The government of India will bear the transaction cost of electoral bonds used to make anonymous donations to political parties, a response by the Finance Ministry under the Right to Information Act has revealed.

In 2017, the Narendra Modi government introduced the electoral bonds scheme that allows individuals and organisations to make donations to political parties by purchasing bonds through a public sector bank.

By replacing unaccounted cash donations with traceable bank transactions, the scheme would help curtail the flow of black money into India’s electoral system, the government claimed.

But critics point out the scheme had actually made it simpler for political parties to accept funds without any scrutiny: banks are barred from disclosing the identity of the buyers of the bonds. Anonymity makes it hard to assess whether those contributing funds to a political party are extracting favours or benefitting in any way at the cost of the public interest.

More than Rs 5,800 crore have been paid to political parties through anonymous electoral bonds raised in ten rounds since March 2018. In the first round, 95% of the funds were pocketed by the ruling Bharatiya Janata Party.

Not only have the transactions been opaque, they come at a cost to the Indian taxpayer. A response by the Finance Ministry to an application filed by retired Commodore and activist Lokesh Batra under the RTI Act has revealed that the State Bank of India, which issued the bonds, has sought Rs 3.24 crore as a commission from the government, as of May 27.

Benefit to parties, cost to people

When a bank provides any service, it charges the customer a transaction fee or commission. An example is the demand draft. When a customer buys a demand draft to make a payment to another party, the bank charges a commission, depending on the amount of the draft.

Electoral bonds are a transaction between the funder and the political party.

So why is the government paying the commission on them?

A notification issued by the Union Ministry of Finance on January 2, 2018, explicitly bars banks from levying a commission on buyers of electoral bonds. However, it is silent on who actually pays this commission.

Thomas Franco, former general secretary of the All India Bank Officers’ Confederation, said it was unjustified for the Indian public to bear the burden of a fee that does not benefit them in any way.

Electoral bonds should not be treated at par with government bonds, he said. When the government issues a bond, it essentially takes money from the public by promise to pay interest. “The money is in simple terms a loan the government takes from the market,” he said. This money so secured is used for various projects, schemes and expenses of the government, which in turn benefits the people.

In the case of electoral bonds, the only beneficiary is the political party which redeems the bond. The government neither pays any interest to the buyer nor does it have access to the money. “When there is no benefit for the government, why should it pay the commission?” said Franco.

Ideally, he said it is the political party that should be footing the commission bill.

Questions sent to the Finance Ministry went unanswered.

Legal challenge

The electoral bonds scheme is currently under challenge in the Supreme Court. The Association for Democratic Reforms has filed a petition challenging the lack of transparency under the electoral bond scheme, asking for the names of the donors to be revealed.

It said amendments carried out in relevant Acts have opened the floodgates to “anonymous financing by Indian as well as foreign companies which can have serious repercussions on the Indian democracy”.

The government and the Election Commission of India have taken contrasting positions in court, with the commission favouring greater transparency. Arun Jaitley, former finance minister, justified the anonymity, arguing that once names are revealed, “donors would not find the scheme attractive and would go back to the less-desirable option of donating by cash”.

On the question of who bears the transaction costs of electoral bonds, however, Jagdeep Chhokar, founder member of the Association of Democratic Reforms, pointed out that since the scheme funnels donations, neither the donor nor the recipient can be expected to pay the commission.

The main concern, he said, should be whether the State Bank of India has made a profit from the scheme by charging the commission.

Chhokar pointed out that when the bank sells the bond, the money received remains with the bank till it is redeemed by a political party. By rule, a bond has to be redeemed within 15 days, failing which the amount will be transferred to the prime minister’s national relief fund. “So the bank will earn interest for the days it holds the money,” he said.

What needs to be scrutinised is whether the interest earned by the bank is enough to cover the cost of the transaction, and if, despite that, the bank was charging a flat rate of commission to make a profit.

As per the RTI replies, the State Bank of India has charged 5.5 paise per Rs 100 worth of bond money.