Internet and Mobile Association of India vs Reserve Bank of India (WP(Civil) No.528 of 2018)
Internet and Mobile Association of India vs Reserve Bank of India
Writ Petition (Civil) No.528 of 2018
Supreme Court of India
Full Bench - Hon’ble Mr. Justice V. Ramasubramanian (author), Hon’ble Mr. Justice Rohinton Fali Nariman, Hon’ble Mr. Justice Aniruddha Bose
ALSO KNOWN AS
Crypto/Virtual Currency Case or Bitcoin Case
POINT OF CONSIDERATION
Whether the RBI has power to regulate and ban Virtual Currencies or not? And Whether the circular banning Virtual Currencies by the RBI is legally sound or not?
Initially, The Reserve Bank of India (for short “RBI”) issued several advisories since 2013 to caution various stakeholders against the use of virtual currencies (for short “VCs”)/ crypto currencies/ bitcoins.
Consequently, the RBI on 06-04-2018 released the impugned circular prohibition on dealing with the virtual currencies.
The circular directed the entities regulated by RBI (i.e., nationalized banks/scheduled commercial banks/cooperative banks/NBFCs), firstly, not to deal in virtual currencies neither to provide services for facilitating any person or entity in dealing with nor settling virtual currencies and secondly, to exit the relationship with such persons or entities, if they were already providing such services to them.
The circular was statutory in character and issued in exercise of the powers conferred on RBI by (i) the Reserve Bank of India Act, 1934 (ii) the Banking Regulation Act, 1949 and (iii) the Payment Settlement Systems Act, 2007.
Several aggrieved traders and organisations filed writs in the Supreme Court to strike down the prohibitory circular. The Supreme Court heard all the relevant petitions together and pronounced its judgment on 04-03-2020.
ISSUES RAISED & RATIO
Whether the RBI has power to regulate VCs and VCE or not?
- It was the contented by the petitioners that VCs are not money or other legal tender, but only goods/commodities falling outside the purview of the RBI Act, 1934, Banking Regulation Act, 1949 and the Payment and Settlement Systems Act, 2007. Therefore, it was argued, that the RBI did not have the power to regulate the VCs and the circular released by the RBI were ultravires.
- The court rejected the petitioners’ contentions and held that RBI has the requisite power to regulate or prohibit an activity of this nature. To substantiate this finding the court cited the preamble, statement of objects and reasons and various provisions of the RBI Act, 1934 (section 3(1), 45JA,45L) inter alia and concluded 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 even if the RBI has power to regulate the VCs, does it have additional power to prohibit it?
- The petitioners contented that the RBI is conferred only with the power to regulate, but not to prohibit, as seen from the express language of Section 45JA of RBI Act, 1934.
- The court rejected this contention and held that it is a trite law that the word “regulate” entails the word “prohibit” within it.
- The petitioners also tried to take shade under Section 18, Payment and Settlement Systems Act, 2007. To buttress their contention regarding the availability of power to regulate, the petitioners contended that virtual currency exchanges (for short “VCEs”) do not operate any payment system and that since the power to issue directions under Section 18 of the 2007 Act is only to regulate the payment systems, the invocation of the said power to something that does not fall within the purview of payment system, is arbitrary.
- The court rejected this argument. The court explained 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. Section 36(1)(a) of the Banking Regulation Act, 1949 clearly empowers RBI to caution or prohibit banking companies against entering into certain types of transactions or class of transactions. The prohibition is not per se against the trading in VCs. It is against banking companies, with respect to a class of transactions. Further, the court held that in the overall scheme of the Payment and Settlement Systems Act, 2007, it is impossible to say that RBI does not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that will fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 failed.
Whether imposition of restriction under the circular infringes Article 19(1)(g) of the Petitioners?
- It was contended by the petitioners that since access to banking is the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which is not prohibited by law, was not a reasonable restriction and that it was also extremely disproportionate.
- The court finally accepted petitioners’ argument and held that the petitioners were entitled to succeed, and the impugned circular dated 06-04-2018 was liable to be set aside on the ground of proportionality. The court explained that till date RBI had not come out with a stand that any of the entities regulated by it namely, the nationalized banks/scheduled commercial banks/cooperative banks/NBFCs have suffered any loss or adverse effect directly or indirectly, on account of the interface that the VC exchanges had with any of them. Court held that RBI has wide preventive and curative powers, but such powers should not be exercised overbearingly and hence lifted the ban imposed on trading of VCs .
IMPORTANT CASES REFERRED
Keshavlal Khemchand & Sons Pvt. Ltd. v. Union of India (2015) 4 SCC 770
Star India Pvt. ltd. v. Dept. of Industrial Policy and 111 Promotion and Ors. (2019) 2 SCC 104
ICICI Bank Ltd v. Official Liquidator of APS Star Industries Ltd (2010) 10 SCC 1
Modern Dental College and Research Centre v. State of Madhya Pradesh. (2016) 7 SCC 353
State of Maharashtra v. Indian Hotel and Restaurants Association (2013) 8 SCC 519
The author is a LL.B Graduate of University School of Law and Legal Studies, GGSIPU, New Delhi.