Electoral Bonds: How concerns expressed by Election Commission of India, RBI were brushed aside

The Supreme Court on Friday refused to stay the release of the fresh set of electoral bonds from April 1 for the assembly polls in West Bengal, Kerala, Tamil Nadu, Assam and Puducherry.

The court dismissed the application filed by NGO Association for Democratic Reforms seeking stay of the bonds.

"Since the bonds were allowed to be released in 2018 and 2019 without interruption, and sufficient safeguards are there, there is no justification to stay the electoral bonds at present", the court said in its order, as per a Live Law report.

A bench comprising Chief Justice of India SA Bobde, Justices AS Bopanna and V Ramasubramaniam had reserved order on the application filed by NGO 'Association for Democratic Reforms' on Wednesday.

The bench heard the arguments of advocate Prashant Bhushan for the petitioner, Attorney General for India KK Venugopal, Solicitor General Tushar Mehta and Senior Advocate Rakesh Dwivedi for the Election Commission of India.

Notably, the Election Commission of India, which had earlier filed a counter affidavit in the case expressing its concerns about the anonymous nature of bonds, opposed the plea for a stay on Friday. The ECI said they are not opposed to electoral bonds, but want more transparency. But Electoral Bonds is one step ahead of unaccounted cash system, ECI said. ECI's counsel Senior Advocate Rakesh Dwivedi told the SC that the issue of transparency can be considered at the final argument stage, and there should be no interim stay.

Prashan Bhushan argued that the anonymous electoral bonds was a scheme to facilitate money laundering and funding by shell companies, and thereby undermined transparency in political funding. Bhushan placed heavy reliance on the concerns expressed by the ECI and the Reserve Bank of India regarding the anonymity of the bonds.

The Attorney General submitted that the bonds ensured that political funding was completely routed through banking channel, thereby eliminating black money.

During the hearing, the bench had expressed concerns about the possible misuse of funds procured by political parties through electoral bonds and asked the Centre if it has any control of such use of money.

The CJI also had orally remarked that if the arguments of Bhushan were correct, the law will have to be struck down.

The petitions were filed in 2017 challenging the provisions of Finance Act 2017 which paved the way for anonymous electoral bonds. The Finance Act 2017 introduced amendments in Reserve Bank of India Act, Companies Act, Income Tax Act, Representation of Peoples Act and Foreign Contributions Regulations Act to make way for electoral bonds.

The petitions have been filed by political party Communist Party of India (Marxist), and NGOs Common Cause and Association for Democratic Reforms (ADR),which challenge the scheme as "an obscure funding system which is unchecked by any authority". The petitioners voiced the apprehension that the amendments to Companies Act 2013 will lead to "private corporate interests taking precedence over the needs and rights of the people of the State in policy considerations".

However, the case became alive only by March 2019, by which time most of the electoral bonds have been purchased.

On April 12, 2019, after several sessions of hearing held during the run up to the 2019 Lok Sabha polls, a three judges bench of the SC comprising the then CJI Ranjan Gogoi, Justice Deepak Gupta and Sanjiv Khanna had directed the political parties to submit the details of donations received to the ECI in sealed cover by May 30.

Concerns raised by EC

The Election Commission of India has already filed a counter-affidavit in the case expressing its concerns about the anonymous nature of bonds. The ECI has described this a "retrograde step as far as transparency of donations is concerned" and called for its withdrawal.

By virtue of the 2017 amendment made to Section 29C of the Representation of Peoples Act 1951(RPA), political parties need not report to ECI the donations received through electoral bonds. The ECI described it as a "retrograde step as far as transparency of donations is concerned" and called for withdrawal of the amendment.

The ECI said that if contributions are not reported, it will not be possible to ascertain if political parties have taken donations from government companies and foreign sources, which is prohibited under Section 29B of RPA.

The amendments made to Companies Act 2013 were also flagged by the ECI. The amendment to Section 182 of the Act took away the restriction that contribution can be made only to the extent of 7.5% of net average profit of three preceding financial years, enabling even newly incorporated companies to donate via electoral bonds.

"This opens up the possibility of shell companies being set up for the sole purpose of making donations to political parties, with no other business consequence of having disbursable profits", said the ECI.

Also, the amendment to Section 182(3) abolished the provision that companies should declare their political contributions in their profit and loss accounts. Now, this requirement is diluted to only showing the total expenditure under the head. This would "compromise transparency" and could lead to the "increased use of black money for political funding through shell companies", the ECI said.

ECI had urged the Ministry to ensure that only profitable companies with proven track record should be permitted to make political donations. The ECI had informed the Ministry that these amendments will have "serious repercussions/impact on the transparency aspect of political finance/funding of political parties".

It has also taken a stand against the amendment to Foreign Contributions Regulation Act with permitted acceptance of donations from foreign companies with retrospective effect. "This would allow unchecked foreign funding of political parties in India which could lead to Indian policies being influenced by foreign companies", said the ECI.

The ECI added that it had suggested amendments to RPA Act to make reporting compulsory even for cash donations less than the existing limit of Rs.20,000, if the total cash contributions exceeds 20 crores or 20 percentage of total contributions, whichever is lesser. It further suggested that reports of contributions of political parties should be uploaded in the website of ECI. It had also suggested that anonymous contributions above or equal to Rs.2000 should be prohibited, instead of the present limit of Rs.20,000.

But the scheme was implemented without paying any heed to the concerns expressed by the poll body.

The petitions also raise the contention that the scheme was made into effect through amendments made to RP Act, IT Act and RBI Act through a money bill - the Finance Act. This is alleged to be a colourable exercise of the money bill provision in order to circumvent scrutiny by the Rajya Sabha.

The bonds can be bought for any value, in multiples of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh or Rs 1 crore. The name of the donor will not be there in the bond. The bond will be valid for 15 days from the date of issue, within which it has to be encashed by the payee-political party. The face value of the bonds shall be counted as income by way of voluntary contributions received by an eligible political party, for the purpose of exemption from Income-tax under Section 13A of the Income Tax Act, 1961.

The Centre claims that the schemes will bring in more transparency in political funding. The anonymity of the scheme was intended to protect the privacy of the donor, stated the centre.

Objections by the RBI

In 2017, before the BJP government introduced electoral bonds, it sought the RBI’s opinion as mandated by law. The RBI’s reply, recording its unequivocal opposition, said that electoral bonds and the amendment to the RBI Act would set a “bad precedent” by encouraging money laundering and undermining faith in Indian banknotes, and would erode a core principle of central banking legislation, as per a HuffPost report.

Electoral bonds, the RBI said, would effectively be a type of “bearer bond” — a notoriously opaque financial instrument that carries no trace of its ownership.

“Bearer instruments have the potential to become currency and if issued in sizeable quantities can undermine faith in banknotes issued by RBI,” the bank wrote. “The bonds are bearer bonds and are transferable by delivery. Hence who finally and actually contributes the bond to the political party will not be known.”

As per the HuffPost report, RBI’s concerns were summarily and swiftly dismissed by Hasmukh Adhia, who was then revenue secretary, in a single short paragraph on the same day the finance ministry received the central bank’s letter.

“It appears to me that the RBI has not understood the proposed mechanism of having pre-paid instruments for the purpose of keeping the identity of the donor secret, while ensuring the donation is made only out of fully tax paid money of a person,” began Adhia’s note to the secretary for economic affairs, Tapan Ray, and finance minister Jaitley.

Yet, rather than provide substantive arguments to counter the RBI’s concerns, his note revealed that the government had never been serious about RBI’s feedback to begin with.

“This advice has come quite late at a time when the Finance Bill is already printed.” Adhia wrote, despite the RBI responding on the first working day after it was asked for comment. “We may, therefore, go ahead with our proposal.”

On the same day, his colleague Tapan Ray agreed with Adhia. The file moved with lightning speed, and finance minister Jaitley signed off on it immediately.

Two days later, on February 1, 2017, Jaitley proposed the creation of electoral bonds, and the amendment to the RBI Act, as a means to introduce transparency and “cleanse the system of political funding in India”. The next month, the proposals passed into law with the passage of the Finance Bill 2017.