New electoral bonds will bring "substantial improvement in transparency over the present [electoral] system of no-transparency", finance minister Arun Jaitley said in a Facebook post on January 7, 2018.

As the bonds prepare for an April 1, 2018, launch, that may not happen, according to our analysis, because donors and political parties are guaranteed anonymity; donors can donate no more than Rs 2,000 in cash but can make repeated donations of that amount; loss-making companies are now allowed to make donations, which could spur the creation of shell companies; and parties do not need to declare donations or reveal who made them.

It's clear that political funding in India requires transparency. Many members of the OECD, a group of rich countries, ban anonymous donations to political parties; in India, 69% income of political parties (Rs 7,833 crore) over the decade ending 2014-15 came from undisclosed sources.

In addition, 83% of donations to national parties in 2015-16 were from donors whose identity was not made public, and 1,933 corporate donations, together valued at Rs 384 crore, did not disclose permanent account numbers, according to data from Association for Democratic Reforms (ADR), an advocacy.

What are electoral bonds?

An electoral bond will function as a promissory note, an interest-free bearer instrument, which can be purchased by any Indian citizen or a Indian entity. It will not carry or disclose the name of donor.

The bond can be purchased for any value in multiples of Rs 1,000, Rs 10,000, Rs 1,00,000, Rs 10,00,000 and Rs 1,00,00,000 from specific branches of the State Bank of India.

Source: Ministry of Finance

Why anonymous electoral bonds will make political funding more opaque

"Electoral bonds will reduce transparency and increase opacity," ADR's founder-trustee Jagdeep Chhokar, a former professor and director of the Indian Institute of Management, Ahmedabad, told IndiaSpend.

There are three reasons for more opacity, according to Chhokar: One, both the donor and the party are guaranteed anonymity; two, no limit on corporate donations (earlier, companies could only donate 7.5% of their average net profits in the last three financial years to political parties); three, parties do not need to declare donations made to them or who made them.

Over 11 years to 2014-15, six national parties and 51 regional parties reported an income of Rs 11,367 crore, of which 69% or Rs 7,833 crore was from unknown sources.

"The electoral-bond scheme also says information (about) purchasers of electoral bonds will not be made available to anybody except a court," Shahid Khan, retired Indian Revenue Service officer and former member of the Central Board of Direct Taxes, told IndiaSpend. "So the scheme virtually overrides the Right To Information (RTI) Act."

That is a problem, he explained, because electoral bonds were given life by a notification, which is--as the name suggests--no more than an official government notice, while the RTI is an act of Parliament, given life after public debate and being cleared by both houses.

"These are the issues that make the funding of political parties more opaque than before," said Khan.

In addition, the government allows donors to give political parties cash up to Rs 2,000, which experts pointed to as a loophole that can be used to make repeated donations of this amount.

The Rs-2000 cash-donation loophole

To make political funding more transparent, the government instituted a Rs-2,000 limit on cash donations to political parties in the Finance Bill 2017, which will come into effect from April 1, 2018. Any donations above Rs 2,000 must be through cheques, electoral bonds or digital means like online transactions.

Cash plays an important role in funding of political parties, especially during elections. Donors gave political parties Rs 2,355 crore over the last three (2004, 2009, 2014) Lok Sabha elections, of which 44% (Rs 1,039 crore) was in cash and 55% (Rs 1,300 crore) by cheque, according to ADR data.

Together, the new Rs-2,000 cash limit and electoral bonds were to make elections cleaner. But there are loopholes that could have the opposite effect.

"They (cash limit and bonds) will not reduce black money coming into politics," said Chhokar. "It may actually increase it."

He pointed to India's experience after demonetisation--the withdrawal of 86% of India's currency, by value, on November 8, 2016--which, as IndiaSpend reported, made it clear that black money was not held in hoards of cash; it was held in property, jewellery and even laundered into bank deposits.

"The money that people hold in banks is not necessarily all white, it comes from variety of sources," said Chhokar. "So a corporation can deposit any kind of money in any bank and can buy them (electoral bonds)."

Currently, most donations made to political parties come from undeclared or "unknown" donors.

In 2015-16, 69% of political-party income came from unknown sources

Seven major Indian political parties reported a combined income of Rs 1,033 crore during 2015-16, of which Rs 325 crore or 31% was from "known sources" and Rs 708 crore or 69% from "unknown sources", according to ADR reports (here and here) on September 6, 2017 and May 9, 2017.

These parties are the Bharatiya Janata Party (BJP), the Indian National Congress (Congress), the Bahujan Samaj Party (BSP), the Nationalist Congress Party (NCP), the Communist Party of India (CPI), the CPI (Marxist), or the CPM and the All India Trinamool Congress.

"Unknown sources" includes the sale of coupons, voluntary contributions, contributions at political meetings and income declared in income tax-returns without mentioning source--below Rs 20,000.

"Known sources" refer to contributions made to political parties above Rs 20,000 with names of donors.

Source: Association for Democratic Reforms reports on September 6, 2017 and May 9, 2017 ;
Note: The figures for CPI are in negative as details of donations above Rs 20,000 given by the party in the statement to the Election Commission of India is more than the donations declared in the income tax returns of the party for FY 2015-16.

About 83% (Rs 514 crore) of all donations to national parties in 2015-16 were from donors whose details were not disclosed.

In comparison, about half of OECD countries, such as France, Korea and Mexico, ban anonymous donations to political parties, as we said; and 38% of these countries ban anonymous donations to parties above a limit, according to a 2016 OECD report.

Loss-making companies can now donate money to political parties

Donations from corporate houses to political parties (BJP, Congress, NCP, CPI and CPM) accounted for 89% (Rs 957 crore) of all the contributions from known sources over three years to 2015-16.

Source: Association for Democratic Reforms; Figures in Rs crore

Satya Electoral Trust was the leading donor to three national parties--BJP (Rs 194 crore), Congress (Rs 57 crore) and NCP (Rs 10 crore)--between 2012-13 and 2015-16. The trust, run by Bharti Group, made 35 donations over three years (no donations in 2012-13), amounting to Rs 261 crore.

Associations/unions were leading donors to the communist parties. The CPI received Rs 14.64 lakh from 15 associations/unions and CPM Rs 1.09 crore from seven associations.

Source: Association for Democratic Reforms Figures in Rs crore

"Earlier there were some checks and balances, as the Companies Act required that a company donating to a political party should be in existence for at least three years and make profits," Khan said.

That restriction has now been removed, which means a loss-making company can also make donations to a political party from its capital, which is "dangerous" and prompts the establishment of shell companies to finance politicians, said Khan.

"Instead of creating electoral bonds, or electoral trusts (certain business groups operational in the country have established Electoral Trust companies under the Electoral Trust scheme, 2013)--what the UPA [United Progressive Alliance] created, all political parties should be required to accept payments only through digital means," Chhokar said..

Political parties should be brought under the RTI Act, the Central Information Commission recommended in 2013, but political parties "are blatantly defying" the suggestion, Chhokar said.

(Mallapur is an analyst with IndiaSpend and FactChecker.)