Electoral bonds: Why Narendra Modi govt should go beyond cosmetic reforms and switch to demat mode

Finance minister Arun Jaitley has paid his own creation a back-handed compliment—it is a substantial improvement over the existing state of affairs. It is significant to note that he has not called it the panacea for all black money-related evils. Indeed electoral bonds have very little to commend themselves. Rahul Bajaj of the House of Bajaj is known for not mincing his words. He has often said in the past that upfront political donations through banking channels have had very few takers due to the resultant public glare on corporate donors. The names of the political parties need to be disclosed in the annual report thus bringing wide into the open the political affiliations of industrial houses. One could have played it safe by donating to two or more political parties across the political divide in equal measures but that is easier said than done. In the event, the one not benefiting from the munificence will exact revenge on the company when it comes back to power. Tax hounds were alleged to have been unleashed on such companies by the hostile and piqued political party now in power. Has Jaitley used a sledgehammer to swat a fly? If public scrutiny was the only problem for honest corporates, he could have amended the Companies Act to say that names of political parties could be disclosed at the discretion of the donor-company. Because that is the only improvement electoral bonds offer insofar as honest corporate donations are concerned. Be that as it may. [caption id=“attachment_4277911” align=“alignleft” width=“380”]  Finance Minister Arun Jaitley. PTI image[/caption] Jaitley ought to have mandated that electoral bonds would be issued only in demat form. When shares have to be issued only in digital or dematerialized form, why not electoral bonds? For otherwise it can tantalize the buyer of the bond into trading in it for profit. An example is in order. Suppose a company (not an honest one) buys bonds worth Rs 200 crore from a designated branch of the SBI. Remember electoral bonds can remain in circulation for 15 days before they find their way into a political party’s coffers. It is during this crucial period that danger lurks. Suppose a moneybag wanting anonymity is on the prowl and there is a sympathetic political party hungering for his munificence? What would happen? Well, he would buy the bonds for Rs 225 crore by paying cash to the original subscriber. Who could have thought the docile electoral bonds would electrify further the hurly-burly world of black money? In other words, there could be two owners of these bonds in the short time period of 15 days they are allowed to circulate without hindrance. Who knows there could be a third within the above example of a Johnny-come-lately offering Rs 230 to the buyer in the black market? The point is the Modi government is innocent when it believes the original subscriber and the donor would be the same person. In fact political parties themselves might encourage their moneybags to indulge in trafficking in electoral bonds so that they can go to town with the claim that they have now stopped touching cash! To eschew this mischief and to get other benefits of electronically-held securities, Jaitley ought to have mandated that SBI (State Bank of India) would issue electoral bonds only in dematerialized form. Of course the wily moneybag may not mind donating the depository receipts instead of the bonds to his favorite political party but dematerialized bonds could discourage trafficking because to a vain and egoistic moneybag donating a mysterious receipt is not the same as donating the bond or cash. Equally important, chances of forgery are nil which is the hallmark of dematerialization of securities. As it is the government is agonizing over how to make the electoral bonds immune to forgery with enhanced security features etc. Dematerialization is what the doctor has ordered.