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The bank argued that such issuing electoral bonds would encourage money laundering and would undermine the faith in Indian currency

twitter-logo BusinessToday.In   New Delhi     Last Updated: November 18, 2019  | 15:07 IST

Finance Ministry dismissed RBI's warning on electoral bonds: report

RBI said electoral bonds would set a bad precedent

The Reserve Bank of India had warned the government on the perils of electoral bonds and its effect on the country's currency just before its announcement on Budget 2017. However, the Finance Ministry overlooked it stating the apex bank had not "understood the proposed mechanism".

According to a report by HuffPost India, four days before Budget 2017, a senior tax official flagged an issue with electoral bonds the government was planning to announce. He wrote to his superiors in the finance ministry. The report states that on the same day the finance ministry wrote an e-mail to the deputy governor of the RBI, Rama Subramaniam Gandhi requesting early comments from the bank. This was required as the RBI had to be brought onboard the proposal to legalise anonymous donations that would need amendments to the RBI Act.

The RBI sent its reply on the first working day (January 30) after it received the letter. It stated that the electoral bonds and amendment to the RBI Act would set a "bad precedent". The bank argued that such a step would encourage money laundering and would undermine the faith in Indian currency. It stated that electoral bonds would be a type of "bearer bond" that bears no trace of its ownership.

"Bearer instruments have the potential to become currency and if issued in sizeable quantities can undermine faith in banknotes issued by RBI. The bonds are bearer bonds and are transferable by delivery. Hence who finally and actually contributes the bond to the political party will not be known," the bank stated in its reply.

Hasmukh Adhia, revenue secretary at that time wrote in a note to secretary for economic affairs Tapan Ray and FM Arun Jaitley on the same day the letter was received, as mentioned in the report. He said that it appeared that the RBI had "not understood the proposed mechanism of having pre-paid instruments for the purpose of keeping the identity of the donor secret, while ensuring the donation is made only out of fully tax paid money of a person". "This advice has come quite late at a time when the Finance Bill is already printed. We may, therefore, go ahead with our proposal," he wrote.

On February 1, Jaitley proposed the creation of electoral bonds as well as an amendment to the RBI Act. He stated that it was aimed to introduce transparency and cleanse the system of political funding in India. The amendment meant that any company, including foreign ones, could now route money to political parties in India.

The report states that the government started working on how the bonds would actually work after it was passed by the Lok Sabha. Once it was finalised, a meeting between the finance ministry officials, the Election Commission of India and the RBI was scheduled. The RBI did not attend the meeting.

The RBI wrote to the government once again and suggested ways to limit the misuse of the bonds. It stated that the bonds should be valid only for 15 days - something the government accepted.

So far, the report states, electoral bonds of at least Rs 6,000 crore have been sold since March 2018. Data compiled by Association for Democratic Reforms showed that in the first tranche of Rs 222 crore, BJP garnered 95 per cent of the total money.

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