Election funding system was challenged by the opposition and activists on grounds that it hindered people’s right to know who gives money to parties.

India’s Supreme Court has scrapped a seven-year-old election funding system, called “electoral bonds”, that allows individuals and companies to donate money to political parties anonymously and without any limits.

Coming nearly two months before the general election, Thursday’s decision is being seen 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.

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

A five-judge top court bench headed by Chief Justice DY Chandrachud on Thursday said the system is “unconstitutional” and directed the state-run State Bank of India (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.

For years, critics condemned India’s election campaign financing method as an opaque way to funnel “black money” to parties.

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

Undeclared individuals and companies bought such bonds worth 165.18 billion rupees ($1.99bn) up to November 2023, according to the Association for Democratic Reforms (ADR), a non-government transparency watchdog working on election funding in India.

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

Jagdeep Chhokar from the ADR, which had challenged the scheme in the top court, said the ruling would help end political “mischief”.

“My initial reaction is of big relief – and some hope,” he said, adding that the bond system “had added an extra layer of opacity”.