Home / Industry / Banking /  Union Budget 2017’s electoral bond proposal raises thorny questions for RBI

Mumbai: Union Budget 2017’s proposals on electoral funding reforms have found favour generally, but the plan to issue so-called electoral bonds is seen as yet another attempt by the government to step on the turf of the Reserve Bank of India (RBI).

While all details on electoral bonds are not out yet, here’s what is known: a person wishing to donate to a political party can purchase these bonds from an authorized bank using cheques or digital payment methods. These bonds shall be redeemable only in the designated account of a registered political party. To issue these bonds, the government will amend the RBI Act.

On the face of it, these bonds look like bearer bonds. These are instruments which are not registered in the name of a specific owner and will pay to whoever bears them.

“Section 31 of the RBI Act gives power, as of today, to issue bearer bonds to RBI and government. The bearer bond has the characteristic of a currency. That is why the power is not given to a bank," said a senior RBI official on condition of anonymity.

The RBI Act states that other than the central bank and central government, nobody can issue notes which have the characteristic of a banknote or a currency note. Hence, the government move to amend the Act to allow commercial banks to issue such bonds is leading to some discomfort among RBI officials who feel it will erode some of the central bank’s authority.

The issue is especially sensitive coming at a time when two former governors—Y.V. Reddy and Bimal Jalan—have expressed concern over RBI’s eroding autonomy after the government rode roughshod over the central bank while demonetizing high-value currency notes.

“This will unnecessarily fragment the note-issuing authority’s capacity. The government can do without amending the Act," said a senior banker on condition of anonymity.

Such bonds have nothing to do with RBI’s authority or autonomy, said an expert in financial markets, but added that they are a bad idea nonetheless.

“RBI is a creature of RBI Act and if the government amends the Act, RBI will have to comply. I don’t see the government’s move to issue electoral bonds as infringing on RBI’s autonomy," said Ajay Shah, professor, National Institute for Public Finance and Policy.

“A bearer bond assumes the character of cash. Then there is no difference if political parties are funded by cash or through electoral bonds. It doesn’t improve the transparency of the funding process," said Shah.

This is not the first time that the government has issued bearer bonds.

In 1987, the then government floated a development bond called Indira Vikas Patra, which was issued through post offices. Since this had the characteristic of a bearer bond, it conferred anonymity to the holders of this bond. However, it was finally discontinued after it was suspected that these bonds were used as a conduit for laundering black money.

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