Electoral Bonds

Introduced with the Finance Bill 2017, the Electoral bonds are instruments/securities that are used to donate funds to the political parties. The Electoral Bonds were notified in the year 2018. These bonds are on the lines of bearer bonds or promissory notes wherein the issuer (bank) is the custodian and pays the one who holds the bonds (political party).

Electoral Bonds – Introduction

Context: The present government continuing their war against both the problems (black money and corruption) has proposed a set of reforms related to political funding like issuing of Electoral Bonds.

The features of electoral bonds and the process involved are:

These bonds are issued by notified banks.
The donor may approach these banks and purchase the bonds.
The donor shall be permitted to buy the bonds through cheque/digital payment. Hence the identity of the donors is protected (if the donors are identified, they may get caught up in political rivalry-especially if the donor is a businessman).
The donor donates these bonds to the political party.
The political party has to encash it into the account which is registered with the Election Commission of India.

Importance of the Electoral Bonds

They ensure that the funds being collected by the political parties are accounted for money or clean money.

Concerns with respect to Electoral Bonds:

Even though the Electoral Bond Scheme acts as a measure against the old under-the-table donations since bonds are through cheques and digital paper trails of transactions, there are many key provisions of the scheme that are causes of concern.

Anonymity: There is no obligation on the part of the donor (individual or corporate) or the political party to reveal from where the donations come from.

Transparency: It will also go against transparency, a fundamental principle in political financing. Companies will no longer have to declare the names of the political parties to which they have donated, so shareholders won’t know where their money has gone.

There are possibilities of making electoral bonds a convenient channel for black money. The following provisions are controversial in that sense:
- Doing away with the 7.5% cap for corporate donations.
- No need for companies to reveal their political contributions in their profit and loss statements.
- The requirement that companies should be in existence for 3 years before making political contributions undermines the scheme’s intent. This makes it easy for dying, troubled or shell companies to make an unlimited donation anonymously.
Since the bonds are bought through the State Bank of India (SBI), the government is always in a position to know who the donor is. This asymmetry of information threatens to favour whichever political party is ruling at the time.
The Election Commission of India had asked that the limit for reporting the donations (which is Rs 20000) should be brought down to Rs 2000, but instead, the government has reduced the maximum contribution by cash to Rs 2000.
It could become a convenient channel for business to round-trip their cash parked in tax havens to political parties for a favour or advantage granted in return for something.

Drawbacks of Electoral Bonds

The RPA (Representation of People Act 1951) although makes it mandatory for the political parties to disclose donations over Rs 20000, there is no law which prohibits these parties from disclosing the donations below Rs 20000 but the parties lack political will hence do not disclose
The political parties have regularly delayed submitting the audited reports to the ECI. As per ADR between 2011-2015
- BJP has delayed the submission on an average by 182 days
- Congress by 166 days
- NCP by 87 days

Worse is the fact that some political parties do not even file the returns. There is little to show that action has been against these parties who have either delayed or not filed the returns.

The political parties can continue to collect the funds through cheque and digital payments (but will have to file returns to the Income Tax authority)

Hence there are some concerns associated with the usage of electoral bonds. Then, what is the way out of this?

As per T S Krishnamurthy (Former CEC), the government will not know how many times, the bond has been sold in the market before being encashed by the political party. So it would be better if an Election Fund is set up by the EC and donations to various political parties are collected by ECI (with compulsory PAN number)
The above suggestion of setting up of election fund has been given by Indrajit Gupta Committee

Electoral Bond – Electoral Trust

Is a section 25 company (as per the companies act 2013, it has been referred to section 8 company)
The sole purpose of this is to collect donations on behalf of a political party and then route it to the concerned political party
The CBDT has issued operational guidelines for the Electoral Trust in 2013
These will not only bring transparency from the donor side but will also from the receiver side (political parties)
So far more than a dozen trusts have opened up, but the objective with which they had been set up is not being achieved-
- The funds that are routed through trusts is a fraction of the total donations received by the political parties (there are more than 1800 political parties in India as per ECI)
- Few trusts are disclosing the contributions (only 5 trusts disclosed donations in 2014-15)

Electoral Bond – What is Section 25 company (or Section 8 Company)?

Is an entity registered under section 25 of The Companies Act 1956
US 25 allows the formation of a company involved in charity without having to set up a Trust or a Society, which will exist as a legal entity but the catch is any company set up under this section must utilize/re-invest all income towards achieving the same objective, i.e. unlike a regular company no money will go out of the company either in the form of profits or dividends.

Advantages

Very easy to set up
Minimum capital requirements are not applicable.
Much easier to run – easy to join the board of directors, the minimum quorum to conduct the board of directors meeting, etc.
Tax benefits are provided