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India

Electoral Bond Scheme In India, Decoding The Funding

For this eligible political party is one that is registered under Section 29A of the Representation of the Peoples Act, 1951 and secured not less than 1% of the total votes polled in the last General Election to the Lok Sabha or to the Assembly Constituency.

(Image used for representational purpose only)
(Image used for representational purpose only)

Electoral Bond Scheme was introduced as a new way of funding for the political parties in India in 2017 Finance Bill and was notified on Jan 2, 2018.

What are “Electoral Bonds”?

It is a bond issued in the nature of Promissory note, which shall be bearer in character, (i.e., record of the ownership of the security is not maintained, only physical possession of the security is the sole source determining ownership and thus not possible to trace ownership at any point of time) used for funding eligible Political Parties.

For this eligible political party is one that is registered under Section 29A of the Representation of the Peoples Act, 1951 and secured not less than 1% of the total votes polled in the last General Election to the Lok Sabha or to the Assembly Constituency.

Using this individuals as well as corporations incorporated in India can make donations to the political party of their choice.

These bonds are issued in denomination of Rs.1, 000, Rs.10, 000, Rs.1 lakh, Rs.10 lakhs and Rs.1 crore.  These are to be issued for a period of 10 days in the months of January, April, July and October and additional 30 days are provided during an election year.

There is no limit on the number of bonds bought by a person or a corporation. These bonds can be bought and encashed only from the SBI Bank designated branches using a KYC-compliant bank account, with no upper limit on the donation amount. Political parties can encash the bond within 15 days. The identity of the donor is anonymous but known only to the bank.

The amount of bonds that are not encashed within the validity period of 15 days shall be deposited by the authorized bank to the Prime Minister Relief Fund (PMRF).

The Electoral Bond Scheme was introduced through the Finance Acts of 2016 & 2017, which amended 4 legislations which governs Elections Finance in India: Foreign Contribution Regulation Act, 2010 (FCRA), Representation of People Act, 1951 (RoPA), Income Tax Act, 1961 and the Companies Act, 2013.

Amendments in the Acts Governing Financing of Elections in India:

According to Section 182 of the Companies Act, 2013 “Companies can contribute directly or indirectly to the political parties, section 182 (3) states that the company shall report in its profit and loss account, the details of the contributions that they have made in a certain financial year.”  

Before 2017, companies were restricted to use only 7.5% of the net profit of the past 3 preceding financial year and must disclose this amount and beneficiary party, but an amendment in 2017 made it possible for companies to contribute any amount of money, without limit, to political parties. Even the requirement for such firms to have existed for the last 3 years on a profit-making basis has been done away with. The implication of this has been that even loss-making companies can be used to purchase electoral bonds.

Before the Electoral bonds political parties were funded through Electoral Trusts. Electoral Trust is a non-profit organization formed in India for orderly receiving of the contributions from any person. These trusts brought in transparency as these were submitting annual reports containing details of donations.

We can see that donations through Trust were not much but with the electoral bonds the donations increased significantly.

Amendment also made to RP Act, 1951. Under section 29C of the Representation of the People Act, 1951 (RP Act, 1951), “it is the duty of the political party to disclose the donor’s name to the Election Commissioner when the amount exceeds Rs.20, 000. These donors may be individuals or private companies. However, the RP Act was amended in 2017 and according to the new direction “this subsection shall not apply to the contributions received through electoral bonds.”

According to Section 13A of the Income Tax Act, 1961, the political parties are allowed to not include the income they have received  via house property, capital gains and  contributions, under total taxable income if certain conditions like maintenance of account books, auditing of books, maintaining books for the funding in excess of Rs.20,000 (this does not includes funding via electoral bonds) are met and have not received donations exceeding Rs.2000 other than by cheque or bank draft or electronic means.

So, Government brought in an amendment to the Section 13A of the IT Act which now says that all parties will have to declare all donations above Rs.2000 to obtain tax exemption but did not amended Section 29 C of the RP Act, to reflect the same. This has resulted in a situation where a political party declares donations below Rs.2000 to IT department for tax exemption but do not declare the names of donors to Election Commission. Thus, public cannot access the names of entities who have donated more than Rs.2000 to a political party.

Coming down to Foreign Contribution Regulation Act, 2010 (FCRA). This act was re-enacted in 2010 replacing the 1976 version. According to this act a foreign source meant a company who’s more than 50% of the share capital is owned by a foreign entity. But with the Finance Act, 2016, this definition was altered by inserting a provision that “if a company is compliant with the prescribed limits under the Foreign Exchange Management Act, 1992, it would not be considered a foreign source under FCRA despite its share capital being owned by a foreign entity to the extent of more than 50%.

This change of definition had ramifications for the RP Act, 1951. Section 29B of the RP Act states that “no political party shall accept funding from a foreign source”, but with this amendment any political party can accept donation from any company that has more than 50% foreign control if it adheres to FEMA prescribed sectoral limits of investment.

So, Foreign Exchange Management Act, 1999 (FEMA) becomes important as it is indirectly regulating foreign contributions to political parties. It was enacted to manage the foreign exchange. Along with this it also deals with foreign securities such as bonds and shares of companies.

The Indian government, under FEMA, releases the FDI policy where the limits of foreign control are specified and these limits are termed as “sectoral caps”. For example, in the Defence Sector, a company’s share capital can be held by foreign entity up to the extent of 74%, and post that, government’s approval is needed to increase the share ownership. In the Digital or News & Current Affairs Streaming the limit is 26%, that too, with the approval of the government. So, if company adheres to these limits in FEMA they cease to be a foreign source under FCRA and thus become eligible to fund political parties under RP Act, 1951.

This has opened the gateways for foreign companies to have a say in Indian policy making, which can have negative consequences.

Issues with the Electoral Bonds:

  • These Electoral Bonds were introduced through the Finance Act 2017, which was passed as a Money Bill. This was dubious as the bill was passed without the concurrence from Rajya Sabha and solely based on the strength of incumbent government in the Lok Sabha.
  • Since big corporate or individuals donate huge amounts through electoral bonds, politicians become more dependent on them. This dependence of political class on the rich for political funding will skew elections in favour of top 0.1% of the population. Eg: According to report from WIRE, Germany is the only EU country that has not banned cigarette advertisements. This is because all political parties gets funds from cigarette companies.
  • Moreover it infringed the citizen’s fundamental “Right to Know”. Since, the electoral bonds are given by hand to the concerned political parties, thus they know how much, which person or corporation is giving and present day Govt. can demand data from the SBI. Thus, implies that only people who are kept in dark are the taxpayers.

Even the ECI stated on record “that any donation received by a political party through an electoral bond has been taken out of the ambit of reporting is a regressive step and needs to be withdrawn.” ECI further stated that without disclosure of names and addresses it can never be ascertained whether the political party had taken donation from government companies and foreign sources.

Relation between Electoral Bonds and Elections Inflation:

PhaseDatesDuration in DaysNo. of Bonds SoldValue of Bonds (Rs in Crore)No. of Bonds RedeemedValue (Rs in Crore)
Seven1st January to 10th January, 201910937350.4936350.4
Eight1st March to 15th March, 20191527421365.727381364.7
Nine1st April to 20th April, 20192046812256.446072251.3
Ten6th May to 10th May, 201951187822.31153819.3
Eleven1st July to 10th July, 20191010145.410145.4
Twelve1st October to 10th October, 201910531231.9531231.9
Ninteen1st January to 10th January, 20221020681213.220631212.9
Twenty1st April to 10th April, 202210811648.5811648.5  
Twenty first1st July to 10th July, 202210480389.5475389.5
Twenty second1st October to 10th October, 202210741545.25738542.3  

Source: ADR & Media Reports
From the data as provided by Commodore Lokesh Batra (Retd.)  and ADR, we can see that there is clear relation between elections and sale of electoral bonds. It can be seen that before state assembly elections and Lok Sabha elections the sale of these bonds increases. But the most significant sale of bond can be seen during the 2019 Lok Sabha elections which was won by BJP. This was also the watershed year for elections in Indian democracy as record money was spent by political parties on elections.

The 2019 Lok Sabha elections were the first countrywide elections that took place after the starting of “Electoral Bond Scheme”.  From the table below it can be seen the biggest beneficiary of these bonds was BJP which also won the elections.

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According to Audit reports of political parties for FY 2019-20, 18 recognized parties declared receiving a total of Rs.3441.32 crore from donations via electoral bonds. Out of this BJP declared receiving 2555 crore (74.25% of the total declared bonds) from electoral bonds with the nearest rival, i.e. INC receiving only Rs.317.86 crores (9.2%).

So, it can be said that the “Electoral Bonds” have started playing an important role in the Indian elections and with time their role will become more prominent. So, any decision regarding their regulation needs to be taken after much consideration.

Source:

  1. SBI FAQs on Electoral Bond Scheme (https://retail.onlinesbi.sbi/documents/FAQs.pdf)
  2. https://www.indialawjournal.org/electoral-bond-scheme-the-paragon-of-paradoxe.php
  3. ADR Report on Electoral Bonds and Opacity in Political Funding (https://adrindia.org/sites/default/files/Background%20Note_Electoral%20Bonds_June%202022.pdf)
  4. https://adrindia.org/sites/default/files/Electoral_bonds_oct22.png
  5. https://adrindia.org/sites/default/files/Background%20Note_Electoral%20Bonds_June%202022.pdf
  6. https://www.orfonline.org/expert-speak/financing-elections-india-scrutiny-corporate-donation-49750/