Electoral bonds: Progress or pitfall?

There are broadly two ways of looking at the Electoral Bonds (EB), a) whether they are an improvement over the status before the EB were introduced, and b) how far away they are from an ideal in a system with many other non-idealities. This article covers the first perspective. The article is not a defence of the Donor (buyer of EB), or the Recipient (seller of Eb/political party). Readers are advised to research and update the numbers & data on their own, as some of the information is not available readily, and some are estimates.

Situation before the introduction of EB: 1)Rules: There are many rules governing elections, some of which are stated here. The maximum expenses allowed for a Lok Sabha (LS) candidate is Rs 95L (2024). This limit has no connection with ground realities. As an example, compare it with the communications budget alone for even the relaunch of a mid-size brand, which is several multiples more than Rs. 95L. Expenditure by political parties does not have a limit. Any donation above Rs 20,000/must have the name & address of the donor, and up to Rs 2,500/- can be donated by cash. Both expenses & collections are reported to the Election Commission (ECI), and available in public. 2) Actual Expenditure: The estimated expenditure by political parties in the 2019 LS elections is reported at about Rs 60,000 cr. Estimated expenditure for 2024 elections ranges up to Rs 100,000 cr, of which spending by the government is a small fraction. Including estimates for the plethora of elections between the two LS elections, the total expenditure in 6 years from 2018 to 2024 is about Rs. 200,000 cr. Given the rules on per candidate spending, and actual ground reality on expenses, a candidate would have little choice but to fudge election expenses. As a consequence of fudging expenses, the candidate (& hence the party) would have to fudge the collections. Therefore, below the radar funds are inevitable and often in cash. 3)Collections: Declared collections by political parties over 2018 to 2024 are estimated at a small fraction of what is estimated to have been spent. Of the collections which are declared by the political parties, about 70% are declared as collected from “Unknown Sources”. 4)Process: The key participants in the funding are a) Donor, b) Intermediary, c) Channel, d) Recipient party. Donations are channelled in Cash for a) where the donations are not declared b) donations are declared but source is not known. Process for majority of the donations is shown later.

Situation after the introduction of EB: 1)Rules for Bonds: EBS came effectively in 2018, by an act of Parliament. This act guaranteed anonymity to the Donor for a very long period. The matter came to the Supreme Court (SC) soon after introduction, which did not a stay on the EBS, saying at that time that the anonymity was subject to review. Effectively, the law of the land until 2024 was that the Donor identity would remain confidential. EBS could be purchased by a Donor or encashed by a Party only using bank accounts in their names in State Bank of India (SBI). SBI has submitted that it has done full KYC on the Donors & Recipients. It was obligated not to reveal, intentionally or by accident, the details of which Donor donated how much, and to whom. EB were purchased only from SBI, in short windows of 14 days each, about 3 times every year. The bonds would expire if not donated to a party within this window and encashed. SBI reported the details of which political party encashed how many EBS and their value to the Election Commission (ECI) periodically. ECI put up this information on its website. Hence which party was receiving how much through EBS was public knowledge from 2020 onwards. 2)Donations: Donations through EB were tax deductible (like many donations are), and not limited by the profits of the corporate. Corporates often manage donations through specific departments. In case of very large entities a proliferation of such departments would then be required, hence such very large entities set-up companies/spvs to manage such interfaces. These SPVS may not be in any business, and hence the profit of such entities may not be a constraint for the amount of donations. Donations not limited by profits was a deficiency in the EB system, and perhaps this exception could have been made available only to specific SPVS set up for the purpose of managing corporate donations. From April 1, 2019 to Feb15, 2024, total donations were cumulatively about Rs. 12,145 cr. This is about only 6% of the estimated total expenditure (Rs 200,000 cr). Therefore at least 90% of the donations to parties came through means other than EB, including from undeclared or unknown sources All major parties received donations through the EBS, and arguably in proportion to their presence across the country, with some notable exceptions. Therefore, EB cannot be said to have resulted in illicit financing of elections, or swinging electoral outcomes because of their introduction. 3)Donors: They were a combination of corporates and wealthy individuals. Only a few of the very large corporates donated through EBS, except for very small token amounts through SPVS or companies set-up for these purposes. If EBS are assumed to be a primary means of funding, then it would imply that these very large corporates were not making donations to parties, which is counterintuitive. Similarly, it is very hard to believe that corporate entities started donating only after the EB scheme came, or that the donations through the EBS represent a significant share of such donations. Anonymity of Donors protected them from the very real risk of competitive harassment by parties and others demanding donations. This is a common & hard reality at ground level. 4)Process for EBS: SBI reportedly encoded each EB on the back page with an alpha-numeric code which could be read only under UV light of a particular frequency range. Information on Donor-bond and Receiver-bond were kept in different silos. No manual or electronic records connecting the two were allowed. Importantly, Purchaser & Receiver of EBS (the Donor) opened a bank account with KYC with SBI, as did the Receiver (Party). Proceeds were paid to the Receiver into the designated bank account. The process before the EBS is compared with the process after introduction of EBS for the donations in a flowsheet.

5)Allegations of Corruption: Would participants in corruptions make payments directly from Giver to Receiver, that too through banks, and on top of that with clear KYC of both parties on record? Corruption is routed through intermediaries who are difficult to link, and most often with cash as the vehicle. The alternative mode seems to be to donate indirectly by defraying expenses. A common form of corruption in large parts of the world is by skimming, i.e., diverting a proportion of government spending. The total amount of government spending in India, the proportionately very small amounts donated through EBS, the risk associated with EBS with KYC on record in a bank transaction, the fact that the SC was already cognizant of the EB matter, all these together suggest that EB may not have been the primary route for corruption. No dramatic form of extracting donations would be needed. Of the more than 3000 entities which have been investigated by government agencies, only 26 (less than 1%) seem to have used the EB for donations. 37% of these donations were to the ruling party, and 63% of donations to the opposition. The cause-effect relationship of investigation-donations does not seem to be strong. In any case, a common fallacy is that correlation is often confused as causation i.e., cause-effect without meticulous substantiation. Specific cases should, of course, be examined.

The current status is that EB are now unconstitutional with the “Right for Information to Donor identity” considered more important than the “need to curb black money”. This is 6 years after the scheme started and participation by several Donors to whom parliament assured anonymity. Information on Donor-amount-date-recipient is now in the public domain. Donor of EB of Rs 1 cr is considered privileged enough to “sit at the high table” with the political party, which, however, would have been the same before the EB. Since SBI is a government controlled entity, the ruling party could have had preferential access to donation information. This was undesirable, though in practise the largest donor donated much larger sums to parties other than the ruling party.

Systems to isolate the information from the ruling party could have been instituted. The status is summarized in the attached Table.

Consequences: a)anyone wishing to donate more than Rs 2,500/-, and who does not wish to have his/her name made public to prevent competitive harassment or for other private reasons, is left with very little choices than to donate in cash. b) Donations which had started coming through banks using the EB will now shift to back to cash. c)in turn these will increase the need for the donor to generate cash, d) Therefore, the need for the prospective recipient party to look the other way while cash is being generated. e) Donations flowing through the bank with transparency of Channel and Recipient will shift back to the opacity of all 3 participants i.e., Donor, Channel & Recipient. Thus, the partial transparency facilitated by the EB may revert back to the complete opacity of cash, with a built-in incentive to generate cash, and to permit generation of cash. f)retrospective action on removing the assurance provided by a law passed by parliament is like retrospective taxation, or levying a penalty by changing a law retrospectively. g)in future, any such scheme will be viewed with suspicion as litigation on any issue in the country goes on for a very long time, and there is often no assurance of finality. h)an unfortunate conclusion may be that donating through the anonymous & cash route is safer in the country than donating through banks and KYC verified accounts.

The need was to identify & maintain the benefits of the EB over the system prevalent before it, maintain the transparency of the Channel & Recipient with the EB, and gradually address its weaknesses, finally leading to the perfect state of full transparency and disclosure. Instead, in junking the system the baby has been thrown out with the bath water.