“Supreme Court Observes Center Issued Electoral Bonds Despite Reserve Bank of India’s Objections”

The five-judge constitution bench, which on Thursday invalidated the 2018 electoral bonds scheme, highlighted the Centre’s issuance of the bonds despite objections from the Reserve Bank of India (RBI). The RBI had expressed concerns regarding potential money laundering, misuse by shell companies, and erosion of the bank notes issued by the central bank.

According to the apex court, the RBI had communicated these concerns to the finance ministry’s joint secretary on January 2, 2017, emphasizing that the electoral bond scheme could undermine the RBI’s authority to issue bearer instruments, potentially impacting faith in RBI-issued banknotes. Additionally, the RBI cautioned that the scheme could contravene the Prevention of Money Laundering Act 2002 and suggested alternative payment methods such as cheques, demand drafts, and digital payments.

In a subsequent letter dated August 4, 2017, the RBI deputy governor recommended transitional issuance of electoral bonds through the RBI under existing provisions of the RBI Act. The RBI proposed various safeguards to mitigate misuse, including limiting bond tenure to 15 days, denominations of 1,000, 10,000, and 1 lakh rupees, purchase from KYC-compliant bank accounts, redemption only through eligible political party accounts, restricted sale windows, and exclusive issuance at the RBI, Mumbai.

The RBI cautioned against commercial bank issuance, expressing concerns about public perception and the financial system’s credibility, reiterating potential misuse by shell companies for money laundering.