Electoral Bond Scheme

Electoral Bonds as instruments alternative to cash Donations made to Political parties

The Finance Ministry has come out with the scheme "Electoral Bonds Scheme" with a view to cleanse the Election Funding.

The Finance Minister Shri Arun Jaitly has announced on January 2nd the details of Electoral Bond Scheme.

The electoral bonds, which are being pitched as an alternative to cash donations made to political parties, will be available at specified branches of State Bank of India (SBI) for 10 days each in months of January, April, July and October 18. The bonds, which would be valid for 15 days, will not carry the donor’s name even though the purchaser would have to fulfil KYC norms at the bank. The new electoral bonds donors can buy from SBI and receiving political parties can encash only through a designated bank account.

The Electoral Bond Scheme is proposed as a Electoral reform because of the following:

• The move is aimed at making political funding more transparent.
• The bonds will be bearer bonds and the identity of the donor will not be known to the receiver.
• The Bonds will substantially cleanse the Political funding System as Clean Money through banking System would be channelised in the system. “Electoral bonds will ensure clean money and significant transparency against the current system of unclean money.”
• Moving away from Cash -The Electoral Bonds which will be Bearer Instruments being issued in different denominations ranging from Rs.1000 to Rs. 1 crore can be encashed only through a designated Bank just removing the Cash Element.

What is an Electoral Bond?

Electoral Bond is a financial instrument for making donations to political parties. These are issued by Scheduled Commercial banks upon authorisation from the Central Government to intending donors, but only against cheque and digital payments (it cannot be purchased by paying cash). These bonds shall be redeemable in the designated account of a registered political party within the prescribed time limit from issuance of bond.

Electoral bond was announced in the Union Budget 2017-18. Required amendments to the Reserve Bank of India Act, 1934 (Section 31(3)) and the Representation of People Act, 1951 were made through Section 133 to 136 of Finance Bill, 2017.  

(For Details of Amendments please click on the following link: Amendments to the Reserve Bank of India Act, 1934-Section 133 to 136 of Finance Bill, 2017.)

Characteristic of Electoral Bonds:

• Electoral bonds will be issued by a notified bank for specified denominations of Rs. 1000,              Rs 10000, Rs.  1 Lakh, Rs. 10 lakh and /or Rs 1 Crore.
• The Donor willing to donate to a political party, can buy these bonds by making payments digitally or through cheque. The Donor's are then free to gift the bond to a registered political party. 
• The Donors would have to make KYC (know your customer) disclosures to the SBI. “A citizen of India or a body incorporated in India will be eligible to purchase the bond,” he said.
• The electoral bond is more like a bail-bond than a Government or corporate bond. 
• The bonds will likely be bearer bonds and the identity of the donor will not be known to the receiver. Electoral bonds are essentially like bearer cheques. 
• The issuing bank will remain in the custodian of the donor’s funds until the political party redeems the bond. 
• The Political Party can can convert these bonds back into money via their bank accounts. The bank account used must be the one notified to the Election Commission.
• The bonds may have to be redeemed within a prescribed time period of 15 days, during which it can be used for making donation only to registered political parties,
• The Electoral bonds will prompt donors to take the banking route to donate, with their identity captured by the issuing authority.

Objective of Electoral Bond Scheme

Introduction of electoral bonds specifically aims at killing the black money that funds political parties in India. Most political parties use the sloppy/lax regime on donations to accept cash donations from anonymous sources.

• Nearly 70% of the Rs.11,300 crore plus in party funding over an 11-year duration came from unfamiliar sources, as per the opinion of Association for Democratic Reforms.
• Currently, political parties are required to report any donation of over Rs.20,000 to the IT Department. But there is practice of more endowments coming by way of hard cash in smaller amounts.
• To fix this, the Union Budget has reduced the disclosure limit to Rs.2, 000 and insists that any amount over this must be paid through cheque or the digital mode. The concept  is that electoral bonds will be carried out by donors to take the banking route to donate, with their identity captured by the issuing authority.
• Under Section 31 of the RBI Act of 1934, the bearer instruments can be issued only by the Central government or the RBI. The change in the RBI Act will empower the designated authorized banks also to issue the bearer instruments. The government will decide which banks to authorize and other modalities after discussion with RBI.

        Improved Transparency

        The Finance Minister Shri Arun Jaitly  while announcing the details of  Electoral bonds said 

• “Donors  who buy these bonds, their balance sheet will reflect. It will ensure cleaner money coming from  donors, cleaner money coming to political party and ensure significant transparency”.                 
• He said at present, donor, quantum and source of funds is not known.
• “The donor will know which party  he is depositing money. The political party will file return with the Election Commission.  Now, which  donor gave to which political party, that is the only thing which will not  be     known,”
• “Electoral bonds will ensure clean money and significant transparency against the current system of unclean money.”      

 Contrary to the perception that the curbs on political funding proposed by the Finance                     Minister    in the Union Budget would improve transparency, political organizations funding is         likely to become largely vivid in the coming years.

• Section 29C of the Representation of People Act (RP Act-1951) for which BJP led NDA regime claims  credit during the Vajpayee era  needs all recognized National and State level political parties to make annual declarations of contributions received from companies, institutions and individuals in excess of Rs.20,000.
• The EC publicises the contribution reports of recognized National and State level political parties on its website as and when it receives them.

      The Finance Bill 2017 had proposed that the contributions accepted through “electoral bond”          needs to be excluded from the preview of sub-section (3) of section 29C of the said Act. 

• The Income Tax Act is also sought to be amended to exclude donations received by these political organization  via electoral bonds  reported to the IT Department each year in order for them to continue to avail the exemption from submitting income tax.
• In other words, political parties will not be required to disclose the identity of individuals and organizations who make donations through electoral bonds bought from the commercial banks.
• Thus, if approved by Parliament, the combined effect of the amendments to the IT Act and the RP Act is likely to be as follows:

Implications

(1) Many political parties are likely to strive to accept cash endowments below Rs. 2,000 only, these will not be required to be reported to the Income Tax Department and  or to the EC India.

(2) As donations received through electoral bonds are exempt from being included in the annual reports of political parties to the IT Department or the Election Commission of India, these amounts will also not be reported.

(3) Only such contributions received above Rs. 20,000 through cheques or digital mode of payment will be required to be reported to the IT Department and the Election Commission of India.

In  the year 1987, the  then regime launched  a  bond called Indira Vikas Patra, which  issued through Post offices. Since this had the essence of a bearer bond, it conferred secrecy to the holders of this bond. However, it was finally  not continued after it was doubted that these bonds were used as a conduit for laundering black money.

But there are loopholes to electoral bonds too. While the identity of the donor is captured, it is not revealed to the party or public. So transparency is not enhanced for the voter.

Source: Indian Economic Service, Business Line, Ministry of Finance, RBI,  https://www.iassolution.com/electoral-bonds-scheme/