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Electoral Bonds: How RBI Continues to be Pushed to the Brink by the Government

Revealing the Disconcerting Battle Between Donor Secrecy and Democratic Transparency and the Coercion of India's Central Bank in the Electoral Bonds Saga.

By Neeraj Thakur
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Electoral Bonds scam
Electoral Bonds scam | Digital Art | Courtesy: Special arrangement 

In the realm of financial governance, the autonomy and independence of a nation's central bank are pillars of stability and credibility. However, revelations surrounding India's Electoral Bonds (EB) scheme have brought to light a disconcerting narrative—a narrative that suggests that the Reserve Bank of India (RBI), the country's apex financial institution, was pressured and continues to be forced to bend under the weight of political influence. This unfolding story exposes a troubling aspect of India's democracy, where the government's interests seem to overshadow the principles of transparency and accountability, effectively undermining the integrity of free and fair elections. 

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As the nation grapples with questions surrounding the transparency and integrity of India's electoral funding system, a ray of hope emerges from the highest echelons of our judiciary. The Supreme Court has notified a 5-Judge Bench to deliberate on the contentious issue of Electoral Bonds. This crucial case is set to be heard on October 31, and its timing couldn't be more crucial. On Tuesday, a Constitution Bench of the Supreme Court will examine a series of petitions that challenge the very essence of the Electoral Bond scheme. The bench comprises Chief Justice of India DY Chandrachud, Justices Sanjiv Khanna, BR Gavai, JB Pardiwala, and Manoj Misra. Notably, the decision to refer the matter to this 5-Judge Bench was made on October 16, when a 3-Judge Bench, consisting of the CJI, Justice JB Pardiwala, and Manoj Mishra, recognised the gravity and significance of the issues at hand. 

As the nation's highest court gears up to address this controversial issue, an unsettling development emerged recently when the Attorney General for India, R Venkataramani in a statement filed before the Supreme Court in the Electoral Bonds case said that the citizens do not have the right to information under Article 19(1)(a) of the Constitution pertaining to the funding of political parties. In doing so, the Attorney General has forcefully rebuffed the argument put forth by the petitioners, who stand in opposition to the Electoral Bonds scheme. These petitioners contend that citizens have a fundamental right to know the sources of funding for political parties.

These developments cast a revealing light on the priorities of the government. It vividly illustrates how the government has chosen to elevate the secrecy of donors making contributions to political parties as a priority, even at the expense of safeguarding the public's right to information. In the following story, it becomes evident that it is not just now but right from the beginning - to be precise from 2017 itself - the government has been trying to protect the anonymity of donors over upholding the principles of transparency and accountability in the electoral funding process. In this process, the RBI has been subjected to humiliation and undue pressure. Its well-considered suggestions and recommendations, aimed at upholding transparency and accountability in the Electoral Bond scheme, appear to have been casually disregarded and tossed aside. The disregard for the RBI's reservations and insistence on issuing Electoral Bonds in a manner that the central bank cautioned against raises serious questions about the respect for institutional autonomy and expertise. It also underscores the profound influence exerted by political considerations over prudent financial governance.

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In 2017, India witnessed a development that sent shockwaves through its democratic foundations - the introduction of the Electoral Bond scheme. This controversial move was tucked away within the folds of the Finance Bill, 2017, during the Union Budget for 2017-18. Then Finance Minister Arun Jaitley, in his proposal, sought to amend the Reserve Bank of India Act to pave the way for the issuance of Electoral Bonds for the purpose of political funding. Moreover, to make matters worse, political parties were granted exemption from paying income tax on the funding they received. This marked the beginning of a dark era of massive political corruption in India.

The EB scheme was presented to the public as a means of promoting transparency in political funding. However, what unfolded in reality was far from this lofty goal. Instead, it became a tool that threatened the very essence of democracy in the world's largest democracy. 

One of the most alarming aspects of the EB scheme was the secrecy surrounding it. Donors could purchase these bonds anonymously, leaving the citizens in the dark about who was financing their elected representatives. It allowed for powerful interests to influence the political landscape without accountability, ultimately undermining the democratic principles.

While the Electoral Bond scheme was introduced in 2017, its true impact didn't materialise until the Department of Economic Affairs officially notified the scheme in 2018. Since then the country witnessed a disturbing nexus between money and power with massive amounts of undisclosed funding flowing into political coffers.

“The main issue is that these are completely opaque. The EBs are being sold by the State Bank of India under its 29 branches across the country. Who buys it and which party gets the money? We don’t know. That is the whole issue. In a democratic country, we don’t know as citizens where our political parties are getting their funds. This opaque nature of the EBs has been damaging our democracy”, states Commodore Lokesh Batra, one of India’s foremost transparency activists.

The introduction of India's Electoral Bond scheme was shrouded in controversy right from the beginning and has raised serious concerns about the government's intent, particularly in its potential for massive, large-scale corruption. This intent becomes especially evident when examining the timeline of events surrounding the scheme's inception.

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On September 14, 2017, the then Governor of the Reserve Bank of India (RBI), Dr Urjit Patel, expressed the RBI's preference for issuing Electoral Bonds in dematerialized (demat) form. Patel's suggestion for demat bonds was grounded in the principles of transparency and accountability. However, this advice seemed to have fallen on deaf ears.

In a letter dated September 14, 2017, Dr Patel told the then Finance Minister Arun Jaitley about the RBI’s preference for digital transactions for Electoral Bonds as opposed to physical transactions. In the letter, Patel notes: “We are concerned that the issue of EBs as bearer instruments in the manner currently contemplated has the possibility of misuse, more particularly through use of shell companies. This can subject the RBI to a serious reputational risk of facilitating money laundering transactions… For these reasons, we are keen that we put in place a robust system that minimises the reputational risk. We, therefore, brainstormed this feature in the Senior Management Team and came to the conclusion that issuing EBs in a digital form will be a superior method.”



Letter dated September 14, 2017, written by the then RBI Governor Dr Urjit R Patel to the then Finance Minister Arun Jaitley stressing the need for digital transactions of EBs as opposed to physical transactions

In another letter dated September 27, 2017, Patel wrote to Jaitley, highlighting the RBI's concern over the government's decision to amend Section 31 of the RBI Act, despite the bank's recommendations to the contrary. Patel's letter provides a stark warning: "Now that the RBI Act has been amended, the government should in the least not authorise any other institution to issue EBs."

What is particularly alarming is Patel's assertion that issuing EBs in scrip form posed a significant risk of money laundering. He pointed out that the transfer of scrips from the original subscriber to a transferee, and subsequently to a political party for encashment, would all be conducted in cash, leaving no transaction trail. “In the process of providing anonymity to the contributor to the political party, anonymity will be provided to several others in the chain of transfer of EBs. This can render the scheme open to abuse by unscrupulous elements," wrote Patel.

Patel also noted that the moment the proposed scheme of EBs in scrip form is operationalised, there would be a possibility of that helping black money to be laundered and this would invariably expose the government and the RBI to adverse public criticism and consequent loss of goodwill for both. He asserted that the EB scheme as proposed by the government will not only be seen as facilitating money laundering but on the contrary it will be seen as intended to enable it. 

In a curious turn of events on October 5, 2017, the government defended its decision to issue Electoral Bonds in physical bearer bond form by arguing that the demat form would compromise the scheme's fundamental feature - the anonymity of donors in relation to political parties. In a letter written by Subhash Chandra Garg, Secretary, Department of Economic Affairs to RBI Governor Patel, Garg notes: “It is considered view of the government that EBs in demat form will take away the key feature of the scheme to provide anonymity of the donor vis-a-vis political parties. The fact that information of this aspect will be with the bank, would make the scheme a non-starter… It has been decided that the issuance of such bonds would be in the form of physical bearer bond form only.”

This stance raised significant questions about the government's priorities. It appeared that the administration was more concerned with safeguarding the secrecy of donors making contributions to political parties than with upholding the citizens' right to transparency regarding the funding sources of these parties. This perspective underscores a troubling aspect of the EB scheme: a seeming disregard for the principles of open democracy. The citizens of a nation have a legitimate interest in knowing who is financially supporting the political entities they vote into power.


Letter dated October 5, 2017 written by Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance to RBI Governor Dr Urjit R Patel 

The intense pressure on the RBI to align with the government's agenda was unmistakable, reaching a point where, in a handwritten note dated September 29, 2017, Garg, expressed in very terse words: "RBI has again emphasised the need for issuance of Electoral Bonds in demat form. This aspect was clearly addressed in DO reply from Secretary EA to Governor RBI that EBs in demat format only may take away a key feature of the scheme to protect the identity of the donor. The fact that information of donor and donee is with RBI will raise apprehensions and make the scheme a non starter.... Hence repeated apprehensions voiced by RBI appears to be a bit anachronistic at this stage. Anyways, Section 31 of the RBI Act has now been amended and it is the government's prerogative to notify the scheme for issuance of EB. The RBI is duty bound to provide detailed modalities to make the scheme operational as per the scheme notified by the government".


Handwritten note dated September 29, 2017, by Secretary, Economic Affairs, Subhash Chandra Garg calling the RBI’s approach “anachronistic” over Electoral Bonds.

This note once again highlights a significant tension between the RBI's commitment to accountability in the electoral bond scheme and the government's apparent prioritisation of donor anonymity over the citizen’s right to know. 

What is truly shocking is that despite the RBI expressing its reservations about issuance of electoral bonds in the form of physical bearer bonds, thousands of crores of electoral bonds have been issued between 2018 and 2023 using the very same method which the RBI cautioned the government against. Commodore Batra took it upon himself to uncover this information. After obtaining responses to his Right to Information (RTI) queries, he accessed critical documents from both the Ministry of Finance and the State Bank of India.

The information he acquired has been meticulously compiled under 27 different phases, commencing from Phase 1 in March 2018 and extending to the most recent Phase 27 in July 2023. Astonishingly, it has been revealed that over these 27 phases, a staggering total of 13,791 crore, 89 lakh, and 79 thousand Electoral Bonds were sold. What's particularly noteworthy is that a staggering 94.251 percent of these bonds sold had a denomination of 1 crore each.

The government's attempt to influence and bend the central bank to its will in the matter of electoral bonds can be attributed to a complex interplay of political and financial interests. Electoral Bonds, as a method of political funding, provide a certain level of anonymity to donors. This anonymity can be appealing to those who wish to make substantial contributions to political parties without disclosing their identities. By maintaining this secrecy, political parties can receive large donations without the potential scrutiny that might accompany full transparency. This is particularly beneficial for ruling parties, as it allows them to tap into significant financial resources discreetly.

According to the analysis of the Association for Democratic reforms (ADR), the ruling BJP has gained significant financial advantage through the use of electoral bonds. Professor Jagdeep S. Chhokar, founding member of the ADR, states that the Electoral Bond scheme raises critical questions about its compatibility with the fundamental principles of a democratic system. "Free and fair elections are a part of the basic structure of the constitution. the legislature cannot legislate anything which will impede free and fair elections. So, this is completely unconstitutional and therefore the entire EB scheme has to be scrapped. Why should the identity of the donor be a secret? There has always been an apprehension that when this scheme was launched, it had the potential of choking funding to all opposition parties except the ruling party, whichever may be the ruling party. That apprehension has been proven correct repeatedly as BJP gets almost 70 percent of the donations. All other political parties put together get about 30 percent. So, how can you call this a fair system? The government is more interested in protecting the rationale for quid pro quo.”

Such a dominant share of electoral bond funding for a single political party raises several important questions and concerns. It points to a significant financial advantage that the BJP has enjoyed over other parties, potentially affecting the level playing field in Indian politics. It also underscores the need for transparency and accountability in political funding, as the source and intent of such substantial contributions may come under scrutiny.

“The conversion of black money into white has been legalised using the EB scheme. The gates have been opened for dubious money from foreign countries to come into shell companies in India and be donated to political parties thereby completely jeopardising the security and the integrity of the nation. Therefore the judiciary must step in and take a stand before it is too late,” cautions Prof Chhokar.

Given these factors, it becomes evident why the government may have sought to bend the central bank to its preferences. Ensuring that the Electoral Bond scheme continued to function in a way that protected donor anonymity and facilitated significant financial contributions to the ruling party would have been advantageous from a political standpoint.

However, this advantage comes at the expense of transparency and accountability in the political funding process. It raises concerns about the integrity of the electoral system and the influence of money in politics, as well as the potential for financial imbalances among political parties.

In the unfolding saga of India's Electoral Bond (EB) scheme, one thing remains clear: the tussle between secrecy and transparency, between political interests and democratic principles, continues to cast a long shadow over the nation's electoral funding system. As the Supreme Court gears up to hear the case, it stands at a critical crossroads where the future of transparency and accountability in Indian democracy hangs in the balance.

(With additional inputs from Inderpal Singh) 

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