On what grounds RBI, EC objected to electoral bonds scheme

At the time it was being conceived, the electoral bonds scheme faced stiff challenges from two key institutions — the Reserve Bank of India (RBI) and the Election Commission of India (ECI). While both had differing concerns, prevention of money laundering was a common ground.

RBI’s objections

There were multiple rounds of discussions between the RBI and the Finance Ministry on electoral bonds. In January 2017, the RBI first objected to the proposal to enable other banks to issue electoral bearer bonds for donations to political parties before the Finance Act 2017 was enacted. The RBI had three main arguments:

Such an amendment would enable “multiple non-sovereign entities to issue bearer instruments”. The RBI had argued that this proposal — to allow any other bank to issue EBs — “militated against RBI’s sole authority for issuing bearer instruments which has the potential of becoming currency”. RBI was of the opinion that if such EBs are issued in sizable quantities, they “can undermine the faith in banknotes issued by the Central Bank.

The RBI also noted that while 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,” it stated.

The RBI was of the opinion that the intention of introducing electoral bonds — that the electoral contributions be paid out of tax-paid money — 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,” it stated.

As the discussions continued, the RBI persisted with its view that it should be the only authority to issue such bonds. In September 2017, when it was presented with the draft scheme, 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 reiterated “the possibility of shell companies misusing bearer bonds for money laundering transactions”. It also warned that the “issuance of electoral bonds in the scrip form could also expose it to the risk of forgery and cross-border counterfeiting…”

What ECI said

The Election Commission’s main objection was that EBs would have a “serious impact on transparency of political finance/funding of political parties.” In May 2017, the ECI wrote to the Ministry of Law and Justice about the amendments to the IT Act, the Representation of the People Act, and Companies Act introduced by the Finance Act 2017.

In it, the ECI stated that “the Amendment which has been made” — that any donation received by a political party through electoral bond is out of the ambit of reporting under the Contribution Report as prescribed in the Representation of the People Act 1951 — “is a retrograde step as far as transparency of donations is concerned and this proviso needs to be withdrawn”.

Further, 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 had 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.”

The ECI had also recommended that “the earlier provision prescribing a cap on corporate funding be reintroduced because unlimited corporate funding would increase the use of black money for political funding through shell companies”.

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