In a bid to infuse the political system with white money to fight the menace of black money, the NDA government launched a funding channel called electoral bonds in 2018. The scheme, which was included in the 2017 Finance Bill, was notified by the finance ministry on January 2, 2018. The 2017 Union Budget, which devoted a full section to poll reforms, particularly new channels of political funding, introduced electoral bonds to check rampant “under-the-table cash transactions”.

However, with controversial features such as anonymity for donors and the corresponding removal of 7.5 per cent limit for corporate donations, electoral bonds have drawn criticism from many corners, especially civil society activists, election watchdogs and some political parties, who have challenged the scheme before the Supreme Court.

The SC passed an interim judgment on 12 April, directing political parties to submit details of donations via electoral bonds and furnish the same before the Election Commission in a sealed cover by 30 May before it takes a final call on the scheme.

Key features

An electoral bond is a bearer instrument in the manner of a promissory note and an interest-free banking instrument whereby a citizen or a corporate body in India is eligible to purchase (through cheque or digital payments only) the bond from notified branches of State Bank of India for 10 days each in January, April, July and October.

As per the notification, the bonds can be bought by a citizen of India or a company incorporated or established in India. Further, a person can buy the bonds, either on his/her own or jointly with other individuals.

Only political parties registered under Section 29A of the Representation of the People Act, 1951, that has secured not less than 1 per cent of votes polled in the last election to the Lok Sabha or Legislative Assembly is eligible to receive such donations.

The major highlights of the bonds are that they will stay valid for 15 days and shall not carry the donor’s name, although the payee will have to fulfil the know your customer (KYC) norms at the bank. Further, no report is required to be submitted by the receiving parties. In other words, neither the donors nor the political parties are obliged under law to disclose the sources of such donations.

Main problems

There is some merit in using electoral bonds to infuse the political system with “clean money” as the buyers of the bonds will have to furnish KYC at the authorised bank and make transactions through cheque or digital means. Thus, in some sense, the scheme would act as a check against traditional under-the-table donations as it avoids cash transactions. Yet, many other features makes it controversial.

First, the anonymity clause or lack of disclosure requirements for the individuals or corporate donors buying such bonds defeats the fundamental principle of transparency in political finance. Opacity in donation would make it a convenient channel for black money flow. To expand the argument further, the scheme could be a convenient channel for businesses to round-trip their cash parked in tax havens to political parties for a quid pro quo. Yet, what makes the scheme even more controversial is the removal of the 7.5 per cent cap on corporate donations (bringing changes in the Companies Bill, 2013). This would allow for unlimited corporate/business donations even from loss-making companies.

Second, given the fact that a public sector bank (SBI) will be the sole repository of donor details, in effect the government of the day (given it is a public sector bank, the finance ministry will be able access any information it needs) will have an upper hand on this new mode of donations. This is evident from the early trends of donations flowing via electoral bonds. For instance, from seven tranches that were rolled out since March 2018, the BJP received 94.5 per cent of the total donations.

Third, electoral bonds are emerging as the most popular channel of donations to political parties for obvious reasons. In little over a year (2018-19), donations worth as much as Rs 2,550 crore have been made in the form of bonds. Until 2016, the most popular channel of political donations used to be electoral trusts. As per available data, the contribution from electoral trusts for FY2017-18 was Rs 194 crore, whereas the first tranche of bonds garnered Rs 222 crore (March 2018). This establishes that individual corporates who earlier used to make contributions through electoral trusts are now routing the same through the bonds. The clearest proof of this is that nearly all bonds (99.9 per cent) purchased are of high-value denominations between Rs 10 lakh and Rs 1 crore, implying corporates are preferring bonds for political donations.

How it harms democracy

A key factor that drives corporate and wealthy donors to opt for electoral bonds is the anonymity provision, which protects their identity. Whereas, an electoral trust has a mandatory requirement to submit a report to the EC, listing contributors and donations to different parties. If the early trends are to be believed, electoral bonds are the surest way of inviting unbridled corporate influence into politics and governance of the country, and the negative implications of the cosy ties between businessmen and politicians are well-known.

Second and the most alarming trend is the complete lopsided flow of donations from bonds. As forewarned by many analysts, the ruling BJP has captured as much as 95 per cent of the total donations from the first set of tranches. This greatly undermines the principle of equity in political funding as it denies other parties a level playing field.

Finally, as discussed above, given its anonymity provision, the scheme is likely to push the trends of  “unknown” source of political donations in India. And this goes against the grain of clean campaign finance goal as the NDA government had loudly claimed in its 2017 Finance Bill.

To sum up, the early trends attest to what political analysts have been fearing that electoral bonds would greatly undermine India’s electoral democracy by inviting unbridled corporate influence. Along with the changes that the government introduced in the 2017 Finance Bill, particularly the removal of the 7.5 per cent cap in corporate donations, electoral bonds undo the significant gains achieved in political finance reforms and transparency norms. To put it simply, electoral bond is an anathema for a healthy democracy.

Niranjan Sahoo is a senior fellow at Observer Research Foundation, New Delhi. He is a public policy and governance expert. The views expressed here are personal.