Supreme Court has Quashed/Set-aside RBI’ Circular,directing banks to not to deal in crypto currency

Case Covered:

INTERNET AND MOBILE ASSOCIATION OF INDIA

Versus

RESERVE BANK OF INDIA

Facts of the case:

In case the said enactment (2019) had come through, there would have been an official digital currency, for the creation and circulation of which, RBI/central government would have had a monopoly. But that situation had not arisen. The position as on date is that VCs are not banned, but the trading in VCs and the functioning of VC exchanges are sent to comatose by the impugned Circular by disconnecting their lifeline namely, the interface with the regular banking sector. What is worse is that this has been done (i) despite RBI not finding anything wrong about the way in which these exchanges function and (ii) despite the fact that VCs are not banned.

As we have pointed out earlier, the concern of RBI is and it ought to be, about the entities regulated by it. Till date, RBI has 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. As held by this court in the State of Maharashtra v. Indian Hotel and Restaurants Association, 115 there must have been at least some empirical data about the degree of harm suffered by the regulated entities (after establishing that they were harmed). It is not the case of RBI that any of the entities regulated by it has suffered on account of the provision of banking services to the online platforms running VC exchanges.

It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the 3 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 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.

Observations of the court:

Therefore, in the light of the above discussion, the petitioners are entitled to succeed and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality. Accordingly, the writ petitions are allowed and the Circular dated 06- 04-2018 is set aside. The Statement dated 05-04-2018, though challenged in one writ petition, is not in the nature of a statutory direction and hence the question of setting aside the same does not arise.

There is still one more issue left. It is the freezing of the account of Discidium Internet Labs Pvt. Ltd., which is petitioner no. 6 in WP (C) No. 373 of 2018. This company seems to have had an amount of Rs. 12,05,36,667.83/- in current account no. 3677101984 with the Central Bank of India, Worli, Mumbai. When the petitioner made a request on 21-05-2018 to close the account and issue a demand draft, the Central Bank replied that they had referred the matter to their higher authorities/regulators. Therefore, petitioner no. 6 has come up with an application in I.A. No. 110424 of 2019 for appropriate directions.

RBI has filed a reply to this application conceding that it had not directed the bank to freeze the account. It is specifically stated in paragraph 12 of the affidavit-in-reply of RBI that they did not issue any direction to the Central Bank of India to freeze the account. However, RBI has taken a stand that the prayer for the release of the amount does not arise out of or incidental to the main writ petition.

But we think that the lukewarm response of RBI in this regard is wholly unjustified. Admittedly, the activities carried on by the petitioner no. 6 were not declared as unlawful. It is the positive case of RBI that they did not, in fact, freeze the accounts of petitioner no. 6. Therefore, RBI is obliged to direct the Central Bank of India to defreeze the account and release the funds. Hence, RBI is directed to issue instructions forthwith to the Central Bank of India, Worli branch, to defreeze the current account no. 3677101984 of petitioner no. 6 in WP (C) No. 373 of 2018 and to release the funds lying in the account to the company together with interest at the rate applicable. There will be no order as to costs.

Before drawing the curtains down, we are bound to record, as in every artistic display, our appreciation for the skillful manner in which Shri Ashim Sood, learned Counsel, led the attack on the impugned Circular, but for which, the climax could not have had a nail-biting finish. 

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