Finance Ministry ignores RBI’s dissent on electoral bonds; assumes 'indirect' approval

New Delhi: The Reserve Bank of India’s (RBI) repeated warnings on the electoral bond scheme in bearer form having the potential to increase black money circulation, money laundering, cross-border counterfeiting and forgery were ignored by the Prime Minister Narendra Modi government, as it was more keen on protecting the identity of donors, the Ministry of Finance’s responses to right to information (RTI) queries has revealed.

In response to applications about the electoral bond scheme filed by RTI activist Anjali Bhardwaj, the ministry has released the correspondence between the RBI and the Centre, that clearly show how the Centre went ahead with a “bearer” electoral bond scheme, as announced in the Union Budget 2017-18, regardless of the concerns raised.

Earlier, this week, HuffPost India broke the story of how the RBI objected to the electoral bonds scheme, documents provided by Bhardwaj give further details on the back-and-forth that took place between the RBI and the central government.

In fact, a file noting has revealed that Subhash Chandra Garg, Secretary of the Department of Economic Affairs in the finance ministry, took RBI’s defiance in the matter to mean indirect approval.

On November 21, 2017, in a file, Garg noted that “RBI has indirectly agreed for electoral bonds to be issued by SBI as recorded in the CCB minutes” and that “FM may like to approve the notification for issuance.”

This was in contrast with the RBI’s stand on the electoral bond issue. The minutes of the weekly meeting of the Committee of the Central Board (CCB) convened on October 11, 2017, clearly shows what the RBI’s stance was.

During the said meeting, the then RBI governor Urjit Patel had briefed the Committee on the management’s discussion with the government on electoral bonds. It stated, “The CCB supported the Bank’s stand on not issuing the EB in scrip form and observed that if the government decides to issue EB in scrip form through SBI, the Bank (RBI) should let it be”.

In fact on September 29, Garg had himself noted that “repeated apprehensions voiced by RBI appear to be a bit anachronistic at this stage. Anyway Section 31 of the RBI Act has now been amended and it is Government’s prerogative to notify the scheme for issuance of EB (Electoral Bonds)”.

He further wrote that, “RBI is duty bound to provide detailed modalities to make the scheme operation as per the scheme notified by the Government. RBI may accordingly be requested again to do the needful.”

He followed it up with another noting on the file the same day, saying: “The matter was discussed by the FM with Governor today. It is proposed to convey the government decision…”

A look at the communication between then RBI governor Urjit Patel and then finance minister Arun Jaitley reveals that the government repeatedly ignored concerns raised by the central bank around the scheme.

On September 14, 2017, the then RBI governor Urjit Patel in a letter to Jaitley clearly raising his concerns, wrote:

“We are concerned that the issue of EBs as bearer instruments in the manner currently contemplated has the possibility of misuse, more particularly through use of shell companies. This can subject the RBI to a serious reputational risk of facilitating money laundering transactions.”

In a follow-up letter, dated September 27, 2017, Patel again wrote to Jaitley asking that the government “revisit its stance on issuing EBs in scrip form”. He also conveyed to the minister that the Committee of the Central Board (of the RBI) suggested that the bank “advise the central government, in our fiduciary capacity, to reconsider the idea of issuing EBs in the form of physical scrips in view of the likely unintended consequences that it could result in”.

Despite the concerns and red flags raised, the PM Modi led government stood its ground. On October 5, 2017, Garg wrote to the RBI governor saying, “it has been decided that issuance of such bonds would be in the form of physical bearer bond form only. Your views and suggestions have been duly considered and this is the final decision of the Government.”

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