Electoral bonds: Buyers may not have paid for bonds themselves

Company X, a cash-rich and diversified entity, decides to donate Rs 100 crore to a political party. It does not, however, want to show this amount in its accounts. Under the electoral bonds scheme, the company need not disclose the names of the party or parties it is donating to, but still has to disclose the total amount of such donations in its books. It does not, however, want to be in the picture. 

What can it do? Identify several smaller companies and persuade them to buy electoral bonds on its behalf. These smaller companies disclose the amounts in their books and claim income tax exemption on them. They also hand over the electoral bonds to Company X and are paid for them, possibly with a proportionate commission as well. The amount is arranged from shell companies, by showing the amount as loan and so on. In due course, they can be written off as well. 

The electoral bond certificates are then handed over to the political party by Company X, which demands its pound of flesh — a policy tweak, a licence, or concessions. In its books, there is no mention of electoral bonds and neither auditors, nor the income tax department, nor investigating agencies get a whiff of the bonds it has paid for. 

Is this too far-fetched an example? Possibly, but why else did the government then repeatedly turn down the Reserve Bank of India’s pleas that electoral bonds be issued electronically in demat format by the RBI? As official file notings have revealed, the RBI had also offered to incorporate features which would ensure the anonymity of the donors, which was and still is the government’s key concern.

This aspect was highlighted on the second day of arguments in the Supreme Court on Wednesday as a five-judge Constitution bench continued to examine petitions challenging electoral-bonds.

Heading the bench, Chief Justice of India (CJI) DY Chandrachud observed, “The problem with the scheme is that it's not completely anonymous. It's not confidential for the SBI and the law enforcement agency. So a large donor would never take the risk of buying the EB. Big business owners will never place their heads on the line.” 

All that the large donor has to do is "disaggregate the donation, get people who will purchase electoral bonds with small amounts", the CJI went on to observe. The bench noted the argument that the buyer of the bonds may not be the actual contributor.

It was pointed out by the petitioners on the first day of hearing that the Companies Act had been amended several times. Between 1969 and 1985, companies were not even allowed to make political donations. When the act was amended, restrictions were placed and it was stipulated that only three-year-old companies could donate, not fly-by-night shell companies. There were disclosure clauses and restrictions on how much the companies could donate. 

In 2009, the act was amended to make provision for electoral trusts. Five or more companies could form an electoral trust and make donations to the trust and the common pool. The trusts then distributed the amount among different political parties. The electoral bond scheme, supposedly an electoral reform, has done away with the trusts.    

The anonymity of donors, the petitioners held, was problematic and the bench agreed that the scheme is only partially confidential. Justice Sanjiv Khanna observed, "The problem is that... Opposition parties do not know who is making the contributions to the ruling party, but the ruling party through law enforcement agencies will know who is contributing to them and that is where the level playing field is getting disturbed. That is what they are contending."

Solicitor-general Tushar Mehta, who stoutly defended the scheme on Wednesday and maintained that electoral bonds had ensured "cleaner" and accountable money to fund political parties, will resume his arguments on Thursday.

The solicitor-general has not yet explained why the government has not yet converted the bonds from physical scrips to the digitised demat format.