The finance ministry has announced the launch of the 11th tranche of electoral bonds sale from July 1 to 10. Electoral bonds are being pitched as an alternative to cash donations made to political parties as part of efforts to bring transparency in political funding.

“State Bank of India (SBI), in the XI phase of sale, has been authorised to issue and encash electoral bonds through its 29 authorised branches with effect from July 1 to 10," the ministry said in a statement.

This is the first issuance of electoral bonds after the conclusion of the general election and the formation of the new government.

The sale of the first batch of electoral bonds took place from March 1 to 10, 2018.

What is a bond?

A bond is a debt security, which is similar to an Instrument of Understanding (IOU). Borrowers issue bonds to raise money from investors, who are willing to lend them a sum for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality or a corporation.

Electoral bonds

The Union government notified the Electoral Bond Scheme on January 2, 2018. As per provisions of the scheme, electoral bonds may be purchased by a person, who is a citizen of India or incorporated or established in India.

A person being an individual can buy electoral bonds, either singly or jointly with other individuals. Only political parties registered under Section 29A of the Representation of the People Act, 1951 and which secured not less than 1 per cent of the votes polled in the last general election to the Lok Sabha or the Legislative Assembly of the state shall be eligible to receive electoral bonds. The electoral bonds shall be encashed by an eligible political party only through a bank account with the authorised bank.

Electoral bonds shall be valid for 15 days from the date of issue.

Who can purchase electoral bonds?

Electoral bonds under this scheme may be purchased by a person, who is a citizen of India or an entity incorporated or established in India.

The definition of ‘person’ includes…

* An individual

* A Hindu Undivided Family

* A company

* A firm

* An association of persons or a body of individuals, whether incorporated or not

* Every artificial juridical person, not falling within any of the preceding subclauses; and

* Any agency, office or branch owned or controlled by such person.

At what price are the bonds are sold?

Electoral bonds shall be issued in the denomination of Rs 1,000, Rs 10,000, Rs 1,00,000, Rs 10,00,000 and Rs 1,00,00,000.

Are electoral bonds tax-deductible?

Donations will be tax-deductible, and the beneficiary will get a tax privilege for the amount received. Further, the RP Act was amended in March 2018, which excused parties from informing the Election Commission of any amount accepted above Rs 2,000 if made through electoral bonds.

So, is this system transparent?

* According to former finance minister Arun Jaitley, “some element of clearness would be introduced in as much as all donors declare in their accounts the amount of bonds that they have purchased and all parties announce the quantum of bonds that they have received”.

* But the voting public will not know which individual, company or organisation has funded which party and to what extent.

* At the same time, the fact that SBI - and by implication, the government - will know who is getting what from whom can open up the circumstance of arm-twisting or harassment of those seen to be supporting parties or ideologies that are opposed to the government. And this will be possible without the public knowing or being able to see the pattern of such harassment.

* In a 2012 paper, economists M.V. Rajeev Gowda and E. Sridharan argued that corporates and businesspersons, while availing tax benefits, are wary of political donations because they can’t remain anonymous - a concern that the idea of bonds appears to address.

* However, critics argue that such a solution pushes back decades of work to ensure that the electoral process is not captured by just the rich or those who can draw funds, which might then lead to a quid pro quo, a tailoring of government policy to favour these donors.

Tackling the poll funding issue

* In 1968, corporate funding was banned. In 1974, the Supreme Court ruled that party spending for a candidate must be included in calculating the candidate’s election spend (Kanwar Lal Gupta vs Amar Nath Chawla & Ors), but Parliament legislated against the order the following year.

* In 1979, political parties were exempted from income and wealth tax, provided they filed annual returns, including audited accounts, listed donations of Rs 10,000 and above, and disclosed the identities of such donors.

* An amendment to the Companies Act in 1985 restored corporate funding. Companies could donate up to 5 per cent of their average net profit over the previous three years.

* More changes came based on reports on poll funding, such as the Dinesh Goswami Committee Report (1990) and the Indrajit Gupta Committee Report (1998), which recommended partial state funding of polls.

* In 1996, the apex court ruled that political parties must file returns by February 20, as required by the I-T and Wealth Tax Acts.

* The court also made clear Explanation 1 of Section 77(1) of The Representation of the People Act, so that election expenditure by a political party would not be included with that of a candidate for the purpose of determining compliance with the expenditure ceiling, if the party had submitted audited accounts of its spends and incomes.

* In 1998, the government provided partial state subsidy in the form of allocation of free time for national and state parties on state TV and radio.

* In 2003, the NDA government made individual and company donations fully tax-deductible.

* However, the cap on how much companies could contribute remained. The government now wants to remove this limit through the electoral bonds; individual cash contributions to parties have been capped at Rs 2,000.