Why did we need electoral bonds? An attempt at an explainer

The Supreme Court has finished hearing arguments on electoral bonds and will hopefully tender a judgement soon. I say “hopefully” because it has now been six years since the scheme was introduced through the 2017 budget.

Many readers will not know the background to the institution of the bonds and what they are. This column will serve to explain the scheme.

In brief, electoral bonds allow unlimited, anonymous donations to any registered political party. The scheme also hands anyone with deep enough pockets — including foreign governments, criminal gangs and, of course, corporate interests — the ability to influence political parties, because parties accept money from them effectively in secret.

The process to fund a party anonymously was made very easy. Bonds would be available in denominations of up to Rs 1 crore at State Bank of India branches in 29 cities. A donor could purchase them through their bank account and hand them over to the party or individual of their choice, who could then encash them. They would be valid for 15 days.

The manner in which the scheme was introduced should have been enough to alert us to the fact that something was off from the start. Four days before the Budget of 2017, a bureaucrat spotted the scheme in then-finance minister Arun Jaitley’s speech, and noted that the assent of the Reserve Bank of India (RBI) was required for such a large shift. This was because the introduction of bonds required changes to the RBI Act, something that apparently the government did not know.

The officer drafted a proposed amendment to align the act with the change and sent the file up the ranks for the finance minister to see. The same day, 28 January 2017, a Saturday, the RBI was sent a five-line email seeking its comments.

The reply came on Monday, 30 January. The RBI said it was a bad idea because it went against the RBI’s authority as the sole issuer of bearer instruments, meaning cash. These bonds, because they were anonymous, could become currency and undermine the faith in India’s cash.

On this point, the RBI was unambiguous: amending the law to facilitate this ‘would seriously undermine a core principle of (the) central banking legislation and doing so would set a bad precedent’.

The second objection the RBI had was that ‘even the intended purpose of the transparency might not be achievable, as the original buyer of the instrument (the bond) need not be the actual contributor to the party’. If person A purchased the bond and then sold it, at face value or more, to any entity — including a foreign government — then that entity could gift it to a party. The nameless bond was as good as cash.

‘The bonds are bearer bonds and transferable by delivery,’ the RBI said, ‘hence, who finally and actually contributes the bond to the political party will not be known.’

The last point it made was that what was being proposed through the electoral bond scheme — the transfer of money from bank accounts of various entities to political parties — could as well be done through a cheque, bank transfer or demand draft: ‘There is no special need for, or advantage by, the creation of an Electoral Bearer Bond, that too by disturbing an established international practice.’

The man charged with steering the thing through the bureaucracy was Hasmukh Adhia, an IAS officer from Gujarat with a PhD in yoga. (He had earlier chaperoned the GST bill, and after he retired, Adhia was made chairman of the Bank of Baroda and chancellor of the Central University of Gujarat).

Adhia dismissed the RBI’s objections on two grounds. First, he said, “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 (the) fully tax-paid money of a person.” By this he meant that because the original purchaser had to acquire the bonds through their official account, it made the donation clean.

This was not, however, a response to the RBI’s specific objections. Adhia also said the 15-day time limit for redemption would mitigate against the RBI’s other fears, without explaining how.

Second, he said, “Also, this advice has come quite late, at a time when the Finance Bill is already printed.” It had actually come within hours of being sent for. It was hardly the RBI’s fault that the advice had not been sought earlier. This was clearly deceit, but Adhia concluded that “we may, therefore, go ahead with our proposal”.

His colleague, economic affairs secretary Tapan Ray, concurred with Adhia the same day, and on Wednesday 1 February, Jaitley announced the scheme, which became law with the passage of the Budget.

Asked by journalist Nitin Sethi of the Huffington Post (which carried a six-part investigation into electoral bonds, based on documents procured by RTI activist Commodore Lokesh Batra) why the government had ignored the RBI’s objections, the finance ministry said it had taken the decision “in good faith and in the larger public interest”.

At the stage when the law was passed, the details were not yet made public. This came in June 2017, when Tapan Ray revealed how the bonds would work in practice: “The information regarding purchaser and payee shall be kept secret by the issuer bank. These details would also be beyond the purview of RTI.” (Ray was made chairman of Central Bank of India after he retired in 2018, and in 2019, he was also made CEO and managing director of Gujarat International Finance Tec City.)

The next crucial body to say the electoral bonds scheme was dangerous was the Election Commission of India. In an affidavit to the Supreme Court, it said that to exclude the reporting of donations received by political parties through electoral bonds would have ‘serious repercussions on the transparency aspect of (the) political funding of political parties’.

Despite all of this, for the last six years, India’s politics have been funded anonymously. It is time to end this. But will the Supreme Court finally cast its vote in this matter quickly enough to impact the next set of elections?

Views are personal