Amendments to People's Act, unrestrained corporate funding: ECI, RBI's past objections to electoral bonds

In a momentous ruling on Thursday, the Supreme Court scrapped the Electoral Bonds Scheme, which was instituted on January 2, 2018, as a discreet means for political party contributions. The court deemed the scheme "unconstitutional" due to its infringement on citizens' right to information and the potential for quid pro quo between large corporations and political entities.

The verdict was delivered by a five-judge bench led by Chief Justice of India Dr D Y Chandrachud, and comprising Justices Sanjiv Khanna, B R Gavai, J B Pardiwala, and Manoj Mishra. The decision marks a pivotal moment in the nation's legal landscape, emphasising the importance of transparency in political financing.

The Electoral Bonds Scheme encountered formidable opposition during its conception from two influential institutions—the Reserve Bank of India (RBI) and the Election Commission of India (ECI). While their concerns varied, a shared apprehension regarding the prevention of money laundering united their stances.

ECI's contentions

The primary objection raised by the Election Commission of India (ECI) against electoral bonds was their perceived negative impact on the transparency of political finance and funding for political parties. In May 2017, the ECI communicated its concerns to the Ministry of Law and Justice regarding amendments introduced by the Finance Act 2017 to the IT Act, the Representation of the People Act, and the Companies Act.

1.Exclusion from contribution report: The ECI criticised the amendment exempting political party donations received through electoral bonds from reporting under the Contribution Report, as outlined in the Representation of the People Act 1951. The ECI considered this change a backward step in terms of donation transparency and recommended its withdrawal.

2.Deletion of disclosure provision: The ECI objected to the removal of a provision in the Companies Act that mandated companies to disclose details of the amounts contributed to specific political parties. It suggested that companies should be required to declare party-wise contributions in the profit and loss account to uphold transparency in the financial funding of political parties.

3.Reintroduction of corporate funding cap: The ECI recommended reinstating the previous provision that imposed a cap on corporate funding, expressing concerns that unlimited corporate funding could lead to increased use of black money for political funding through shell companies.

RBI’s objections

During multiple rounds of discussions between the Reserve Bank of India (RBI) and the Finance Ministry regarding electoral bonds, the RBI raised significant objections to the proposal.

1. Issue of bearer instruments: The RBI opposed the amendment allowing other banks to issue electoral bearer bonds, asserting that it could lead to multiple non-sovereign entities issuing such instruments. This, according to the RBI, could undermine its exclusive authority to issue bearer instruments, potentially eroding public trust in central bank-issued currency.

2. Violations of the Prevention of Money Laundering Act 2002: While the purchaser's identity was to be known due to the Know Your Customer (KYC) requirement, the RBI highlighted that the identities of intervening persons/entities would remain undisclosed. This non-disclosure raised concerns about violating the principles of the Prevention of Money Laundering Act 2002.

3. Alternative payment methods: The RBI questioned the necessity of introducing a new bearer bond, arguing that the intended purpose of using tax-paid money for electoral contributions could be achieved through existing methods such as cheques, demand drafts, and electronic payments.

4. Risk to financial system credibility: Expressing apprehension, the RBI insisted on being the sole authority to issue electoral bonds, emphasising that permitting commercial banks to do so might negatively impact public perception of the scheme and undermine the credibility of India's financial system. The RBI cautioned against the misuse of bearer bonds by shell companies for money laundering transactions, as well as the risk of forgery and cross-border counterfeiting if issued in scrip form.