The former standards chief Sir Alistair Graham led calls yesterday for an inquiry into how a businessman linked to the Liberal Democrats’ biggest donor was given a peerage.

Sir Alistair called for the Lords Appointments Commission to examine how it was kept in the dark about £395,000 in gifts from the newly elevated Lord Hameed’s business partners.

Labour and Conservative MPs demanded action after an investigation by The Times revealed that Lord Hameed was helped towards his independent peerage by leading Liberal Democrat figures.

The only Lib Dem on the vetting panel, Lord Dholakia, a Hindu, told fellow members that he was impressed with the interfaith work done by Khalid Hameed, a Muslim and private hospital chief. Lord Dholakia is the sole Asian on the six-member commission, but it insists that he has no undue influence over the fate of candidates from his community.

Lord Clement-Jones, the Liberal Democrats’ treasurer, helped to nominate Lord Hameed as a “people’s peer”.

Lord Hameed and Lord Dholakia both deny knowing about the donations from Alpha Healthcare, a care home business, although Lord Hameed sits on all its sister companies. Lord Dholakia is his party’s deputy leader in the Lords.

Sir Alistair, the former chairman of the Committee on Standards in Public Life, said: “Circumstances such as you have outlined make the reform of party political funding a matter of some urgency, If we are to clean up our democratic system we really need a cap on donations from whatever source to political parties.

“They give the impression, even if it is not the actual reality, that substantial donations may well lead to membership of the House of Lords.

“Given this set of circumstances, I am sure that the House of Lords Appointments Commission would want to review how it carries out its process of selection to see if they were provided with all the information they should have been at the appropriate time.”

Siôn Simon, a Labour MP who sits on the Treasury Select Committee, said: “The sequence of events involving donations, meetings with senior Lib Dems and the peerage is certainly worth further investigation by higher authorities. Most people will look at these events and smell a rat.

“I will write to the new chairman of the Committee on Standards in Public Life to find out if there is a loophole in current rules governing transparency and people’s peers which is being exploited by the Lib Dems. I will also ask the Cabinet Secretary to investigate whether the House of Lords Appointments Commission has properly fulfilled its remit by investigating fully the process by which Lord Hameed was nominated and confirmed as a people’s peer. This murky business can only damage the public’s faith in politics even further.”

Lee Scott, a Conservative MP, said: “There seem to be a number of circumstances which obviously need exploring.”

The Liberal Democrats have made political capital out of Labour’s embarrassment over concealed donations, with the leadership contender Chris Huhne even calling in Scotland Yard. But the Lib Dems’ own checks on donors are now under scrutiny as Simon Hughes, the party president, says he knew that Alpha Healthcare was giving large amounts but was unaware why.

The company, run by the Indian brothers Dhruv and Bhanu Choud-hrie, handed over its first gift of £10,000 to the party’s London region during Mr Hughes’s campaign to be mayor in 2004. “Only they will tell you what their reasons are,” Mr Hughes told The Times.

However, Alpha Healthcare’s spokesman, while denying any link between the gifts and the peerage, has given no public explanation for paying the Liberal Democrats beyond stating: “Why not?”

A spokesman for the party said: “We regard the story as entirely unfounded, but we are not going to comment further.”

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