What are Financial Bonds:
Any entity who wishes to raise money from investors issues bonds to so that any investor willing to lend money for a certain amount of time can buy those bonds and lend the money to get a certain amount back with interest (taxable at withdrawal) at maturity. Generally, the issuer of these bonds is a government, municipality or a corporate entity, and investors are retail public or corporate entities
What is an electoral bond (India market)-
These are financial instruments in the nature of financial bonds, the difference being that investors do not earn any interest on them. These have been introduced as a completely new concept by the Indian central government by amending the RBI Act in 2017. The India election funding was widely believed to be funded with black money and introducing electoral bonds is one of the steps the central government has taken to stop illegal money flow into election machinery. Here are the salient features of electoral bonds:
- Issued only by State Bank of India, the largest public sector bank of India
- Donors can only buy these bonds in multiples of pre-set denominations (Rs 10,000, Rs 1 lakh and Rs 1 crore) from their own bank account- No cash donation accepted
- The donation goes to the political party’s bank account when the bearer of these bonds presents them to the bank within 15 days of issuance. Party must be recognized by Election Commission of India
- Donor details remain anonymous (unless they wish not to be) to public and to the party (Except the argument by critics that the political party can get to know the donor details from the bank or other means)
- As per the scheme, even the Election Commission of India is kept in dark about donor details when the political parties submit their annual funding details to Election Commission. Efforts are on by groups as well as Election Commission to bring more transparency by disclosing investor details to the public
What is a Catastrophe Bond
Cat bond is one of the insurance-linked securities (ILS) instruments that provide one of the myriad ways in which an insurer can transfer risk. ILS are mainly used by insurance companies to buy supplemental protection for high-severity, low-probability catastrophe risks. Catastrophe Bonds are insurance-linked securities that transfer a defined risk (egg Florida hurricane or California earthquake) from a sponsor (the insurer or reinsurer) to capital market investors.
A bond pays out according to its trigger, which could be based on a total industry loss or on a trigger based on the actual physical event, such as wind speed or earthquake magnitude. Investors receive a high-interest rate but risk losing their principal and get back only the interest earned on their money, if a cat bond is triggered.
Where is the similarity between these?
- An electoral bond doesn’t pay any interest but is termed as a donation, however looking at it in a different perspective, it can be argued that it does pay an ‘interest’ (favors by ruling government like stifling competition) but the investor risk losing the ‘principal’ (in the case when the ruling party loses the elections). Thus making it similar to Cat bonds
- Electoral bonds don’t pay an ‘interest’ and cannot be securitized. This may change further when successive governments enhance the model by allowing these bonds to be ‘securitized’ thus making them similar to any other Financial bond.
- Electoral bonds are currently not ‘priced’ like financial market bonds since they are termed as instruments to donate money to political parties for election funds, making a similar case as that of US elections
Critical Viewpoint:
There have been allegations that Electoral Bonds is a scheme to let foreign corporate funds flow into Indian election machinery, allowing them to influence policy decisions, making them a quasi- P-notes- instrument but looking at the intention and details of the scheme, it doesn’t seem to be. P-notes were instruments that allowed foreign investors to pump in money into Indian stock markets without registering them with SEBI. It also allowed investors to remain anonymous. In 2008, there were widespread concerns that this allowed shell companies to route hawala money come unchecked into the Indian stock market. This is when SEBI tightened the regulations around P-notes. Electoral bonds only allow investors to buy these bonds from a KYC compliant bank account and encashed only into KYC compliant bank account of the political party.
Therefore, as long as the transparency is encouraged by disclosing the investor details to the public either through RTI or other means, this is a good first step towards rooting out large black money flow into Indian election machinery.
References:
- IASA Property Casualty Insurance Accounting
- www.business-standard.com
- www.economictimes.com
- recent news articles on Electoral bonds