What Led to Urjit Patel’s Resignation? An Insider Explains

There have been resignations in the Reserve Bank of India (RBI), but governor Urjit Patel’s in 2018 over policy differences was a rare event in the history of the central bank, writes former finance secretary Subhash Chandra Garg in his book. He details the frustration of the government with the RBI under Patel and the circumstances that eventually culminated into the latter posting his resignation on the RBI website

Published 7 months ago on Nov 01, 2023 5 minutes Read

The key features of the electoral bond scheme were approved at the highest level of the government in late August/early September, with RBI on board. The bonds were to be issued as physical bonds by scheduled banks authorized by the government.

Governor of RBI, Urjit Patel, for reasons best known to him, wrote to Finance Minister Arun Jaitley sometime in the middle of September questioning the issuances of bonds by anybody/bank other than RBI. Equating the bonds as currency, he wanted RBI to issue the bonds as it was the monopoly issuer of currency. This was a shocking ask. The RBI Act had been amended, which provided for the government-authorized scheduled banks to issue electoral bonds. By making this proposal, he was questioning the law of the land.

The second suggestion was a bigger shocker. Urjit Patel proposed that the bonds be issued in digital, not physical mode. This implied that potential donors would have to apply digitally to RBI to buy electoral bonds; and RBI—after completing the entire process of KYC and collecting funds from the buyer’s bank account— would issue a digital bond that the buyer would digitally transfer to a political party.

Finally, the political party would collect the proceeds of the bond digitally by going through the banks. Every political party would know who had contributed, and so would the EC and RBI. This would kill the most important feature that Arun Jaitley wanted to build in—the anonymity of the donor vis-à-vis political parties.

These two proposals from RBI worried the government. In a meeting called by Arun Jaitley, which Urjit Patel attended along with his deputies, Patel was combative and confrontational. He told Arun Jaitley that he could have objected to this provision in the Finance Bill (amendment of the RBI Act to allow electoral bonds) like his predecessor Raghuram Rajan had done earlier. Rajan had objected to the proposal in the Finance Bill 2015, that the government take over the issuance of government bonds from RBI, and had made the government roll it back. Arun Jaitley kept his cool and tried to explain the pith and substance of the electoral bonds to Urjit Patel.  

Considerable correspondence took place between RBI and the government thereafter on the issue. We also discovered that Urjit Patel had used the mechanism of the Committee of Central Board (CCB), the meetings of which were never attended by most RBI and government directors. He had proposed the issuance of the electoral bonds as digital bonds by RBI in one of the CCB meetings. The CCB, being almost an internal body of RBI, went along with this suggestion.

More discussion took place, involving the PMO as well. After this ping-pong went on for about three to four weeks, one day I saw in one of the CCB minutes: ‘If the government decides to issue electoral bonds in script through SBI (State Bank of India), the Bank (RBI) should let it be.’

RBI, under Urjit Patel, never furnished its comments on the draft electoral bond scheme or provided its formal consent to electoral bond issuance. We took the minutes of CCB as the consent of RBI and proceeded ahead.

The Law Ministry Introduces Its Own Complications

Once RBI’s googly (issuance of electoral bonds only in digital mode and that too only by RBI) was negotiated without any loss of wicket, the government decided to use only SBI as the authorized bank to manage the electoral bond scheme. The draft of the scheme was shared with the SBI top management. SBI designated one of its managing directors to finalize the scheme. After a few meetings, a draft acceptable to both the government and SBI was developed. SBI wanted to start with a few branches and gradually expand the network of issuing branches. This was also accepted.

The scheme required the Ministry of Law’s concurrence before being notified by DEA. Its job was essentially twofold: first and foremost to ensure that the draft of the notification met the standards of good legal drafting; and, second, to check its constitutionality. The formulation of the scheme and its key features were not the concern of the Ministry of Law. This was the job of the concerned administrative ministry/department.

We had expected the ministry to vet the proposed notification in a routine manner, the way hundreds of other notifications are cleared. This was not a new law, nor were the rules being framed under any particular law. The fundamental features of the electoral bond scheme had been mentioned in the Budget announcement and the relevant laws had been amended to allow bringing in electoral bonds.

The Ministry of Law proposed numerous amendments of drafting nature. This was not a problem. We discussed all of these and jointly agreed to modify the draft scheme wherever the suggestions were found to be in order. The ministry had a few substantive issues as well. The most important related to questioning the rationale for the 1 per cent vote share cut-off.

Noting that a registered political party required 6 per cent of the votes to get the status of a ‘recognized political party’ by the EC, the ministry asked that only the recognized parties be made eligible for receiving electoral bonds. We argued that this would be highly restrictive as there were only a few parties (less than ten) recognized nationally and in the states (about fifty). 


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