The electoral bonds' story: From Arun Jaitley convincing his secretary to the RBI's issues

In a landmark ruling, the Indian Supreme Court on February 15 unanimously struck down the electoral bonds scheme as unconstitutional, saying it violated Article 19 of the Constitution by not disclosing the source of funding to political parties.

The apex court's ruling is the culmination of years of questions over the scheme that was announced in the 2017-18 Union Budget by the then Finance Minister, the late Arun Jaitley. Interestingly, the scheme had its doubters even within the Finance Ministry, including former finance secretary, Subhash Chandra Garg.

Garg joined the ministry as Secretary of the Department of Economic Affairs (DEA) in July 2017. Writing in his book 'We Also Make Policy', released in October 2023, Garg said his first impression of the electoral bond announcement was that it was a "devious way" to funnel company donations to the ruling party. However, Garg said his confidence in Jaitley's "sagacity" meant he didn't think this was actually the case.

"When I called on him, after joining DEA in July 2017, five months after the electoral bond announcement had been made, the matter of electoral bonds was uppermost in his mind," Garg wrote in his book.

Also Read: SBI to stop issuing electoral bonds immediately after SC's judgement

Garg, as the economic affairs secretary, was in charge of framing the scheme.

"He (Jaitley) was convinced that the scheme announced by him in the Budget was much more transparent, more equitable and was most necessary to transform the financial management of political parties. He began by explaining the state of funding received by political parties, saying that even a party like the BJP received 90 percent of its funding in cash. Parties had to break the donation received in cash in bulk, into multiple donations of less than Rs 20,000 each to ensure they were not required to report the actual donors to the EC (Election Commission). Most of this bulk donation came from companies," Garg wrote.

Jaitley told Garg that the pre-electoral bonds system "encouraged money laundering and the formation of shadowy shell companies to hide transactions", with promoters buying cash by "siphoning money from their companies".

"Political parties, saddled with so much cash, found it difficult to keep track of it and had to make most payments from the hoard received. They usually did not have enough money in their bank accounts to make payments by cheque," he added.

Jaitley reasoned that the scheme would allow companies to make political donations from their accounts without using cash, promoting transparency in corporate accounting.

"The only compromise made in the scheme was that companies/their sponsors would not be required to disclose which party they had made contributions to. This would, he (Jaitley) argued, build confidence in companies as no one would know whom they had given donations to. He also said other political parties had supported the scheme in private but were not courageous enough to do so in public," Garg wrote.

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Jaitley's arguments left Garg "fairly convinced" that electoral bonds were an improvement over the existing system. As such, he decided to "push the scheme through".

Some concerns

While the government was convinced, others were not.

The Reserve Bank of India (RBI), for instance, wanted to ensure electoral bonds were not similar to bearer bonds.

"This could be done by ensuring that the bonds did not get transferred from one party to another and that the window of holding the bonds was small enough to allow the donor to buy the bonds lawfully and against full 'Know Your Customer' norms, donate them to political parties and for political parties to deposit these bonds in designated bank accounts," Garg wrote. This left the RBI "reasonably satisfied".

The Election Commission (EC), meanwhile, was in principle against electoral bonds.

"Nonetheless, we discussed the features that would make the bonds least unpalatable," Garg wrote.

A key issue facing Garg was to ensure that every serious political party had equal opportunity to receive the electoral bonds.

"If electoral bond funding was allowed to every registered party, the system could become prone to misuse and blackmail. Moreover, it would be difficult to manage the electoral bond issuance and management system. Further, as a great majority of these parties were not politically significant, it did not appear advisable as it would become an avenue for funding individuals or groups rather than parties," the former secretary wrote.

"After mulling over some permutations and combinations, we arrived at the cut-off of 1 percent of votes obtained in the last election, nationally or in the state, as the identifier of eligibility," he added.

Once the key features of the electoral bond scheme were finalised, Garg submitted the file to Jaitley in early August 2017. Jaitley approved the same, adding that it be discussed with the Prime Minister's Office.

Concerns re-emerge

While the finance ministry considered the matter to be "wrapped up", others were not fully convinced as initially thought.

"One of the election commissioners, OP Rawat, made a statement in public that was critical of the electoral bond scheme. He referred to the EC's letter to the Law Ministry in this regard, which he said was not responded to. He further stated that he suspected the scheme would encourage political funding by shell companies," Garg wrote, noting that he had met the poll panel's commissioners earlier and had explained that under the electoral bonds scheme, there would be no change in information the EC would receive.

"Earlier, it (EC) received information about the cash donations received in total by a political party; now it would get the same information about the donations received in the form of electoral bonds," Garg wrote.

EC's Rawat continued to object, although he eventually came around after he realised he was "flogging a dead horse".

Meanwhile, Urjit Patel, then Governor of the RBI, performed his own U-turn, according to Garg.

Patel, Garg said in his book, wrote to Jaitley in mid-September 2017 saying only the RBI could issue the electoral bonds.

"Equating the bonds as currency, he wanted RBI to issue the bonds as it was the monopoly issuer of currency. This was a shocking ask. The RBI Act had been amended, which provided for the government-authorised scheduled banks to issue electoral bonds. By making this proposal, he was questioning the law of the land," Garg wrote.

Patel's second suggestion to make the electoral bonds digital and not physical was an even bigger issue for the government as a digital bond would mean every political party, the RBI, and the EC would know who had made the contribution.

"This would kill the most important feature that Arun Jaitley wanted to build in – the anonymity of the donor vis-à-vis political parties."

Eventual notification

After numerous meetings, the electoral bond scheme was finally notified on January 2, 2018. But even before the notification, it was challenged in the Supreme Court by the Association for Democratic Reforms (ADR). No stay was granted by the court.

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Concluding the chapter devoted to the electoral bonds issue, Garg wrote that while the BJP has received the bulk of donations under the scheme, other national and prominent state parties had also benefitted.

"The electoral bond scheme has made its contribution to cleaning up cash financing of elections. It has drastically reduced the contribution received by political parties in cash," Garg wrote.