Electoral Bonds: Step Towards Clean Money in Political Funding?

What we know about electoral reforms and their likely impact on political funding in India.

Electoral bonds were first announced by Finance Minister Mr Arun Jaitley as a major reform that could “cleanse the system of political funding in the country”. It was in sync, he said, with the government’s desire to move towards a cashless economy. Experts say that while electoral bonds do provide an easy route for anonymous donations, they could be instrumental in blocking the entry of black money into political system. Critics, however, argue that shell companies could easily defeat the entire purpose.

The Election Commission has said that it will take at least one election cycle before it can pass comment on the efficacy of electoral bonds in bringing clean money into the political system while maintaining transparency.

On Sunday, 7 January, Arun Jaitley published a blog saying that while he finds cheques and online donations ideal for transparency, electoral bonds “envisage total clean money and substantial transparency” in political funding.

Here’s what we know so far and the possibilities that could emerge.

What is an electoral bond?

An interest-free banking instrument for political funding, electoral bonds can be purchased from SBI for 10 days in January, April, July and October and will be available in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh and Rs 1 crore. This will increase to 30 days in the year that Lok Sabha elections are due.

Who can buy them?

Companies, individuals, NGOs, charitable and religious trusts, etc can purchase electoral bonds.

Is there a limit to how many electoral bonds that can be purchased?

No. There exists no limit on total monetary worth or the number of electoral bonds that a corporate entity can purchase. In fact, with the new rules, the Modi government has removed the earlier cap – 7.5 percent of the net profits for the past three years – that companies could donate to a political party.

Why were electoral bonds introduced?

Ostensibly, the government’s purpose is to cut out large inflows of black money into political funding, and so electoral bonds are being pitched as an alternative to cash donations. While unveiling the framework for electoral bonds at the beginning of the new year, Finance Minister Arun Jaitley said, “Electoral bonds will ensure clean money and significant transparency against the current system of unclean money.” The purchaser will be allowed to buy electoral bonds only on due fulfillment of all Know Your Customer (KYC) norms and by making the payment from a bank account.

What’s in it for the purchasers?

Anonymity. Under the earlier rules (Section 182 (3) of the Companies Act 2013), every company had to disclose in its profit and loss account, the name of the party to which it had made any contribution. However, after the Finance Act of 2017, they no longer need to disclose the name of the political party/parties they donated to.

So while earlier, one could knock on the doors of the Registrar of Companies (ROC) for information on a company’s political donations, these entities are now immune to any such public inspection.

Are there any tax benefits to donating through electoral bonds?

Under the Income Tax Act, companies which make donations to political parties or electoral trusts can claim deductions against the amount of tax that they would otherwise have to pay. With the earlier cap (7.5 percent of the net profits for the past 3 years) removed, the amount of reduction that they can now claim is significantly higher. So, a donor stands to gain not just favour, but also a generous tax deduction.

Why the need for anonymity?

Ironically, this changed rule was promoted as a progressive step for both the donors and the political parties. Speaking in Parliament in March 2017, Jaitley had said that the government wants to help donors who “fear consequences” and noted that many “political donors had been reluctant to donate because of fear of disclosing their identities.”

In fact, the Finance Minister went a step ahead to get the Opposition to support the Finance Bill under which several non-finance related amendments were being pushed as a ‘money bill’.

“The ruling party has to be large-hearted to really frame a scheme…under which people would be, without fear of consequences, willing to give (donations) to someone who is not in power,” Mr Jaitley had said at the time.

Will these donors really remain anonymous?

Considering the State Bank of India (SBI) falls directly under the banking division of the Finance Ministry, no. As mentioned earlier, one of the prerequisites of purchasing an electoral bond is registering one’s Know Your Client (KYC) details with the SBI. The Revenue Department or the Banking Division of the Finance Ministry will not exactly have to jump through hoops to requisition data on any transaction with the SBI, including the purchase of electoral bonds.

However, this information will be limited to the amount and number of electoral bonds bought. But critics argue that if the government were to match the value of the electoral bonds bought by a corporate to its own party books, it can easily determine how much of it received and how much it did not i.e: how much went to an opposition party.

As for individuals, NGOs and charitable and religious trusts – they are not required to put out details of their accounts in the public domain. So only the government, its agencies and the bank would know the details of the electoral bonds purchased by them.

But what about transparency before the public?

While the government’s aim is to promote clean money in political funding, Jaitley’s argument for more transparency through electoral bonds is fraught with contradictions. Although these electoral bonds can be bought only after the donor fulfills the existing Know Your Customer (KYC) norms, it will not carry the name of the payee.

Under the earlier system, political parties had to reveal the names of cash/cheque payees who donated more than Rs 20,000. By allowing legitimate bank transactions while ensuring anonymity, the public at large will continue to remain unaware of which corporate interest is rooting for which party.

Do electoral bonds run the risk of running like parallel currency?

No. Although this was an initial fear when the government first announced the concept of electoral bonds in his 2017 budget speech, Jaitley, while announcing the norms for electoral bonds, clarified that the life of these electoral bonds will be 15 days and they can be encashed only by registered political parties through a designated bank account. Also, they do not accrue any interest after they are bought.

Will electoral bonds allow foreign companies to donate to Indian political parties?

Although this was illegal, the amendment to this bill will allow subsidiaries of foreign companies that have offices in India to contribute to its political parties.

The Finance Act of 2017 introduced the use of electoral bonds which are exempt from disclosure under the Representation of Peoples Act, 1951. To facilitate the use of electoral bonds, changes were also made to the Foreign Contribution Regulation Act (FCRA), 2010 through the Finance Act of 2016 that allows foreign companies with subsidiaries in India to fund political parties.

This, Prashant Bhushan and Neha Rathi’s petition, says:

[...] effectively exposes Indian politics and democracy to international lobbyists who may want to further their agenda. These Amendments pose a serious danger to the autonomy of the country and are bound to adversely affect electoral transparency, encourage corrupt practices in politics and have made an unholy nexus between politics and corporate houses more opaque and treacherous and is bound to be misused by special interest groups and corporate lobbyists.

Foreign funding in Indian politics has until now been a closed door.

The Quint had, in December 2016, reported how the Association for Democratic Reforms (ADR) expose on foreign funding to Congress and the BJP had sent the government scrambling to amend the Foreign Contributions Regulatory Act (FCRA) , 2010.

Here’s a quick recap:

On 29 March 2014, the Delhi High Court in a landmark verdict found the Congress and the BJP guilty of violating the Foreign Contribution (Regulation) Act by accepting donations from an electoral group comprising of subsidiaries owned by UK-based Vedanta Group.

According to ADR, Sterlite Industries and Sesa Goa, two companies registered in India but whose controlling shareholder was Vedanta, donated Rs 8.79 crore to Congress between 2004 and 2012. Sesa Goa donated Rs 1.42 crore to the BJP during the same period.

The Delhi High Court asked the Home Ministry and the Election Commission to “relook and reappraise the receipts of the political parties and identify foreign contributions received by foreign sources" and take action “within six months”.

Even with an appeal pending in the Supreme Court, the Modi government moved to let the BJP and the Congress off the hook by amending the FCRA, 2010, with retrospective effect.

Under the amended law, as long as the foreign company was owned by an Indian and as long as the donation was within the limit prescribed by the government for that sector, the company would be treated as “Indian” and not foreign.

Considering these foreign donations were made between 2004 and 2009, much before the FCRA was amended, the political parties find themselves in a bit of spot.

The Finance Act 2017 now allows foreign funds to be channeled through their Indian subsidiaries into our political parties, through the State Bank of India no less.