The five-judge constitution bench that on Thursday struck down the electoral bonds scheme of 2018 noted that the Centre had issued the bonds ignoring the Reserve Bank of India’s objections.

The RBI had flagged possible money-laundering and misuse of the scheme by shell companies, and erosion of the bank notes issued by the central bank.

The apex court noted that the RBI had on January 2, 2017, written to the joint secretary in the finance ministry, saying:

• The electoral bond scheme will enable multiple non-sovereign entities to issue bearer instruments, undermining the RBI’s sole authority to issue bearer instruments that can potentially be used as currency. Electoral bonds issued in sizeable quantities can thus undermine faith in RBI-issued banknotes.

• The scheme will affect the principles of the Prevention of Money Laundering Act 2002.

• The objective behind the electoral bonds can be achieved also through cheques, demand drafts and digital payments.

In another letter, on August 4, 2017, the RBI deputy governor suggested that the Centre consider issuing the electoral bonds on a transitional basis through the RBI under the existing provisions of Section 31(1) of the RBI Act.

The RBI recommended the following safeguards to reduce the scope of misuse of the bonds:

• The bonds should have a maximum tenure of 15 days, and be allowed in multiples of 1,000, 10,000 and 1 lakh rupees.

• Their purchase should be allowed from a KYC-compliant bank account of the purchaser.

• They should be allowed to be redeemed only on being deposited with the designated bank account of an eligible political party.

• The sale of the bonds should be open only to a limited window, such as twice a year for seven days each.

• The bonds should be issued only at RBI, Mumbai.

The RBI said that allowing a commercial bank to issue the bonds would “have an adverse impact on public perception about the scheme, as also the credibility of India’s financial system in general and the central bank in particular”.

It again flagged the possibility of shell companies misusing the bonds for money laundering.