Do Electoral Bonds Conflict with Corporate Governance?
The famous expression of Mrs Joe Gargery in Great Expectations by Charles Dickens, resonates well with the subject on hand! “Ask no questions, and you’ll be told no lies.”
While introducing the much-debated electoral bonds scheme, the then finance minister (FM) Arun Jaitley justified the rationale for anonymity by affirming that “Donors have also expressed reluctance in donating by cheque or other transparent methods as it would disclose their identity and entail adverse consequences.” (para 165 of the 2017 Budget speech) The emphasis is mine and not part of the speech.
The Supreme Court is presently seized of the petitions challenging the various aspects of the law and the anonymous nature of the scheme. 
The government has been anchoring its arguments on the premise that the scheme helps to eliminate black money in funding the elections and that enough checks exist to trace the source of funding and that the apprehensions of abuse and money laundering are ill-founded. 
On the contrary, the petitioners are pinning their case on the plea that masking the identity of the contributors bodes ill for a democracy as the nexus between the contributions and the favours that get extended by virtue of the same should be transparent to the public.
It is best to leave the evaluation of the contentions to the court and await the decision. The present article discusses another aspect less in the public view on this subject.
The facility of contributing to political parties through the anonymous electoral bonds is also available to corporate entities. Prior to the changes introduced by the amendments made consequent to the introduction of the electoral bonds scheme in 2017, corporate donations to political parties, if made, directly required to be reported in the annual report with the details of the recipient of the same. 
There was also an option, which continues, to route such contributions through an electoral trust. 
The electoral trusts were set up by a few corporate groups essentially to cater to their specific set of entities. The contributors to the trust would normally be the group companies. While at the stage of the primary contribution, the exact identity of the political party receiving the amount would not be known, the electoral trusts which handed over the donations to the political parties did disclose in their books of accounts the identity of the party. These trusts are required to file their accounts and disclose the amount paid to different political parties to the election commission, hence a complete camouflaging of the destination was not possible. 
Such trusts were set up by some leading corporate groups like the Tata, Aditya Birla, and the Murugappa group; which list is by no means exhaustive.
Another aspect relevant to corporate donations was the fact that the company law had a limit for political donations at 7.5% of the average profits. With the advent of the electoral bonds in 2017,  this limit was also removed. Hence, full anonymity and the removal of the cap happened simultaneously in 2017.   
Unlike in the case of an individual or a partnership firm, corporate organisations function through the agency of directors and senior officers. Transparency and disclosure are at the core of corporate reporting for which regulators like the Securities and Exchange Board of India (SEBI0 the Reserve Bank of India (RBI) and the department of company affairs, tirelessly strive. 
The board of directors of all companies—and especially companies that are listed—must ensure that all the affairs of the corporation are meticulously reported to the stakeholders. An independent audit reporting on on it through the verification of the accounts forms the core of corporate governance. 
In the case of electoral funding through the bearer bonds, the above premise is entirely torpedoed. 
In the case of most promoter-managed but publicly listed companies, the pivotal position of the chairman and/or managing director would be held by the promoter or a nominee. While the board may have outsiders like the independent directors, sometimes, even in a majority, the promoter would hold considerable sway in the formulation and execution of the board’ decisions. 
With the legal stamp of anonymity conferred by the electoral bonds scheme, even the board of directors would get to know only the total funds being contributed and not the details of the political party(ies) getting the share of it. The board resolution would empower the MD or the company secretary to deal with the purchase and delivery of the bonds. Even the auditors would only know the total sum and not the way it is distributed. 
Strangely, many corporate directors and auditors take comfort from the fact that the amount sanctioned can only be used to buy the bonds and cannot be diverted to any other purpose. Is this sufficient? Isn’t the decision to divide the contributions to different parties important enough for the board in entirety to be aware of? Even assuming a fair-minded chairman informally apprises the board of the allocation, how can the actual distribution be checked? 
The shareholders, too, would not know the destination of the money and the secrecy strikes at the very root of corporate governance. The situation may be more piquant for a subsidiary of a multinational company if the subsidiary is a material entity for the consolidation of accounts and the holding company’s board seeks details of the contributions made!
Should the court’s decision finally sanctify the anonymous nature of the bonds, the outcome will be in opposition to good corporate governance.
There is a vital misunderstanding even among persons who are not lay, that the political party receiving the contributions do not know the identity of the contributor. It is not clear how this myth has taken root! While newspapers do not publish the photo of a corporate chief handing over the bonds to a political boss, the mode of transmitting is personal and physical and not in any unseen electronic mode! 
The myth that the anonymous bonds descend like manna from heaven into the bank account of the political parties is no better than the myth that a heaven exists!
That a political party and its head (leader/president etc) would be unaware of its benefactor is a ridiculous notion. Even more ridiculous is the notion that political donations are actuated by just eleemosynary instincts of improving the democratic system obtaining!
As stated in the beginning, the position that historically obtained under the company law, whereby political donation was limited to a figure of 7.5% of the average profits, was removed in 2017. No valid explanation exists about the motivation to scrap this limit. 
It is seen based on the data in the public domain that large listed companies making political donations seldom cross a limit of say 1% to 2% of the net profits. The data pertaining to a few companies randomly picked up is given below.
This is just a sample of companies randomly selected to buttress the point that even the 7.5% limit was more than generous to accommodate political donations. There is only one company which crosses the 7.5% limit, that too taking just a single year’s profit and not the average of three years. 
However, it is difficult not to feel curious how the concerned file note recommending the amendment to remove the 7.5% cap was constructed!
How much would this aspect weigh with any court in assessing the true intent behind the various limbs of the electoral bond scheme can, at best, be in the realm of speculation only! 
In all the above-mentioned cases, the companies have preferred the route of electoral trust or electoral bonds to avoid disclosure of the names of the political party receiving the donation. It is most likely that, even in cases where the contribution was made to the electoral Trust, the Trust in turn would have acquired the bonds to make the final contribution. Thus, total secrecy would have been ensured in supporting a key democratic process! 
In terms of the current structure, a company with three-year existence as mandated by the law, with no operations and little capital, can take a bank loan and donate. Only the naïve would ask how a company with no financial strength can obtain a bank loan!
There is an assertion on the part of the administration that a robust KYC (know-your-customer) and tracking process exists to detect fraudulent transactions. The modus is not public. As the current discussion is not focussed on the aspect of abuse, this is not further explored.  
Whether or not the court is informed of the philosophical speculations of the corporate governance related issues, it would be seriously failing in its enquiry if it misses to call for the complete records of all the corporate donors which donated large sums to see if the amounts are a reasonable fraction of the profits, or a disproportionate sum. It may not be impossible to find some cases where a loss-making company may have donated. 
Even in a situation that the court is persuaded to accept that corporates can affect anonymous donations, it is important to discern the necessity to mandate that all companies making donations in excess of Rs1 crore (or any other suitable amount) publish a set of details, similar to publicly listed companies publishing financial results at the end of each year.   

An analysis by commodore Lokesh Batra (retd), based on a reply received under the right to information (RTI) from State Bank of India (SBI), shows that a total of 741 electoral bonds were sold during the 22nd tranche, conducted between 1st October to 10th October 2022. His analysis shows that nearly 96% of this was of the denomination of Rs1 crore each.

It is intriguing how SBI decides on the number of bond certificates to print in each denomination. Which authority in the Bank would take that call? A newspaper report, citing an RTI enquiry, mentions that between 1 August 2022 and 29 October 2022, SBI printed, through the security press, 10,000 bonds of the face value of Rs1 crore
This puts the aggregate value at Rs10,000 crore! Is this a harbinger of the bumper corporate profits in the current year and should the Street take the cue and quickly mount the peak 70000-points?
To round off the statistical information, the Delhi branch of SBI had redeemed bonds worth Rs4,917 crore (out of Rs6,108 crore) showing that the national capital is the main magnet for this scheme!  
An imaginary case study is presented to illustrate the corporate governance angle elaborated as a theoretical discussion above. 
X is the promoter and MD of a profitable public listed company with an illustrious board. The MD seeks and obtains the board approval for making political donations for Rs45 crore. He informally shares with the directors that Rs7.5 crore would be given to two smaller (say, regional) parties. Rs15 crore each for two national parties A and B. The board is comfortable as all important constituents get something on a rational basis. 
Since electoral bonds are anonymous no detail is mentioned in any of the records of the company.
X obtains the electoral bonds from the assigned branch of SBI by issuing a cheque for the total amount. 
X is now in possession of the bearer bonds of Rs45 crore (45 bonds of Rs1 crore each) and the only action needed to complete the process is to fill up the name of the political party in the space provided in the instrument for this purpose and hand it over to the respective parties as originally decided. 
X is a good friend of a very senior functionary in Party B. X gets into a discussion with the said person and decides to give bonds worth Rs35 crore to party B rather than Rs15 crore, as told to the other directors. 
The other three political parties get the balance Rs10 crore and the exact division is not material to this example. 
The way X and the said person in Party B had a mutual understanding, was that X would receive Rs20 crore cash which the concerned leader was in possession of. Possibly, this is an unaccounted cash that has come to the party and kept in the custody of the said leader, or unaccounted money of the leader, held without knowledge of the party, or existing for whatever reason. The source of this cash is unimportant for this case study.
X has been negotiating to buy a prime property for Rs33 crore for which the seller has fixed the cash component at Rs20 crore. The party leader (or a close family member as a proxy) wants to be part of the transaction and the two agree on a 50% share each. Both X and the party leader (proxy) have accounted money of Rs6.5 crore and the deal is put through.
Both X and the political leader (proxy) have 50% each share in a property worth Rs33 crore, each having legitimate source to account for the Rs6.5 crore paid to register it.
The effects are as follows.
Party B (or its leader) has accumulated cash and has successfully dissipated about Rs20 crore of it and replaced it with electoral bonds of Rs35 crore.
X has accessed Rs20 crore of cash which he could not have legitimately taken from his company, given the challenges in the current system to siphon out money from a well-run company.
Out of the Rs20 crore cash received by X, he shares 50% with the party leader(proxy). Effectively, party leader of B has taken away Rs10 crore of the party funds (kept in black) to his personal benefit. Assuming the said person is not the supremo of the party and answerable to someone higher up, the deal is a win-win for the party and the individual representing the party. 
In final effect, a well-run company (possibly audited by a top audit firm) and its high-profile board with more independent directors than required under LODR, help its MD, and a key political party leader get richer by a tidy sum!
In a manner of speaking, Rs20 crore of black money with the party/ its leader has been converted to accounted money in the books of the political party. Could the former finance minister have factored a similar situation in believing that the black money of political party will be eliminated? Is it sounding too perverse to use such an example to justify the scheme?! 
Suppose this gets the buy in of the court hearing the matter; is it a buoy to save the democracy, or a burning deck?
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Kamal Garg
3 months ago
Serious implications of the entire Scheme - not only from Corporate governance issue but also the manner in which the MD/top functionary of a public limited listed company can divert company's money legitimately into cash and deal with it in the manner he likes.
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