Is the Virtue of Financial Transparency of Political Parties over-rated?

There is a lot of buzz of late about the need for financial transparency of Indian political parties. Non-governmental organizations (NGOs) such as Association of Democratic reforms (ADR) have been pitching for increased transparency of funding to political parties to curb the impact of money power in deciding the election results. In June 2013, they won a landmark ruling from CIC that brought the six national parties under the ambit of Right to Information (RTI) act. At the core of the argument put forth by ADR is that political parties receive indirect funding from the state (e.g. free airtime in Doordarshan/Akashavani, tax exemptions under IT act) and hence should be declared public authorities.

On the other hand political parties (except BJD and CPI) have questioned the liberal interpretation of them being treated as public authorities; not very different from the stand taken by BCCI in a similar petition. They are even willing to forego the free slots offered by the public broadcaster, and even the IT exemption benefits in a bid to avoid extraordinary scrutiny. Some of the rival think tanks and public policy experts have also expressed reservations about the issue of multiple regulators with divergent interests, increase in unnecessary transaction costs for administering the party and whether RTI is the right way to achieve the objective (on which there is near unanimity) of clean, money-power free elections.

There are several petitions filed in the court of law and a constitutional/legal debate in happening on one front. The parliamentary committee formed to study this issue has suggested amendment to the RTI act to annul the CIC order. Because of lack of agreement and perhaps fear of negative publicity, such an amendment has not yet been pushed through. At the same time there is a popular debate happening in public forums where the merits and demerits of financial transparency initiatives are being hotly discussed.

While taking nothing away from the noble objective of achieving clean elections, and the yeomen service rendered by NGOs such as ADR towards this goal, the intent of this article is to critically examine the claims made by some self-righteous groups, and ensure discussions in public forums are based on facts, rather than on popular myths. This article does not join the policy debate on whether political parties are public authorities or not; as that requires a separate treatment by itself and ample material is already available in public domain from both sides of the divide. Hence the intent of this article is limited to creating awareness about the existing system (its intent and design) and debunk some of the popular myths that are paraded as facts; so that the aam aadmis debating in public forums can have a more reasonable and balanced discussion.

What are the salient points of the existing system?

(1)   Political parties are expected to maintain a book of accounts on donations received just like revenue receipts are maintained by every other corporate firm. The Income tax (IT) department (assessing officer) has been empowered to audit the book of accounts of a political party and seek any amount of details / substantiating evidence on any sum in question. This includes both donations below & above the limit of 20,000 Rs. These parties are hence accountable to IT department and in case of accounting fraud or violation they can be charged under Sec 13A of IT act. Since no such major violation has been reported, there is no evidence to suggest non-compliance.

(2)   Political parties are expected to maintain name & address of all donors who contribute over 20,000 Rs. This exemption limit is provided in Representation of People’s act (RPA) to exempt petty donors due to the disproportionate transaction costs involved in accounting them. The rationale is very similar to the accounting practice norm for miscellaneous expenses. (There is a complaint that this provision is being misused, and we will come to it later!). These records are again open for inspection by the IT department under Sec 13A of the IT act. Additionally the treasurer of respective political parties has to annually file this list of (non petty) donations under Section-29C of the RPA to election commission (EC) to avail tax exemption. Once filed to Election commission, the report is already available for public review on the EC website. Many of the litigations filed in the court (including the one on Vedanta) were based on information obtained via this source.

(3)   Regarding corporate donations, Section 293A of companies act regulates their funding to political parties. Controls such as maintaining books of accounts, declaring it in the P&L statement, a donation limit that cannot exceed 5% of the annual profits declared – are present in the current system. The Company Auditors and IT department can audit these records and the Board of Governors (on behalf of shareholders) can also verify this information. It can also be questioned by individual shareholders in the shareholder meetings of PLCs.

(4)   Section 29B of the RPA limits who can fund political parties. The exclusion list includes among others foreign nationals, foreign sources, and Government companies. Those found taking money from foreign sources can be charged under Section 29B of RPA; however it is not clear in which section can the donors be charged as they lie outside the jurisdiction of India. Furthermore such foreign donations to political parties (and NGOs) are also regulated by the stringent Foreign Contributions Regulation Act (FCRA) 1976, which prohibits donations from foreign sources.

What are facts and what are myths about the existing system?

Is it true that political parties are not expected to maintain name and addresses of their donors?NO! They are only exempt from maintaining the details of petty donors who donate less than 20,000 Rs, very similar to the recording of miscellaneous expenses in the book of accounts. But isn’t it true that political parties are using this loophole to classify a vast majority of their funds as petty donations? This allegation about the disproportionate pie-size of petty donation is justified, but in the same vein it does not automatically imply of any malpractice.

As much one may disbelieve, it is plausible that there are a lot of petty donations from common public of India in response to the ground level campaigns undertaken by these parties. The only way to conclusively establish what is going on is to revise Section 29C of the RPA to remove this restriction. But how does one change this rule without excessively increasing the cost of keeping books for these numerous petty donations? (Clue: Technology solution for political parties?)

Are political parties currently not accountable to anyone on their funds? NO! They are answerable to the appropriate constitutional bodies of this nation as identified by the relevant statutes discussed above. In case of violation these very bodies are empowered to prosecute offenders.

Is review by constitutional authorities sufficient or do we need review by any common public?

I guess there is no straight answer to this question because it depends on the philosophy of the person you ask.

Would bringing political parties under RTI help?

I do not see what more one can gain on “funding source” other than those available from EC website; unless and until petty donations are addressed. However information on other aspects of how political parties are run can definitely be obtained via RTI.

What is the downside of RTI to political parties?

For one, information will become accessible to all and that includes political rivals, domestic detractors, and vested agencies with connections to hostile foreign nations. This can lead to loss of competitive edge, intra-party dissidence, politically motivated malicious campaigns, inordinate harassment to officeholders, and potential loss of privacy for individuals associated with the party in whatever capacity. For example, misuse of RTI act is observed in Maoist infected districts where the list of projects (and their value) is obtained by Maoist sympathizers for extorting their “cuts” from the awarded contractors (see here).

In any case the issue of privacy is often at loggerheads with the society’s quest for increased transparency; as observed in the raging debate for and against “Aadhar” where benefits of transparent subsidy targeting comes with the potential risk of misuse of sensitive information by contracting agencies. And we know private agents (NGOs) are not any more trustworthy than government agents (contractors).

Can corporate donations remain unaccounted and blatantly misused to attain partisan gains?NO!

The existing system has been designed with controls in both sides. The parties have to report (non-petty) donations to the IT department and EC, and the companies have to declare it in their P&L. If there are any partisan gains, the existing system allows affected parties to file a PIL on suspected quid-pro-quo arrangement. In fact as observed in the cases of 2G scam, and allegations against Virabhadra Singh or Yeddyurappa, it is more likely that such corporate doles are diverted to NGOs or corporate firms run by politicians, rather than the party itself.

So corporate funds are all in white?

No! Because the owners/management of corporate firms can have black money (please note the firm by itself cannot feasibly conceal black money that is invisible to the auditors) and can always fund the political parties in their individual capacity. They can even directly fund the expenses of political parties during the run-up to elections. Although EC stretches its limited resources to keep a tab on this, please note this transaction is at par with any other black money transaction of a private individual in the society. Hence this larger societal issue has to be addressed by finding ways of preventing private individuals from storing/transacting in black. It is redundant and too narrow to view this from the prism of political party donations.

So parties saying NO to corporate funds are clean? NO! Nothing stops them from receiving donations from the owners/management of corporate firms in their individual capacity. So there is nothing to guarantee that they have received only white money and these big individual donors can always negotiate quid-pro-quo on behalf of their firms.

Are foreign sources allowed to send funds to political parties and influence the course of country? NO!

The section 29B declares this practice illegal and the existing auditing checks can detect violations for prosecuting the offenders. The more stringent FCRA act is a deterrent for parties to accept donations from foreign sources.

But is it true that MNCs fund political parties via their Indian subsidiaries?

There is a legal case pending on this topic on Vedanta donating to political parties. The ruling will decide the legality of this practice. Irrespective of the court ruling, the post-liberalization India that welcomes FDI needs to pragmatically define how Indian are Indian subsidiaries. For example, Are Sterlite and Sesa Goa (acquired by Vedanta) any less Indian than Jindal and Tata? Are ICICI and HDFC no longer Indian just because it has greater than 51% foreign shareholders?

Is it true thatparties are receiving large foreign donations under the garb of taking it from NRIs?

Yes it appears to be happening. To be fair to them, it is very hard to differentiate who is a resident Indian who lives at-least 180 days in India, who is a NRI and who is a PIO with foreign passport. Political parties are only employing “good faith” in accepting such donations, and are not sufficiently covered against the clutches of FCRA act. The decision of the court in the PIL filed against AAP for receiving funds from foreign source would hopefully provide some guidance on the legality of this practice (see here).

Is it true that political parties divert funds from foreign sources to their affiliate charitable NGO trusts?

Yes it appears to be happening and NGOs are far too many for government agencies to audit on a routine basis. The problem is compounded further because these NGOs spare volunteers and/or undertake to run proxy campaigns for their political masters. Should the government completely ban foreign currency donations to political parties and their affiliated NGOs? Such an outright ban would be kneejerk. It is also impossible to monitor because the money can always be converted to Rupees via other channels and donated by Indian alibis. Hence a more pragmatic control to prevent foreign influence needs to be found.

If the fund sources are known, can EC ensure that only such funds are used by political parties is the run-up to elections?NO!

The existing expenditure limit per constituency set by the election commission is way too small in proportion to the cash reserves built by these parties. In fact most candidates declare actual expenses that are way below these limits, without utilizing their full quota. But there are corridor conversations of how much does it truly cost to contest an election and how this budget is rising faster than inflation. These facts together imply that funds parked with political parties in their own account (for which we want transparency and scrutiny) has no relationship whatsoever with the actual expenditure incurred in the electoral arena.

What is the timing of arrival of these funds?

It is clear that funds (both white and black) arrive in massive numbers only in the run up to elections when donors are excited about funding their favourite parties. Although EC maintains an eagle watch on unaccounted cash in this campaign period, it appears to be evidently inadequate. During this busy period, many times these cash donations never even enter the banking system i.e. are transmitted from the donor to the local party official to the end expenditure in the form of cash.

Does that mean are we barking at the wrong tree of asking for funding transparency of political parties to limit money-power in elections?

It certainly appears to be the case because nothing stops political parties from demonstrating full transparency of funds parked in their party account, while utilizing these alternate sources of funds in the run-up to the elections. Perhaps to counter this behaviour EC is exploring the possibility of mandating all parties to provide receipts on donations/expenses in the run-up to elections. They are also asking for parties to make all election expenditure over Rs 20,000 via the banking system (see here).

In essence, this raises serious questions on whether the solution (financial transparency of parties) we are currently after is appropriate and/or complete for the end-goal of clean elections.

Conclusion

As observed above, it is very hard to obtain a clear-cut answer for any of the questions. Although the objective of money-power free elections is noble, the modalities of how to get there are not really straight forward. We are not even sure whether the financial transparency of political party funds is a solution to the problem or not. But even by taking a conservative view and accepting that there is a certain degree of linkage, aren’t we still over-rating financial transparency of political parties as a virtue in itself?

This is where organizations like ADR need to be credited for running a civilized discourse and resorting to constitutional means for driving towards greater transparency. They realize the limited utility of financial transparency of party funds as a means of attaining the end goal and instead focus on many other electoral reforms.

On the contrary there is a lot of cacophony generated by certain self-righteous groups that attempt to project themselves as paragon of virtue. They tend to trash the existing players and system on this aspect, and instead market themselves as holier than thou.

Isn’t that over-stretching the virtue? Isn’t that equivalent to setting normative rules of a game according to one’s own convenience, and then breast beating about how good they are at it?

Is state funding to political parties the solution to this problem? NO!

On the other hand it can wilfully increase the money spent in the run-up to the elections, wasting precious reserves of the exchequer. There is nothing that stops the current loopholes of – anonymous petty donors, corporate donors holding black money in their private capacity, identity faking foreign sources, and NGO affiliates of political parties – pumping money behind the scenes and more so in the busy period before the elections.

Hence is it then fair to belittle every control that exists in the system to be defunct?

It is evident that every control in a process has a defined utility and a known limitation. It is only the pragmatism of designers that guides them to make the trade-off. It needs to be recognized that replacing one control with another, comes with its own set of limitations. There is no magic control that comes without loop holes or side effects.

To conclude is the system completely broken as some self-righteous groups claim? NO!

That does not appear to be the case as one carefully evaluates the working, limitations, and nature of tradeoffs made by the designers of the existing system.

Does the system have problems?

YES of course and the controls need to be kept abreast with changing realities. But the only way to do it is by having a civilized legal/constitutional debate reassessing the previous trade-offs. Then amendments can be made to the required constitutional statutes.

In the interim, is it justified to rank order parties on their reported election expenditure and evaluate their cleanness?

NO that would be as silly as using the rank order of visual acuity tests to make selection for the army. A qualifier cannot be used to rank order merit. In any case the reported number is meaningless given the deviation from reality.

Is it justified to call all big election expenditures of political parties as pumping of black money? NO such exaggerated statements have only as much value as envious gossips about lifestyle of one’s rich neighbour.

Is it fair to call political parties who comply with the laws of land, but do not publicly declare their sources as funds as corrupt? NO that is only as fair as calling a girl – whore; just because you haven’t personally examined her virginity!