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Law Ministry Said Modi Govt’s Route To Pass Electoral Bonds Was Illegal But Signed Off Anyway

Documents obtained under RTI also reveal that crucial discussions on allowing shell companies to secretly fund political parties were not officially recorded.

This story is a part of #PaisaPolitics, HuffPost India’s investigation into how the Modi government brought untraceable funds into Indian politics. Read the rest of our series here.

NEW DELHI — The Ministry of Law and Justice signed off on the Narendra Modi government’s decision to hastily pass the controversial electoral bond scheme by bypassing the Rajya Sabha, despite putting on record that the government’s strategy was illegal and unconstitutional, documents obtained by HuffPost India establish.

In a two-page note, the law ministry said this illegal step was a one-off exception and urged the Modi government to “avoid considering this practice as a precedent”, the documents reviewed by HuffPost India show.

Worse, crucial official deliberations on allowing even shell companies to secretly donate unlimited funds to political parties were simply not recorded in official meeting minutes. The deliberations were characterised as “informal discussions” between unnamed officials.

This is illegal as it violates a 2013 Supreme Court judgement on how official minutes must be recorded, and breaches the Manual of Office Procedure of the Ministry of Personnel, Public Grievances and Pensions. The Ministry of Personnel reports directly to Prime Minister Modi.

Taken together, the documents show that Modi’s Bharatiya Janata Party (BJP)-led government was so eager to allow corporations to secretly funnel money into politics that the government knowingly broke the law and tried to cover its tracks by refusing to record official deliberations in meeting minutes.

The electoral bond scheme allowing corporations, trusts, NGOs and private individuals to anonymously donate unlimited amounts of money to political parties, was first introduced by then-Finance Minister Arun Jaitley in his 2017 budget speech. The BJP received 95% of the Rs 222 crore of electoral bonds sold in the first tranche in March 2018.

Reports from earlier this month show that 60% of the BJP’s total funds raised through donations in 2018-19, Rs 1,450 crore, was through electoral bonds.

Implementing the electoral bonds scheme required changes to several laws. The most controversial changes involved scrapping a provision in the Companies Act which permitted only profit-making companies to donate money to a political party. The provision had also put a cap on the donations that companies could make annually and forced them to disclose to which party they were donating money.

The ruling BJP knew it would struggle to get this controversial scheme through the Rajya Sabha as it did not have enough representatives in Parliament’s upper house.

Now, documents obtained under the Right to Information Act by transparency activist Saurav Das, a member of National Campaign for People’s Right to Information (NCPRI), reveal how Jaitley bypassed the Rajya Sabha by slipping the most contentious aspects of the scheme into a money bill. Under Article 110 of the Indian Constitution, a money bill does not have to be passed by the Rajya Sabha.

The documents show that the Corporate Affairs ministry, also controlled by Jaitley, sought the Law Ministry’s advice on the legality of using the money bill route. The law ministry concluded that “in strict sense it may not be considered as money bill”, but signed off anyway.

As a consequence, the most significant changes to election funding laws, with existential implications for the health of Indian democracy, were passed without even a debate in the Rajya Sabha, leave alone seeking the upper house’s consent.

The Law and Justice ministry and the Corporate Affairs ministry did not respond to detailed queries sent by HuffPost India. This story will be updated once they respond.

Read how the Modi government overruled the Reserve Bank of India, misled the Election Commission of India, broke its own rules on Electoral Bonds, and arm-twisted the State Bank of India in its quest to funnel dark money into Indian politics.

Jaitley’s scheme

In 2017, Arun Jaitley wore two hats: he was India’s Finance Minister and also the Minister for Corporate Affairs. To force the electoral bond scheme through Parliament, he would need both.

After he had introduced the idea of electoral bonds in the budget and the finance bill he tabled as Finance Minister, Jaitley, as corporate affairs minister, held a meeting with his officers on March 8, 2017, to discuss amendments to the Companies Act, 2013. Some of these amendments, such as the role of independent directors in companies, had been in the works for a while. None of them pertained to the regulations around political donations by corporations, show note sheets maintained by the Ministry of Corporate Affairs and reviewed by HuffPost India.

Yet a file noting made a week later, on March 16, 2017, states that another amendment was decided at the meeting. This amendment had not been on the agenda when the March 8, 2017 meeting began.

“It was, inter alia, decided that section 182 of the Companies Act, 2013 (Prohibition and restrictions regarding political contributions) may be amended, keeping in view the various steps being taken by the government to bring transparency in electoral funding,” read the file noting. “Inter alia”, it is worth noting, literally means “among other things”.

The changes proposed to Section 182 were very significant: One change removed a provision capping the upper limit of corporate donations to 7.5% of net profits averaged over three years. The other change allowed corporations to hide the name of the political party to which they were donating.

The file notings do not reveal who made the proposal, but they say “informal discussions” had taken place between officers of the finance ministry’s revenue department and the corporate affairs ministry after Jaitley’s March 8, 2017, meeting.

A file noting from March 16, 2017, obtained under RTI, states that a far-reaching amendment which would allow even shell companies to secretly fund political parties was decided at a meeting held by Arun Jaitley a week earlier.
A file noting from March 16, 2017, obtained under RTI, states that a far-reaching amendment which would allow even shell companies to secretly fund political parties was decided at a meeting held by Arun Jaitley a week earlier.

The note does not mention who specifically had held these “informal discussions”, but in the course of these “informal discussions” — the file notings say — it was decided to include these changes to Section 182 of the Companies Act by tabling an amendment to the Finance Bill 2017. The bill had been tabled in Parliament on February 1 that year, but the Lok Sabha was yet to vote upon it.

These informal discussions were illegal, as per an October 2013 ruling by India’s Supreme Court.

“We are of the view that the civil servants cannot function on the basis of verbal or oral instructions, orders, suggestions, proposals, etc. and they must also be protected against wrongful and arbitrary pressure exerted by the administrative superiors, political executive, business and other vested interests,” the court said in its judgment in T.S.R. Subramanian versus Union of India.

Further, all discussions, including telephonic discussions between two or more officers of the same or different departments, and the conclusions they reach, must be recorded precisely on files at the earliest, according to the Manual of Office Procedure laid down by the Ministry of Personnel, Public Grievances and Pensions. This ministry is responsible for enforcing protocols on how government business is transacted and recorded.

Finally, government officers are barred from accepting oral orders under their service conduct rules.

If the Modi government’s breach of procedure was worrying, the substance of what was being proposed was scandalous.

Money bill

When the government amends a law, it drafts an ‘amendment bill’ detailing the proposed changes. Bureaucrats from various ministries mull over the changes, and a draft amendment is often made available to elicit suggestions from the public. The amendment is then tabled in Parliament for the Lok Sabha and Rajya Sabha to deliberate and vote on.

Given that Section 182 of the Companies Act, 2013 regulates the role of corporate money in Indian elections, any amendments should have followed this route. But the Modi government decided that, in this matter of unprecedented public importance, “informal discussions” amongst unnamed officials would suffice.

To further curtail any discussion on the matter, the government decided to insert these amendments in the Finance Bill, which is by classification a “Money Bill”. This meant even the Rajya Sabha would not have a chance to debate the bill.

Article 110 of the Indian Constitution says that a money bill is a bill which deals with receipts, expenditures, taxes or borrowings by the government which stands to impact the Consolidated Fund of India.

Did the amendment to the Companies Act fit the bill?

The note from the Ministry of Corporate Affairs dated March 16, 2017, offered a convoluted justification, “It may be noted that all political contributions made by companies under section 182 are eligible for deduction from the total income for the purpose of income tax calculations under section 80GGB of the Income Tax Act. Removal of the upper cap of 7.5% has potential implications on tax revenues of the Government.”

Political donations were tax deductible. So if the government removed caps on donations, the reasoning went, companies might donate more money — and as a consequence pay less tax, which would impact the government’s revenues, which meant the amendments could be considered a money bill.

The note did not justify how an amendment permitting secret donations would affect government revenues, and therefore fit the requirements of a money bill under the Constitution.

Law ministry’s advice

On March 16, 2017, the Corporate Affairs ministry sent a missive to the Law ministry with a simple question: “Whether the proposed changes in section 182 of the Companies Act may be made through official amendment in the Finance Bill, 2017.”

The law ministry responded with a two-page advisory the very next day. This note was prepared by deputy legal advisor R.J.R Kasibhatla and signed off by his seniors, including joint secretary S.R. Mishra, the same day. It read:

“In the light of the above factual and Constitutional position since the amendments proposed in Section 182 are not the provisions directly dealing with all or any of of the matters enumerated there under clause (a) to (g) of Article 110(1) in strict sense it may not be considered as money bill.”

The Law Ministry had seen through Jaitley’s ruse, only to get cold feet.

“However as provided in Para 3 above as the amendments proposed are having a bearing on regulation of income tax under the Income Tax Act, 1961 Act, and revenue flowing into the Consolidated Fund of India it may be made through official amendment in the Finance Bill, 2017,” the note continued.

But even as the Law Ministry gave its blessings to a manoeuvre that it knew was not constitutional and legal “in strict sense”, it ended with a plea for better behaviour in the future.

“In order to avoid considering this practice as a precedent it is advisable to adopt the extant regular legislative practice and procedure in future,” the note concluded.

The law ministry's two-page note dated 17 March, 2017, where it said that while 'in strict sense', the proposed amendments to Section 182 of the Companies Act wouldn't come under a money bill, the government could still go ahead.
The law ministry's two-page note dated 17 March, 2017, where it said that while 'in strict sense', the proposed amendments to Section 182 of the Companies Act wouldn't come under a money bill, the government could still go ahead.

The law ministry’s advice went quickly up the bureaucratic chain. On the very same day, each official signed off on amending provision 182 of the Companies Act through the Finance Bill. Arun Jaitley as corporate affairs minister agreed to it the same day and a missive was sent to the finance ministry confirming this. There, as finance minister, Jaitley was waiting to agree to it yet again.

Four days later, on March 21, 2017, Jaitley introduced amendments to the Finance Bill, 2017 which he had tabled on February 1. The amendments included the changes the government sought to the Companies Act.

On March 31, 2017, the Finance Bill, 2017 was passed by the Lok Sabha. Section 182 of the Companies Act, 2013 had been amended without a nod from the Rajya Sabha. Corporates could now funnel funds to political parties even if they did no real business or earned nothing. And they could do so secretly without making any public disclosures.

Paper trails

In his applications under the RTI Act, transparency activist Saurav Das also asked Prime Minister Modi’s office for all file notings, minutes of meetings, correspondence, memos and letters that the PMO maintained on electoral bonds. He did so because all inter-ministerial discussions on amendments to laws are also marked for the Prime Minister’s attention and considerations.

The PMO refused, claiming “The request of the applicant is sweeping, roving and generic in nature. It does not highlight any specific information, the applicant intends to seek from this office.”

The PMO added another reason for denying information: “The supply of information in this form would divert resources of the public authority disproportionately.”

The PMO's reply to transparency activist Saurav Das.
The PMO's reply to transparency activist Saurav Das.

Das filed an RTI application with the Corporate Affairs ministry, asking if any company had written to it asking for the changes to be made in law providing them a secret route to fund political parties. His question arose from the claim finance minister Jaitley had made in the Parliament that donors had asked for such a route to donate anonymously.

The Corporate Affairs ministry informed Das that it had no records to show any company had asked for these changes. HuffPost India has previously revealed that the finance ministry too has said no one had approached them to make these changes to electoral funding.

The Supreme Court is currently considering a clutch of petitions challenging the government’s decision to use change several laws by folding them into the 2017 Finance Bill. The legal and constitutional validity of electoral bonds, and the implementation of this scheme, has also been challenged in the apex court. The apex court is yet to decide on either matter.

Meanwhile, the Modi government opened the 13th window for sale of Electoral Bonds on January 13, days before Delhi goes to polls.

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This article exists as part of the online archive for HuffPost India, which closed in 2020. Some features are no longer enabled. If you have questions or concerns about this article, please contact