Electoral Bonds

In this article, you can read all about electoral bonds for UPSC exam. This topic has generated a lot of debate in recent times. So, it is important to read about it and form balanced views about it for the UPSC exam.

The generation, circulation of black money and; corruption in India are closely associated with funding to the political parties. The present government continuing their war against both the problems (black money and corruption) has proposed a set of reforms related to political funding – “Transparency in Political Funding” (in the Budget FY18). Under these two reforms have been proposed.

  • The cash donation limit to the political parties has been brought down from Rs 20000 to Rs 2000 per person
  • There is a proposal of issuing Electoral Bonds

Before understanding the electoral bond let’s define what a bond is. Bond is a debt instrument which generally has following instrument

  • The issuer will come under a debt/liability
  • The rate of interest is usually referred to as coupon rate
  • There is a term/maturity period

Although the term “bond” is used the “Electoral Bonds”, these instruments will not have all the features of the bond (no interest rate, returns will go to the political parties-having said so, all of this will be clear when the government in consultation with RBI will come out with a policy)

These Electoral bonds are instruments/securities which will be used henceforth to donate funds to the political parties. These bonds will be on the lines of bearer bonds or promissory notes wherein the issuer (bank) will be the custodian and will pay the one who holds the bonds (political party). The features of electoral bonds and the process involved is:

  • These bonds will be issued by notified banks
  • The donor to the political party may approach these banks and purchase the bonds
  • The donor will be allowed to purchase the bonds through cheque/digital payment. Hence the identity of the donors will be protected (if the donors are identified, they may get caught up in political rivalry-especially if the donor is a businessman)
  • The donor will donate 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
  • As per the information provided so far, these bonds will have a short tenure (in terms of few days)
  • These bonds will not provide any kind of tax benefits
  • The deadline for implementation of this is 1st April 2018
  • The parties will be asked to file returns of donations under the IT Act

In the whole process there are three important stakeholders

  • Donor – the policy/framework which will be announced in the coming days will dictate the eligibility provisions related to the donors (generally the citizens and non-resident Indians are allowed to invest in the bonds issued by RBI)
  • Notified Banks – The introduction of such securities will require the amendment of RBI act.
  • Political Party
    • Till now the political parties were supposed to maintain the records of all the donors who donated above Rs 20000 through cheque. As a result it was observed that there were large number donations with a value less than Rs 20000. Hence the government has brought down the limit to Rs 2000.
    • There are no limits on how much political parties can accept from anonymous donations.

Importance of the Electoral Bonds

  • They ensure that the funds being collected by the political parties is accounted money or clean money.
  • It will also boost digital transactions.

Concerns with respect to Electoral Bonds

  • The donors identity is protected but this doesn’t lead to cleansing of politics
  • The budget does not provide for scrutinization of accounts (which has been a demand by ECI from many years ago) of the political parties. Hence these measures will not lead to transparency
  • Although it provides for cheque payment or digital payment for donations above Rs 2000, unless the donors are scrutinized, it may not change the situation
  • Under this the donor and receiver of the donations will have information of the transactions but not the IT department nor the ECI
  • The Finance Bill proposes section 13A (d) in Income Tax Act 1961,which makes it mandatory for the political parties to get tax exemption (this is already provided under section 29C of RPA 1951, wherein if a party treasurer fails to file the returns then the tax exemptions will not be provided)
  • The budget only raises the issue of political funding but does not completely address it to bring complete accountability and transparency
  • Section 23 of RPA put a limit on anonymous cash donations to Rs 20000. The finance merely reduces the cash component of donations to Rs 2000 but does not completely rule out donations above Rs 2000
  • The Election Commission of India (ECI) had demanded that the limit for reporting the donations (which is Rs 20000) should be brought down to Rs 2000, but instead the government has brought down the maximum cash contribution to Rs 2000
  • The ECI had also recommended that the political parties must not be allowed to collect 20 Cr or 20% of its total collections in the form of anonymous sources. The central government has not considered this so far
  • In case of electoral bonds, the

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 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 parties 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 are 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)

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


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

Approach to the UPSC Exam – GS Paper III

  1. Critically evaluate the electoral bonds in the context of introducing transparency in the electoral system.
  2. Electoral bonds are good measure towards transparency in the political funding, but the measure itself suffers from certain privacy issues-comment.
  3. How effective do you think the electoral bonds will be in cleansing the politics-discuss.

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