties spend more time and resources on fundraising rather than on policy development and voter engagement.

Indian Democracy and Electoral Bonds 

The Supreme Court's decision declared the electoral bonds scheme unconstitutional as it was a threat to our democracy. Many big powers could influence the election without even the knowledge of who they are. We would never be able to determine who funds the political parties. The verdict delivered by the Supreme Court, particularly Justice Sanjiv Khanna's concurring opinion, serves as a significant endorsement for the Election Commission of India (ECI) in its quest to enhance transparency in electoral funding. As the custodian of free and fair elections, the ECI has long been advocating for measures to elucidate the sources and utilisation of election finances. However, the Electoral Bonds Scheme (EBS), since its inception, veiled this process in secrecy, undermining not only transparency but also impinging upon the fundamental right of voters to access crucial information.

Provisions About Political Funding 

Constitution of India

The funding is deeply related to constitutional principles which include free and fair elections for democratic governance. Fundings help to regulate that elections are competitive and that no one party has an unfair advantage over the other. The constitution has a different set of provisions about the conduct of elections which is mentioned in part XV from Articles 324 to 329. Article 19 also mentions the freedom to form associations which gives the freedom to form political parties.

The Representation of the People Act, 1951

Section 29A talks about the registration with the election commission of associations as political parties only those can avail the benefit of funding. Section 29B Allows the political parties to accept the funding from the contributors, except from foreign sources and government companies. Section 29C mandated the political parties to prepare an annual report if the funding has exceeded Rs. 20,000 and has to submit it to the Election Commission of India. This act ensures fair elections, prevents malpractices, resolves disputes, regulates political parties, and promotes inclusive democracy in India. It establishes legal frameworks for electoral processes, essential for maintaining transparency, integrity, and public trust in the democratic system. The RPA fosters inclusive democracy by enfranchising citizens and promoting the participation of marginalized and underrepresented groups. Over the years, the Act has been amended to adapt to changing societal and technological contexts, introducing reforms such as electronic voting machines (EVMs) to enhance the efficiency and transparency of elections.

Income Tax, 1961

Section 13A grants tax exemption to the political parties for income from the voluntary contribution of the funds, only when the parties file an annual report with the income tax department. Section 80GGB states that there will be a tax seduction to the Indian companies who contributed to the political parties. Section 80GGC states that there will be tax deductions to individuals and noncorporate entities for contributions to the political parties.

Foreign Contribution (Regulation) Act, 2010

It prohibits political parties from accepting contributions from foreign sources. However, the amendments in 2016 and 2018 stated that the Indian subsidiaries of foreign companies are not considered foreign contributors. It ensures national security by monitoring foreign funding, prevents money laundering, and safeguards against terrorist financing. FCRA promotes transparency and accountability in financial transactions, enhances public trust, and prevents undue influence on political activities by prohibiting foreign funding for political parties and candidates. 

Companies Act, 2013

Section 182 allows companies to contribute up to 7.5 per cent of their average net profits during the last three financial years to political parties. But in this case, the companies have to disclose the total amount contributed with the name of parties to which contributions were made in their profit and loss accounts. 

Global Scenario of Political Funding

Political Funding in EU Member States

The state subsidies in party income have increased since the 1980s, many times contributing the majority in party funding. Germany promotes state subsidies and shows how it encourages democratic behaviour. Whereas in Italy, and Hungary there has been an elimination of public funding. The best way is to balance out the public funding and make a way out where the new parties also benefit from funding, not just the old parties. All EU member states have adopted the practice of public disclosure of their donations, whether or not it can be disclosed or not. They have set criteria for it. The significance of political funding regulations in European Union (EU) member states lies in promoting transparency, integrity, and fairness in democratic processes.

Political Funding in the United States

The US is heavily funded by private donations, which not only include corporate but also individual donations and political action committees (PACs). The PACs are entities that can raise and spend unlimited amounts of money independently of candidates' campaigns. The public funding is generally not anonymous. The individual donations must be disclosed. PAC must also have to report to the FEC.  By imposing limits on campaign contributions and expenditures, regulations aim to prevent undue influence from wealthy individuals, corporations, and special interest groups, thereby reducing the risk of corruption in politics.

Political Funding in the United Kingdom

It is a blend of both private and public funding but is subject to some restrictions. The public money only goes into the administrative costs, not in campaigning. With private donors, they can put the money into campaigning. The influence of the larger donor will have the most influence in policy decision-making. In the UK also some are disclosed and some are not disclosed. The regulations restrict foreign donations, safeguarding the UK’s political system from external interference and ensuring that domestic political decisions reflect the will of the UK electorate. The UK’s Electoral Commission oversees political funding and ensures compliance with regulations. This regulatory oversight helps maintain the integrity of political financing and addresses any violations or irregularities promptly.

Political Funding in Africa

Parties receive funds from (RPPF) a represented political parties fund that allocates funds and the multiparty democracy fund (MPDF) which accepts funds from private donations for distribution. However, this system might favour some unequal distribution which makes it harder for the new parties to survive political funding laws help create a level playing field by providing equal opportunities for all political actors to compete in elections, regardless of their financial resources. This promotes fairness and diversity in political representation.

Political Funding in Japan

Japan's political party funding is a combination of public funds and private donations. Public funding provides a base level of income for parties, while private donations come from corporations, unions, and individuals. Transparency is a key aspect, with parties receiving public money required to disclose their finances. Japanese regulations restrict foreign contributions to political parties and candidates, protecting the political system from external interference and ensuring that domestic political decisions reflect the will of the Japanese people.


The Supreme Court's decision, to strike down the Electoral Bonds Scheme, provides a much-needed boost to the ECI's efforts. It reinforces the importance of transparency in the electoral process and highlights the inadequacies of the EBS in achieving this fundamental objective. The scheme's opacity not only obscured the origins of political funding but also compromised the integrity of the electoral process itself. In doing so, it eroded the trust of the electorate and undermined the principles of democracy.

Furthermore, the Court's ruling presents an opportunity for the government to reevaluate its approach to electoral funding. Rather than relying on schemes or executive directives, the government should consider enacting specific legislation aimed at promoting transparency in this crucial aspect of democratic governance. Such legislation could outline clear guidelines for the disclosure of political contributions, mandate public scrutiny of election finances, and establish mechanisms for accountability.

By embracing the Court's verdict and taking proactive steps to reform electoral funding, the government can demonstrate its commitment to upholding democratic principles and restoring public trust in the electoral process. Transparency in political financing not only strengthens the democratic fabric but also fosters a more informed and engaged electorate. Therefore, it is incumbent upon the government to heed the Supreme Court's call for reform and embark on a path towards a more transparent and accountable electoral system.

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