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The concept of electoral bonds was introduced by Finance Miniser Arun Jaitley during his Budget 2017 speech in order to bring some transparency to the electoral funding process.

  • Required amendments to the Reserve Bank of India Act, 1934 (Section 31(3)) and the Representation of People Act, 1951 were made through Section 133 to 136 of Finance Bill, 2017.
  • Government is in the process of framing a Scheme in this regard.
  • FM has said that the electoral bonds will be made available ahead of the elections and would remain valid for a few days. He has said that this condition will be added to make sure that these bonds do not turn into a parallel currency.

Read in Hindi: Electoral bonds- All you need to know in Hindi

 What is a bond?
  • A bond is a debt security.
  • Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.
  • When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.

What are Electoral bonds

  • Electoral Bond is a financial instrument for making donations to political parties.
  • It neither entails a tax exemption nor earn any interest and has been proposed as a way of reforming election funding.
  • An electoral bond can be purchased by any donor only by cheque or electronic payment (and not by cash), only at authorized banks.
  • These bonds can be donated only to a political party.
  • The bonds will likely be bearer bonds and the identity of the donor will not be known to the receiver.
  • The party can can convert these bonds back into money via their bank accounts.
  • The bank account used must be the one notified to the Election Commission and the bonds may have to be redeemed within a prescribed time period. These are redeemable in only one account of that party.
  • It is more like a bail-bond than a Government or corporate bond. They are essentially like bearer cheques. The issuing bank will remain the custodian of the donor’s funds until the political party redeems the bond. So, only the RBI will most likely be allowed to issue these bonds, to be sold through notified banks.

Advantages of Electoral bonds

  • The advantage of the electoral bond system over donations through cheques is that many donors express reluctance to use cheques because it becomes transparent and leads to political vendetta by rivals. The scheme of electoral bonds addresses the concerns of donors to remain anonymous to the general public or to rival political parties.
  • The other reason that donors do not want their names to be known is that, following the donation, if they legitimately win a contract, then they open themselves up to suspicion of benefiting from a quid pro quo arrangement with the party in power.
  • It is an effort made to cleanse the system of political funding in India.
  • As per Section 29C(1) of The Representation of People Act, 1951, the political party needs to disclose the details of non-governmental corporations and persons who donate more than Rs. 20,000 to it in a financial year. Vide the Finance Bill 2017, it has been specified that no report needs to be prepared in respect of the contributions received by way of an electoral bond.
  • This reform is expected to bring about greater transparency and accountability in political funding, while preventing future generation of black money.

Why is it important?

  • Today, most political parties use the lax regime on donations to accept cash donations from anonymous sources. Nearly 70 per cent of the ₹11,300 crore in party funding over an 11-year period came from unknown sources, according to the Association for Democratic Reforms (ADR).
  • At present, political parties have to report any donation of over ₹20,000 to the IT department. But there has been a trend of more donations flowing in smaller amounts. To fix this, the Budget has reduced the disclosure limit to ₹2,000 and insists that any amount over this must be paid through cheque or the digital mode. The idea is that electoral bonds will prompt donors to take the banking route to donate, with their identity captured by the issuing authority.

Disadvantages of Electoral bonds

  • While the identity of the donor is captured, it is not revealed to the party or public. So transparency is not enhanced for the voter.
  • Income tax breaks may not be available for donations through electoral bonds.
  • Also, in the electoral bond route, while the party may not know the identity of the donor, the bank will.

Sources: The Hindu, Arthapedia

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