Why Jaitley’s Political Funding Reforms Won’t End Anonymous Donations

Proposed amendments to the IT Act and the RBI Act will exempt political parties from keeping records of donations made through electoral bonds.



While the efforts to reform political funding are commendable, the announcements made in Budget 2017 are not as effective as they are being made out to be. Credit: PTI

During his New Year’s Eve address to the nation at the end of 50 days of demonetisation, Prime Minister Narendra Modi said, “I urge all parties and leaders to move away from a ‘holier than thou approach,’ to come together in prioritising transparency and take firm steps to free politics of black money and corruption.”

That was an indication of things to come. Budget 2017 has kickstarted what appears to be the first round of reforms in political funding. But when it comes to political funding, it is always better to dig deeper into the actual legislation than go by spoken words of intent alone.

In his Budget speech on February 1, finance minister Arun Jaitley made two major announcements. First, cash donations to political parties will be capped at Rs 2,000 from a single source. What’s interesting about this is that technically there was no cap on cash donations to political parties previously. The Representation of the People Act, 1951 does not state that donations are to be made in cash or cheque, but it does state in section 29C that any contributions above Rs 20,000 to political parties are to be reported.


Section 29C of the Representation of the People Act, 1951.

Due to this ‘loophole’, political parties would take donations in cash under Rs 20,000 and not declare their source. A study conducted by the Association of Democratic Reforms found that 70% of the funding to political parties comes from ‘unknown’ sources.

For reporting purposes, parties would have ready receipts with donor names that could be used to take cash. Any donations made by cheque or bank transfer were declared by default since they are reflected in the bank accounts of the parties. In this Budget, the finance minister has capped cash donations from a single source at Rs 2000.

Earlier, if a person had to give Rs 1 lakh in cash, they would make five receipts by breaking it up and keeping it under Rs 20,000. Now, they would have to make 50 receipts. It’s a logistical nightmare but it still doesn’t prevent the party from accepting cash donations. One way to prevent political parties from being used for money laundering would have been to ban cash donations completely. But, unfortunately, this is not the case.

The second of Jaitley’s big announcements is a proposed amendment to the Reserve Bank of India Act, 1934 to enable the issuance of electoral bonds. A donor can purchase these bonds from registered bank accounts and give it to a political party of his/her choice. The party, in turn, would redeem it by depositing it in a specified bank account in the party’s name. This was done to keep the donor identity anonymous, as it would lead to ‘adverse consequences’, as the finance minister indicated in his speech.

This is an innovative concept to allow legitimate funds to flow into political parties since these bonds can only be purchased using cheque or digital payments. But there are some issues with implementation.

Electoral bonds become even more relevant when we take a few recent developments into consideration. In 2014, the Delhi high court found both the BJP and the Congress guilty of receiving foreign funds from UK-based Vedanta in violation of provisions of the Foreign Contribution (Regulation) Act.

The Act explicitly barred political parties from accepting foreign funding. This prompted the BJP government to push back and amend the Act in 2016 to allow donations from foreign companies. It doesn’t take much to figure out why a corporation would give large donations to the country’s two biggest political parties. These electoral bonds will make such donations completely anonymous.

In order to make this possible, an amendment to section 13A of the Income Tax Act has been proposed in the Finance Act, 2017, which exempts political parties from keeping records for donations made through electoral bonds. This particular section in the IT Act states that political parties have to maintain records such as the name and address of the persons who have made contributions above Rs 10,000. Now, this clause is being amended to exempt electoral bonds from falling under that category.


The proposed amendment to section 13A of the Income Tax Act.

While this exercise would ensure that political parties get funded only through legitimate sources, it also ensures that entities eager to lobby with them are kept anonymous. What’s more, the ‘electoral bond’ is not defined in the proposed Finance Act. The Reserve Bank of India Act is being amended and this ‘scheme’ is being left for the government to change at any point through a notification.


Proposed amendments to the Reserve Bank of India Act.

It is a carefully crafted move that seems good on the surface but might be misused in the future. It’s never a good idea to keep instruments like electoral bonds open to interpretation and change through notifications. It leaves open the opportunity for the ruling party to edit the definition infinitely.

While the efforts to kick-start reforms in political funding are commendable and the intent should be welcomed, the announcements made in Budget 2017 are not as effective as they are being made out to be. There are still issues to be resolved and nitty-gritty to be discussed. In the recent past, all parties have steadfastly avoided discussions on political funding and reforms. After all, it is a question of their survival.

The Finance Bill will be discussed after the Lok Sabha reassembles on March 9 for the second half of the budget session. It remains to be seen whether our political parties would come together to point out these flaws and resolve them.

Meghnad S. is a public policy professional, columnist and writer. He presently works with a member of parliament as his chief of staff. He tweets @memeghnad.