MOBILE AND INTERNET ASSOCIATION OF INDIA VS RESERVE BANK OF INDIA : CASE SUMMARY
Reserve Bank of India issued “Statement on Development and Regulatory Policies” on April 5, 2018 whereby it directed entities regulated by it to not to deal with or settle virtual currencies and to exit from any such dealing or settlement. Subsequently RBI also issued circular under Section 35 A read with Section 36 (1) (a) and Section 56 of Banking Regulation Act, 1949, Section 45 JA and 45 L of Reserve Bank of India Act, 1934 and Section 10 (2) R/w Section 18 of Payment of Settlement System Act, 2007 with similar stipulations.
These decisions of the RBI were challenged before the Supreme Court in Mobile and Internet Association Vs. Reserve Bank of India (Writ Petition (Civil) 373 of 2018).
Arguments of Petitioners
Virtual currencies are not legal tender but are rather tradable commodities/digital goods as such they do not fall under regulatory framework of RBI Act, 1934 or Banking Regulation Act, 1949. Power conferred under Section 45 JA or Section 45 L of Banking Regulation Act, 1949 do not empower RBI to regulate virtual currencies and same is not concerned with regulation of financial system or credit system. The directions of the RBI for blanket ban in dealing with virtual currencies do not fall under directions issued “in public interest” under Section 35 A (1) (a ) of the Banking Regulation Act, 1949 as “public interest” can take colour only from context of the provision.
Power granted to RBI under Section 10 (2) of Payment and Settlement System Act, 2007 to issue guidelines for regulation of payment system also can not apply to virtual currencies as such virtual currencies do not fall under “payment system”.
Such total prohibition is in violation of Article 19 (1) (g) of the Constitution.
Arguments of RBI
Virtual currency due to their anonymity/pseudo-anonymity can be used for illegal purposes and can erode monetary stability and credit system. The policy of RBI being an economic policy taken by expert body a hands off approach should be adopted. The directions of the RBI are covered under powers granted to RBI under Banking Regulation Act, 1949, Reserve Bank of India Act, 1934 and the Payment and Settlement Systems Act, 2007. These directions do not violate Article 14, 19 or 21. Although virtual currencies are not payment system but peer to peer transaction, such currencies have the potential to develop into a parallel system of payment.
Cross-border nature of the trade in VCs, coupled with the lack of accountability, has the potential to impact the regulated payments system managed by RBI as such RBI was within its powers to issue directions.
Findings of the Court
The Supreme court traced the historical evolution of the Reserve Bank of India and powers granted under Reserve Bank of India Act, 1934, Banking Regulation Act, 1949 and Payment and Settlement Act, 2007 and observed as under :
6.50. Thus, the RBI Act, 1934, the Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007 cumulatively recognize and also confer very wide powers upon RBI (i) to operate the currency and credit system of the country to its advantage (ii) to take over the management of the currency from central government (iii) to have the sole right to make and issue bank notes that would constitute legal tender at any place in India (iv) regulate the financial system of the country to its advantage (v) to have a say in the determination of inflation target in terms of the consumer price index (vi) to have complete control over banking companies (vii) to regulate and supervise the payment systems (viii) to prescribe standards and guidelines for the proper and efficient management of the payment systems (ix) to issue directions to a payment system or a system participant which in RBI’s opinion is engaging in any act that is likely to result in systemic risk being inadequately controlled or is likely to affect the payment system, the monetary policy or the credit policy of the country and (x) to issue directions to system providers or the system participants or any other person generally, to regulate the payment systems or in the interest of management or operation of any of the payment systems or in public interest.
Whether decisions of the RBI were ultra virus ?
The Supreme Court extensively analysed the jurisprudence in respect of virtual currency and observed that various courts in different jurisdictions have identified virtual currencies to belong to different categories ranging from property to commodity to non-traditional currency to payment instrument to money to funds. While each of these descriptions is true, none of these constitute the whole truth. Every court which attempted to fix the identity of virtual currencies, merely acted as the four blind men in the Anekantavada philosophy of Jainism, (theory of non-absolutism that encourages acceptance of relativism and pluralism) who attempt to describe an elephant, but end up describing only one physical feature of the elephant.
The Supreme Court relying upon definition of currency under FEMA, 1999 held that it is not possible to accept the contention of the petitioners that VCs are just goods/commodities and can never be regarded as real money. The Court noted that Virtual Currencies have potential to interfere with the matters that RBI has the power to restrict or regulate. The Supreme Court held that the decisions of RBI were not ultra virus.
The Court held that anything that may pose a threat to or have an impact on the financial system of the country, can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system.
Whether RBI had power to only regulate and not to prohibit dealing in Virtual Currencies ?
The Court relying on Star India Pvt. ltd. v. Dept. of Industrial Policy and Promotion and Ors ((2019) 2 SCC 104 ) held that the word “regulate” has a very broad meaning including the power to prohibit. The Supreme Court relying on Khoday Distilleries Ltd. v. State of Karnataka ((1995) 1 SCC 574 ) held that prohibition is not hit by principle of res extra commercium. The Court noted that the impugned Circular does not impose a prohibition on the use of or the trading in VCs. It merely directs the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs.
Whether the decision of the RBI suffers from non-application of mind ?
The Court observed that when a series of steps taken by a statutory authority over a period of about five years disclose in detail what triggered their action, it is not possible to see the last of the orders in the series in isolation and conclude that the satisfaction arrived at by the authority is not reflected appropriately.
Whether colorable exercise of power has been done by RBI ?
The Court held that there has not been any colorable exercise of power. The Court noted that the said contention is completely misconceived. There can be no quarrel with the proposition that RBI has sufficient power to issue directions to its regulated entities in the interest of depositors, in the interest of banking policy or in the interest of the banking company or in public interest. If the exercise of power by RBI with a view to achieve one of these objectives incidentally causes a collateral damage to one of the several activities of an entity which does not come within the purview of the statutory authority, the same cannot be assailed as a colourable exercise of power or being vitiated by malice in law. To constitute colourable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and willfully without reasonable or probable cause. The impugned Circular does not fall under the category of either of them.
Whether the RBI decisions are hit by M.S. Gill test ?
The Supreme Court relying on Chairman, All India Railway Recruitment Board v. K. Shyam Kumar & Ors ((2010) 6 SCC 614) has held that M. S. Gill test will not be applicable where larger public interest is involved.
Whether India should have followed light touch approach as other countries ?
The Supreme Court rejected this contention. The Supreme Court noted that judicial decision cannot be colored by what other countries have done or not done. Comparative perspective helps only in relation to principles of judicial decision making and not for testing the validity of an action taken based on the existing statutory scheme.
Whether the decisions of the RBI is hit by Article 19 (1) (g) ?
The Supreme Court found that decisions of the RBI were not proportional as it has almost wiped out VC exchanges out of industrial map of the Country. The court held that It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the three enactments indicated earlier, but also in view of the special place and role that it has in the economy of the country. These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised. While we have recognized elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.
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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.