Case BriefsHigh Courts

Kerala High Court: In a case wherein, due to low CIBIL Score education loan was denied, N. Nagaresh, J., directed for reconsideration of loan applications, disregarding the low Credit Score of the co-obligants.

Petitioners were aggrieved by the denial of the education loan in the present case. The 2nd respondent had rejected the application for an education loan for the reason that the CIBIL Score of the co-applicant was not up to the mark.

On being aggrieved with the above, the petitioner approached the Court.

Petitioner cited the decision of this Court in Pranav S.R. v. SBI, [2020 KHC 4695], wherein it was held that unsatisfactory credit scores of the parents of the petitioner cannot be a ground to reject an educational loan application because the repayment capacity of the petitioner after his education should be the deciding factor. Therefore, the respondents are compellable to sanction and disburse the educational loan applied for by the petitioners.

Analysis and Decision

High Court expressed that, in the exercise of the powers conferred by Sections 21 and 35A read with Section 56 of the Banking Regulation Act, 1949, the Reserve Bank of India, in public interest, has issued Reserve Bank of India (Priority Sector Lending- Targets and Classification) Directions, 2020. Direction 4 contained therein categorises Education as a priority sector. Direction 11 states that Loans to individuals for educational purposes, including vocational courses, not exceeding ₹20 lakhs will be considered as eligible for priority sector classification.

Bench stated that, this Court in the decision of Pranav S.R. v. SBI, [2020 KHC 4695], has held that for educational loans, the repayment possibilities are to be decided not on the financial position of the parents but solely on the projected future earnings of the students on employment after education.

Hence, in the present matter, Court found no reason to take any different view and allowed the petitions.

Lastly, the High Court directed the respondents to reconsider the loan applications, disregarding the low Credit Score of the co-obligants, if any, and sanction and disburse the eligible loan amount.[Kiran David v. SBI, WP(C) No. 3646 of 2022, decided on 2-3-2022]


Advocates before the Court:

For the Petitioner:

MANOJ RAMASWAMY

         JOLIMA GEORGE

         JISHA SASI

         C.B. SABEELA

         APARNA G.

         CHINNU ROSE MARY THOMAS

For the Respondents:

JAWAHAR JOSE

         CISSY MATHEWS

         EDWIN JOSEPH

Case BriefsHigh Courts

Calcutta High Court: The Division Bench of Prakash Shrivastava, CJ. and Rajarshi Bharadwaj, J. dismissed a petition which was filed by the petitioner with the plea that having regard to the contribution of Netaji Subhas Chandra Bose in the freedom struggle, his picture should be printed on the Indian currency.

Having the parties the Court noticed that the similar issue had come up before the Division Bench of the Madras High Court in K.K. Ramesh v. Union of India, 2021 SCC OnLine Mad 5022 wherein initially the Division Bench had directed the authorities to consider the representation and thereafter, taking note of the decision on the said representation the Division Bench of the Madras High Court had dismissed the petition holding that,

“8.This Court is not underestimating the fight and sacrifice made by Netaji Subash Chandra Bose and other great leaders for freedom moment of this Country. There are many known heroes and unsung heroes. If everybody starts making such a claim there will not be an end. Moreover, recent days, there are claims and counter claims based on religion, community and region. If every claim is started to be entertained, there will not be any end. The Central Government as well as Reserve Bank of India have already constituted a Committee and took a decision that it is only the father of the Nation Mahatma Gandhi could represent the ethos of India and therefore, it was decided to retain the Mahatma Gandhi’s image in the currency notes and no other personality image is decided to be included. The said decision cannot be found fault with. It is only the Government which can take a decision and this Court cannot substitute the views stated in the Committee report which has been accepted by the Government.”

The Court dismissed the petition relying on the abovementioned order and clarified that the abovementioned issue has already been considered the Committee constituted by the Reserve Bank of India who had deliberated upon similar prayer and had not found it feasible to accept it.[Haren Bagchi Biswas v. Union of India, 2022 SCC OnLine Cal 898, decided on 05-04-2022]


Mr Rabindra Narayan Dutta, Mr Sibasis Ghosh, Mr Hare Krishna Halder, Mr Ardhendu Nag, Mr Arkoday Mukherjee: for the petitioner

Mr Y. J. Dastoor, ASG, Ms Sarda Sha: for the respondent 1

Mr Prasun Ghosh, Ms Suchishmita Chatterjee (Ghosh): for the respondent 2


Suchita Shukla, Editorial Assistant has reported this brief.

Case BriefsTribunals/Commissions/Regulatory Bodies

Central Information Commission (CIC): Neeraj Kumar Gupta (Information Commissioner) addressed a matter wherein it was alleged that the respondent intentionally provided an evasive reply by stating that the information sought was not clear, hence issue of prompt response of CPIO was raised.

Complainant filed an application under the Right to Information Act, 2005 before the Central Public Information Officer, Reserve Bank of India seeking the information as under:

CPIO informed the applicant that the information sought was not specific/clear and it was not able to furnish information on the matter.

The complainant filed a complaint under Section 18 of the RTI Act before the Commission requesting to take appropriate legal action against the CPIO under Section 20 of the RTI Act.

Decision

The Commission observed that the preliminary information sought were wide/general and non-specific and largely based on the situational queries.

Further, the complainant contended that information sought had not been provided by the respondent which amounts to deemed refusal of information of the complainant.

Additionally, it was stated that, the CPIO is only a communicator of information based on the records held in the office and hence, he cannot expect to do research work to deduce anything from the material therein and then supply it to him.

Coram observed that while examining the complaint under Section 18 of the RTI Act, 2005, the CIC has no jurisdiction to direct disclosure of any information.

The above-said legal position had been authoritatively settled by the Supreme Court in Chief Commissioner v. State of Manipur, Civil Appeal Nos. 10787-10788 of 2011.

Hence, Commission opined that the respondent has already provided a suitable reply to the complainant and prima facie the adequacy of information cannot be adjudicated by the Commission while examining the complaint and there is no malafide intention of obstructing the information.

Therefore, no action is warranted under Section 20 of the RTI Act.

In view of the above, complaints were disposed of. [Shishir Gupta v. CPIO, RBI; 2022 SCC OnLine CIC 159, decided on 28-3-2022]

Case BriefsHigh Courts

Bombay High Court: The Division Bench of G.S. Patel and Madhav J. Jamdar, JJ., addressed a matter concerning currency notes pre-demonetisation and their replacement with current valid tender.

The petitioner had filed a criminal revision under Sections 420, 504 and 506 of the Penal Code, 1860. In the said matter, the Judicial Magistrate directed the accused to deposit Rs 1,60,000 with the police station and the same was deposited in cash.

Petitioner and one witness were asked to collect the above-stated amount from the police station and the petitioner was entitled to Rs 60,000 and the witness was entitled to Rs 1 lakh.

Vide Government of India Notification dated 8-1-2016, demonetization of certain currency notes was done.

Petitioner believed that since his cash was with an authority it was protected from demonetization.

Further, it was stated that, when the Petitioner finally went back to the police station for the return of his money, he was handed the old currency notes, all by then demonetized and every note, as the Petitioner puts it in the Petition, “just a piece of paper having a photo of Mahatma Gandhi.”

The solution that the petitioner asked for was a direction to the RBI to replace the old currency notes since they were all along in custody of the police with valid current tender.

High Court while exercising equitable discretionary jurisdiction under Article 226 of the Constitution of India directed the RBI to replace the currency tendered by the petitioner with current valid tender, subject to the petitioner complying with other requirements such as mentioning serial numbers etc. The said particulars are set out in Notification dated 12-5-2017 and in paragraphs 10 and 11 in RBI’s affidavit.[Kishor Ramesh Sohoni v. Union of India, 2022 SCC OnLine Bom 629, decided on 22-2-2022]


Advocates before the Court:

Ms Sadhna Singh, for the Petitioner.

Mr A I Patel, Addl Government Pleader with Mr K S Thorat, AGP for

the Respondent-State.

Ms Aditi Phatak, i/b Bombay Litigation & Corporate Company for

Respondent No 2.

Case BriefsSupreme Court

Supreme Court: The Division Bench of Hrishikesh Roy* and R. Subhash Reddy, JJ., while deciding on an appeal challenging dismissal of suit by the Calcutta High Court restored the Trial Court’s judgement which was reversed by the High Court.

Factual Backdrop

The suit was filed by SIBCO Investment seeking interest on the alleged belated payment of principal sum and accrued interest to the plaintiff for the Bonds issued by Small Industries Development Bank of India (SIDBI). SIBCO had purchased 15 Bonds at 13.50% and 26 Bonds at 12.50% worth Rs3.69 crores aggregate as on 01-07-1998 from one Shankar Lal Saraf who had bought it from CRB Capital Markets Ltd. The name of the plaintiff was not included by SIDBI as CRB Capital was facing involuntary liquidation proceedings at the instance of the RBI in the Delhi High Court (Company Court).

On 17-12-2004, the Company Court held that the subject Bonds were beyond the purview of the liquidation proceedings. The defendant thus made payment of principal amount and interest calculated up to 31-10-2005 with 20% TDS deduction.

The plaintiff’s case was that the amount, both principal and interest were paid beyond the maturity period and, therefore, the defendant was liable to pay the interest for delayed payment. Whereas the defendant pleaded that the maturity amount was not paid on the date of maturity because of the embargo and restriction by the RBI and the pending proceedings.

Findings of the Trial Court

The Trial Court did not agree with the submission of the plaintiff that there was any deliberate attempt to delay the payment of the maturity amount by the defendant and subsequently dismissed the matter on two grounds: Firstly, the bonds could not be transferred as there was liquidation proceedings against CRB capital whereafter the RBI issued a directive to the petitioner directing not to part with any payment pertaining to the said Bonds without consent of the Official Liquidator and  secondly, the plaintiff slept over the interest claim for almost 8 months after receiving the payment.

Impugned Order of the High Court

The High Court reversed the order of the Trial Court and allowed the plaintiff to raise further demands including demand for interest on delayed payment. Accordingly, the defendant was directed to pay simple interest at 6% per annum on interest from date of accrual and 8% simple interest per annum on principal amount from date of maturity.

Analysis and Findings

Noticing that the transfer in Shankar Lal Saraf’s favor was executed during suspect spell, the Bench opined that the defendant’s prima facie suspicion that the transfer during the suspect spell may be deemed fraudulent was not misplaced. Further, both the RBI and the Official Liquidator treated the transfer in Shankar Lal Saraf’s favour as fraudulent and it was only after the judgment of the Company Court that the cloud over the issue was cleared wherein the defendant’s claim that the transfer in Shankar Lal Saraf’s favour was ‘fraudulent preference’ was rejected. Hence, the Bench held the following:

  • The RBI direction carried statutory force and that it was necessary for plaintiffs to implead RBI in the litigation for getting more clarity on the issue but the same was not done.
  • There was bonafide shadow over the plaintiff’s title to the Bonds till the same was cleared by the Company Court. Therefore, withholding payment was justified till the conclusion of dispute by the Court.
  • The plaintiff failed to establish that the defendant had derived any undue benefit by withholding the payment accrued on the Bonds since the amount was immediately transferred and was not used by the defendant for their business.
  • The plaintiff was not serious on its claim for pendente lite interest as no argument was recorded in previous litigation regarding it.
  • The plaintiff accepted the payment from the defendant as due settlement and failed to raise protest and demand for interest at the earliest possible stage which amounted to sub-silencio Hence, the claim was barred by the principle of waiver/acquiescence.
  • Claim of interest on delayed payment was barred by the principle of constructive Res Judicata.

Conclusion

Finally, considering that as soon as the Company Court’s decision was communicated to the defendant, payment was promptly made to the plaintiff without hesitation, the Bench held that the defendant bank justified in withholding payment till conclusion of dispute in Company Court, even though the relief claimed was in respect of an ‘unconditional undertaking’, as there were reasonable legal concerns for the transaction during the suspect spell, for making such payments.

Consequently, the Bench concluded that the defendant was not entitled to payment till the Company Court’s order. Therefore, rejecting the plaintiff’s claim for interest the Bench compared it to the Shakespearean character Shylock and remarked,

“…the holder of the Bond has received their ‘pound of flesh’, but they seem to want more. Additional sum in our estimation is not merited as SIBCO has already received their just entitlement and burdening the defendant with any further amount towards interest would be akin to Shylockian extraction of blood from the defendant.”

In the light of the above, the defendant’s appeal against the impugned judgment was allowed and the Trial Court’s judgment was restored.

[SDBI v. SIBCO Investment, 2022 SCC OnLine SC 5, decided on 03-01-2022]


*Judgment by: Justice Hrishikesh Roy


Appearance by:

For the Appellant/Defendant: K V Viswanathan, Senior Counsel

For the Plaintiff/Respondent: Sabyasachi Chaudhury, Senior Counsel


Kamini Sharma, Editorial Assistant has put this report together

Experts CornerTariq Khan

There have been rumours and speculations over a year regarding the future of cryptocurrency in India, as many suspected a ban on cryptocurrencies. The Indian Government in the latest announcement did not make any official announcement about legalising it, however, the Government has now put it in the tax framework whereby any profits generated from the crypto will be taxed at the rate of 30%. Further, 1% TDS on transfer of virtual assets above a threshold and gifts are also to be taxed. It can be comprehended as an extreme step as the high tax slab might deter the investors. Back in 2021 when China, which was the biggest bitcoin miner, banned the cryptocurrencies, it missed out on approximately $6 billion in annual crypto mining revenues. As a result of this move, there was a dramatic shift of investors to countries like Singapore and the US as these jurisdictions provide lenient regulations and invite both miners and investors. India seems to be following China as it introduces its own digital currency. The Finance Minister, Ms Nirmala Sitharaman also announced the launch of the digital currency by the Central Bank of India, Reserve Bank of India (RBI) and the currency is set to be based on blockchain technology. This can be considered a welcome step as it promotes the digital economy and boosts the blockchain ecosystem. Moreover, introduction of digital currency will result into a cheaper and more efficient currency management system.

 

Digital Currency v. Cryptocurrency

Digital currency is considered as fiat currency in digital form. It is centralised which implies that it is regulated by a government authority whereas cryptocurrency is based on blockchain technology, and it is decentralised which implies that there is no interference of any government authority over investors. Both differ in technology and encryption; digital currency can be transferred by anyone with access to an online account, but cryptocurrency can only be transferred by the original holder. Another point to be noted is that digital currency is direct liability of the Central Bank whereas, in the case of cryptocurrency there is no State or financial entity backing it. Thus, crypto and digital currency cannot be treated in the same manner.

 

The reason why most of the jurisdictions have not regulated crypto is the nature of this currency which is decentralised and international. The essence of regulation must be to safeguard the interest of the investors and not to hamper the growth of the industry as strict regulations in place tend to drive away the investor to a crypto-friendly jurisdiction. The banning or strict regulations also impact the prices of cryptocurrencies for the short-term, which was witnessed during the time of China ban of the currency. On the flip side, it can be argued that the interest and safety of the State is also an important factor while determining the regulations as any amount can be carried from one country to another for any purpose, without a check this hold some serious concerns about trading in cryptocurrency. It can promote dealing in the dark web, funding terrorism or any illegal activity such as money laundering which goes against the public interest. Hence, considering these things one must keep a check or monitor such transactions to prevent capital flow outside the country.

 

Has cryptocurrency been legalised?

It is incorrect to suggest that it has been legalised as the Government has merely put it in the tax regime but there is no announcement regarding legalising the same and merely because the Government is taxing the gains from crypto, it cannot necessarily or explicitly mean that it is legalising it. The Government made an announcement introducing the official digital currency to be issued by RBI which in the current scenario means that apart from the Indian digital currency any other form of currency is not recognised. Taxation on crypto means that the Government is exercising its power to tax just like it can tax even the unaccounted transactions, for instance, transactions arising from gambling, betting or any such sources. However, that in no way means that the Government is legalising such activities from which these transactions are emanating.

 

Across the world, the stance taken by different jurisdiction have varied with respect to crypto regulations. Countries like China have resorted to a ban while many countries have declared it as legal tender. While dealing with crypto, some countries are relying upon the existing laws or making amendments or altogether enacting a standalone law. The US and Australia have issued clarifications with respect to their existing laws to accommodate crypto assets while South Korea in 2021 has made amendments to Reporting and Using Specified Financial Transaction Information Act, 2001, to bring “virtual assets” and providers of such assets within the ambit of the law.

 

India may have plans to enact a standalone law as mentioned by the Government earlier. The Government intends to keep a check on the assets but has not put them under any legal framework thus, we are yet to see a proper Crypto Bill and unless a Crypto Bill comes into the picture no regulated entity will be able to deal with these cryptocurrencies. It will be interesting to see what framework the Government comes up with in the future and whether regulated entities like Zerodha, Upstox, Angel Broking, etc. will be offering cryptocurrencies.

 

On the other hand, the launch of digital currency by the RBI can be seen as a positive and progressive step as it will give a boost to the digital economy with such a massive internet and mobile user base, India could potentially be a hub of digital currency, making it easier to track the transitions and its distributions.

 

Conclusion

The crypto industry has thrived in the past few years and India being a robust economy has huge potential of growing in crypto trading as the industry estimates suggest there are 15 million to 20 million crypto investors in India, with total crypto holdings of around 400 billion rupees ($5.37 billion). The Government should have invited comments from the stakeholders and considered the opinion of the experts before making such an announcement. This move of the Government has given mixed signals to the investors, firstly because the taxation is too high and might eventually result in a drop in turnover and discourage potential investors however, the positive impact is that Government has not banned the crypto.

The Government should reconsider its decision and in times to come reduce the tax slab as, despite the speculations of a ban, there has been a surge in investment in crypto. WazirX, one of the leading crypto exchange platforms, has recorded a trading volume of over $43 billion in 2021 — the highest in India — a growth of 1735% from 2020. The year 2021 was a blowout for companies trading in cryptocurrency, which indicates the fact that Indian investors are confident about the future of crypto market. As crypto may be the future of currencies, with countries like El Salvador and many more making it legal tender, any extreme step taken by the Government may impact trading and investments in the country.

 


† Advocate and Registrar at the International Arbitration and Mediation Centre, former Partner Advani & Co., e-mail: <advocate.tariqkhan@gmail.com>.

†† Final year law student at Amity University, Noida.

Experts CornerPramod Rao

Two quick questions:

  • Would you consider a storage service as a part of banking and financial service?
  • Would you consider substitution of paper records with digital records and reducing or doing away with sending and receiving of paper records as part of banking and financial services?

For the first question, consider safekeeping services and bank lockers within the safety deposit vaults offered and operated by banks1.

 

For the second question, consider how share certificates became dematerialised via the securities depositories, depository participants and custodial services businesses – all of which comprise part of the financial services sector which are offered by banks and other intermediaries2.

 

Both are examples of deep innovation. Both these sets of services are immensely useful, have become ubiquitous in societal consciousness and in their acceptance as part of financial services businesses, and yet the framing of the two questions above would have compelled some head scratching and soul searching. This occurs especially when innovation is rife and a work in progress.

 

A deep innovation in the works, which will be as ubiquitous and useful is the business of account aggregators. Account aggregator framework can be considered an information superhighway over which financial information will travel.

 

Simply expressed, account aggregator framework allows a consumer control over her financial information, and in being able to obtain such financial information digitally or to authorise the transmission of such financial information to a designated receiving entity from the current financial services provider or keeper of such financial information. The service is provided by “account aggregators” licensed by the Reserve Bank of India who link the consumer, financial services providers and the receiving entity.

 

The financial information can be transmitted upon customer consent to receiving entities regulated by any one of the four financial sector regulators viz. Insurance Regulatory and Development Authority (IRDAI), Pension Fund Regulatory and Development Authority (PFRDA), Reserve Bank of India (RBI) and Security and Exchange Board of India (SEBI).

 

In this paper, your columnist looks at which financial information that a consumer is entitled to require being provided to herself or to a regulated receiving entity, the obligations of a financial information provider, opportunities and challenges in achieving a complete aggregation of “financial information” and the implications of the proposed Personal Data Protection Bill.

 

Financial information

RBI has specified the various types of “financial information”3 in its Master Directions titled Master Directions – Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016.

Such “financial information” means the following4:

Financial Information

1 Bank deposits including

●      fixed deposit accounts;

●      savings deposit accounts;

●      recurring deposit accounts; and

●      current deposit accounts.

2 Deposits
3 Structured Investment Product
4 Commercial Paper
5 Certificates of Deposit
6 Government Securities (tradable)
7 Equity Shares
8 Bonds
9 Debentures
10 Mutual Fund units
11 Exchange Traded Funds
12 Indian Depository Receipts
13 Collective Investment Schemes units
14 Alternative Investment Funds units
15 Insurance policies
16 Balances under the National Pension System
17 Units of Infrastructure Investment Trusts
18 Units of Real Estate Investment Trusts
19 Any other information as may be specified by RBI for the purposes of these directions, from time to time.

 

A quick read would make clear that these financial information are essentially the assets that a financial consumer has.

 

Such information is quite valuable for evaluating creditworthiness, or in aiding in financial planning or in wealth management, as well as many further and other use cases that are being developed.

 

In creating a framework whereby the consumer can obtain her financial information, the centrality of her having control and consenting process, and digital transmission system signals a singular leap in authenticated, verified information which can be harnessed by her when dealing with a variety of regulated receiving entities.

 

Obligations of financial information providers

With the financial consumers having a right to obtain or require the transmission of the financial information via the account aggregator framework, each and every financial information provider – the financial services providers who hold such financial information (or their own service providers who do so for them) – have an obligation to adopt measures for facilitating the transmission of the financial information.

The financial information providers include5:

  • bank, banking company;
  • non-banking financial company;
  • asset management company;
  • depository;
  • depository participant;
  • insurance company;
  • insurance repository;
  • pension fund; and
  • such other entity as may be identified by the bank for the purposes of these directions, from time to time.

 

This places an onus on each such entity’s operations, technology and compliance functions to adhere to the standards specified in the Master Directions as well as norms which ReBIT — Reserve Bank Information Technology Pvt. Ltd., and that of Sahamati, and enable their consumers to require the transmission of the financial information to the consumer or the regulated receiving entity via the account aggregator.

 

A financial information provider that has not enabled this could be subject to adverse consumer claims or to regulatory strictures or both.

 

Near-complete “financial information” to complete or fuller “financial information”

A key item which may have been noted in the definition of “financial information” is the absence of any information around credit facilities including loans of all kinds. These credit facilities are primarily provided by banks and Non-Banking Financial Companies (NBFCs). The information about such credit facilities are reported to and captured by “credit information companies” or credit bureaus, which are however not considered as “financial information providers”. Potential lenders access the credit bureaus to evaluate the creditworthiness of a consumer seeking credit facilities. The financial consumer is entitled to obtain her credit information report6 from the bank or NBFC she applied for a loan or directly from any or all credit information companies7. Accordingly, the credit information report combined with the financial information which the account aggregator framework provides a financial consumer a near-complete status of her financial standing.

 

Presumably since the consumer can access the credit information report and that it pertains to the borrowings and credit facilities availed, it has deliberately been kept out of the ambit of the account aggregator framework.

 

Moving from near-complete financial information to complete financial information may take a longer time, with RBI having to revisit and revise the definitions of financial information and financial information providers (including with respect to credit information companies).

 

Certain categories may also require digital information infrastructure getting harnessed and a repository being created that could be then accessed digitally.

 

The following sets of information are what your columnist could identify being added or considered “financial information”:

  • Security interest, if any, over financial assets, as available with the financial service provider or its registry: encumbrances or unencumbered status is very valuable information.
  • Co-ownership of financial assets, including inter se percentage ownership, as available with the financial services provider or its registry: ownership interest is very valuable information.
  • Nomination particulars, and specification of percentage allocation, etc. of the financial assets, as available with the financial services provider or its registry: in case of demise of the owner/s, this can aid the successors and legal heirs as nominated.
  • Balances held in the Employees Provident Fund Organisation (EPFO), or in the exempted provident fund trusts, and other provident or pension funds.
  • Balances held in Public Provident Fund and other small savings schemes.
  • Balances under superannuation schemes operated by insurers and offered as an employee benefit by employers.
  • Employee Stock Options (ESOPs) conferred by employers.
  • Balances held in the Post Office Savings Bank under various small savings schemes offered or in form of term deposits or monthly income schemes.
  • Senior Citizen Savings Scheme and the Pradhan Mantri Vaya Vandana Yojana or Sukanya Samriddhi Yojana.
  • Insurance policies provided by Postal Life Insurance.
  • Loan assets created via or through peer-to-peer lending platforms.
  • Physical share certificates or bond certificates issued by private companies.

 

Physical assets such as gold and so on also remain outside the ambit, as well as emerging, and as yet unregulated asset classes such as digital gold, other digitally denoted commodities, stablecoins (with underlying assets that are held by third party custodians) or crypto assets.

 

Certain asset types may also have asset registries which could inform about the ownership and wealth of an individual, including real estate, motor vehicles or ships and yachts or aircrafts that could be considered for clubbing into the definition of “financial information”. These registries could also contain information about security interest if any created over such assets.

 

Information held by the Income Tax Department or with the Goods and Services Tax Network (GSTN) especially for self-employed individuals is also a critical and important aspect of financial information.

 

Several of these being incorporated into the definition of “financial information” could be challenging, and yet would appear to be inevitably required to be done if a consumer would want all her assets and wealth to be considered when dealing with other financial services providers or for her own self and records.

 

The mode and manner of incorporation can be many. For instance,

  • notifying the specific asset type as “financial information” and/or holder of the financial information as a “financial information provider”: the challenge is that such entity/authority/holder of information may not actually be under the regulatory ambit of IRDAI, PFRDA, RBI or SEBI. This may mean drawing comfort from current Government Ministries or Departments having oversight over such entity/authority/holder being regarded as sufficient.
    • For instance, EPFO being under the ambit of the Ministry of Labour or GSTN being under the ambit of the Ministry of Finance; by contrast, the Post Office Savings Bank may be just simply notified as a financial information provider or bank under the current provisions of the Master Direction.
  • undertaking the move towards dematerialising of physical records (as done for physical share certificates or bond certificates) of certain types of assets, and harnessing the depositaries system and depository participants network or alternatively, encouraging creation of nationwide electronic repositories which digitalises the records of assets or could even harness blockchain for such record keeping.
    • For instance, ESOPs which are currently notified via a letter or a simple communication of the employer, if could be held in a demat account, or even real estate records being converted to digital records at a depository and reflected in a demat account would be truly transformative

These measures would also considerably improve the transparency and governance apart from aiding in aggregation of financial information.

 

Looking back and looking ahead

The thought process underpinning the creation of the account aggregator framework took place in 2013-2014, as reflected in the minutes and press releases of the Financial Stability and Development Council and its sub-committee. The desirability of developing a common repository of information on financial assets was discussed and an Inter Regulatory Technical Group was tasked with exploring the implementation of such a repository in a progressive manner9. These deliberations culminated in RBI notifying the Master Directions in 2016, and our progressing to having multiple licensed account aggregator entities, and a collective which enables an efficient and effective ecosystem emerging in the form of Sahamati10.

 

The development and regulatory framework evolved independently or at least in parallel to the rising concerns around privacy culminating in the Supreme Court decision in K.S. Puttaswamy  v. Union of India11, the constitution of the Committee of Experts headed by Justice B.N. Sri Krishna to study various issues relating to data protection in India, and framing of the Personal Data Protection Bill12. Among the consumer rights that the Bill outlines is that of consumers to transfer their data from a data fiduciary or business to other businesses via consent manager13. All companies would have to develop ways for allowing the consumers to do this.

 

This is quite similar to the account aggregator framework that the RBI and the financial services sector has already instituted and which has become operational.

 

It would be very useful to either:

  • To require that the Data Protection Authority (DPA) as proposed in the PDP Bill, would act in coordination with, including undertaking prior consultations with the financial sector regulators, or more formally, constitute a council of such financial sector regulators that DPA would consult and be guided by, so that the financial information transmission undertaken by account aggregators and the role of consent managers as contemplated, progress without contradictions or conflicts, and do so in a manner consistent for a consumer and the variety of concerns that the DPA or financial sector regulators seek to address. DPA would considerably gain from RBI’s prior and current experience in making the account aggregator framework operational14.
  • To entirely exempt the transmission of “financial information” from the ambit of the Bill so that the account aggregator framework as instituted in the financial services sector can progress and evolve given it originating earlier and independently and it being core to financial consumers and financial services sector. In such a situation, RBI can be mandated to ensure adherence at a minimum with what DPA stipulates so overall consistency is ensured for the consumer. This approach will give the sectoral specificity by RBI even as the DPA pioneers the general norm.

 

The above can also help in an orderly development of the type of “financial information” that a consumer may seek to access. For instance, under the Bill, all information may be expected to be capable of transmission, whereas the account aggregator framework that RBI has laid down is focused on certain financial assets. Similarly, whether the account aggregators will be under dual regulation could add to uncertainties or lead to unintended consequences if either regulators are not acting in a coordinated manner. These could be considered even as the Bill is reworked and brought back to the Parliament.

 

For now, a financial consumer could consider checking with her financial services provider that they are ready to transmit the financial information (or make a loud noise to make that happen) and to enroll and harness the account aggregator framework, and have the satisfaction of aggregating the financial information for a variety of uses.

 

Here’s looking at account aggregator framework as a deep innovation taking roots and bringing forth a Big Bang moment for financial consumers and the financial services sector, and picking up speed on the information superhighway without encountering speed-bumps or avoidable accidents.


Pramod Rao, Group General Counsel at ICICI Bank. Views are personal.

1 Sections 45-ZC and 45-ZE of the Banking Regulation Act, 1949 could be referenced for mode and manner specified in the law for accessing the contents upon death of the consumer.

2 See the Depositories Act, 1996 and Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 and Securities and Exchange Board of India (Custodian of Securities) Regulations, 1996.

3 Such definition is distinct from definitions used in certain other laws and legislations; for instance, in terms of S. 3(13) of the Insolvency and Bankruptcy Code, 2016 (IBC), “financial information” has the following definition: (13) “financial information”, in relation to a person, means one or more of the following categories of information, namely: (a) records of the debt of the person; (b) records of liabilities when the person is solvent; (c) records of assets of person over which security interest has been created; (d) records, if any, of instances of default by the person against any debt; (e) records of the balance sheet and cash flow statements of the person; and (f) such other information as may be specified. These form part of information that an “information utility” is intended to collect. Similarly, there is “credit information” defined in S. 2(d) of the Credit Information Companies (Regulation) Act, 2005 which credit information companies collect which is worthy of being looked at.

4 See Regn. 3(1)(ix) of RBI Master Directions – Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016.

5 Regn. 3(1)(xi) of of RBI Master Directions – Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016.

6 See What is a Credit Information Report or CIR HERE

7 See S. 21 of the Credit Information Companies (Regulation) Act, 2005 accessible Here.

8 How a real estate demat account could work (or not) can be found HERE and HERE and https://www.linkedin.com/pulse/rumours-demat-accounts-real-estate-bhaumik-thakar>.

9 See HERE or HERE

10 Sahamati <https://sahamati.org.in>.

11 (2017) 10 SCC 641.

12 Personal Data Protection Bill accessible Here

13 See Cl. 19(1)(b) of the Personal Data Protection Bill, 2019, accessible Here.

14 See Cl. 56 of the Personal Data Protection Bill, which contemplates prior consultations and even entering into of memorandum of understanding for governing the coordination of actions.

Case BriefsSupreme Court

Supreme Court: In a major relief to Banks, the bench of MR Shah* and BV Nagarathna, JJ has held that no borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme (OTS Scheme) as,

“If it is held that the borrower can still, as a matter of right, pray for benefit under the OTS Scheme, in that case, it would be giving a premium to a dishonest borrower, who, despite the fact that he is able to make the payment and the fact that the bank is able to recover the entire loan amount even by selling the mortgaged/secured properties, either from the borrower and/or guarantor. This is because under the OTS Scheme a debtor has to pay a lesser amount than the actual amount due and payable under the loan account. Such cannot be the intention of the bank while offering OTS Scheme and that cannot be purpose of the Scheme which may encourage such a dishonesty.”

Factual Background

The original writ petitioner had obtained credit facility from the bank of about Rs. 1 crore. The said loan account with the Bank was categorised as “Non-Performing Asset, (NPA)”. The Bank also initiated proceedings under the provisions of the SARFAESI Act. These proceedings have remained pending for seven years.

There were two other loan accounts also which were being regularly serviced by the original writ petitioner, meaning thereby that the payment was regularised insofar as two other loan accounts are concerned. However, so far as the NPA is concerned, not a single amount was paid till an application for extending the benefit of OTS was submitted.

The Allahabad High Court had directed the Bank to positively consider the original writ petitioner’s application for OTS.

While passing the impugned judgment and order, the High Court, in response to the submissions on behalf of the Bank that, there are all possibilities of recovery of the loan amount and the efforts are being made to recover the amount by initiating proceedings under the SARFAESI Act and that the properties mortgaged can be auctioned, had observed that the proceedings under the SARFAESI Act have remained pending for seven years and the Bank has been unable to recover its dues and therefore the hope of recovery is illusory.

The bank had, hence, moved the Supreme Court.

Analysis

RBI Guidelines on OTS Scheme

As per the RBI guidelines, the grant of benefit of OTS Scheme cannot be prayed as a matter of right and the same is subject to fulfilling the eligibility criteria mentioned in the scheme. A wilful defaulter in repayment of loan and a person who has not paid even a single installment after taking the loan and will not be able to pay the loan will be considered in the category of “defaulter” and shall not be eligible for grant of benefit under the OTS Scheme. Similarly, a person whose account is declared as “NPA” shall also not be eligible.

Further, if there is possibility of recovery of the amount, either by initiating appropriate proceedings or by auctioning the property mortgaged and/or the properties given as a security either by the borrower and/or by guarantor, the application submitted by the borrower for grant of benefit under the OTS Scheme can be rejected.

Benefit of OTS Scheme not a right

No borrower can, as a matter of right, pray for grant of benefit of One Time Settlement Scheme.

In a given case, it may happen that a person would borrow a huge amount, for example Rs. 100 crores. After availing the loan, he may deliberately not pay any amount towards installments, though able to make the payment. He would wait for the OTS Scheme and then pray for grant of benefit under the OTS Scheme under which, always a lesser amount than the amount due and payable under the loan account will have to be paid.

No bank can be compelled to accept a lesser amount under the OTS Scheme despite the fact that the Bank is able to recover the entire loan amount by auctioning the secured property/mortgaged property. When the loan is disbursed by the bank and the outstanding amount is due and payable to the bank, it will always take a conscious decision in the interest of the bank and in its commercial wisdom.

Issue a writ of mandamus directing the Bank to positively consider the grant of benefit under the OTS Scheme

No writ of mandamus can be issued by the High Court in exercise of powers under Article 226 of the Constitution of India, directing a financial institution/bank to positively grant the benefit of OTS to a borrower. The grant of benefit under the OTS is always subject to the eligibility criteria mentioned under the OTS Scheme and the guidelines issued from time to time. If the bank/financial institution is of the opinion that the loanee has the capacity to make the payment and/or that the bank/financial institution is able to recover the entire loan amount even by auctioning the mortgaged property/secured property, either from the loanee and/or guarantor, the bank would be justified in refusing to grant the benefit under the OTS Scheme. Ultimately, such a decision should be left to the commercial wisdom of the bank whose amount is involved and it is always to be presumed that the financial institution/bank shall take a prudent decision whether to grant the benefit or not under the OTS Scheme, having regard to the public interest involved and having regard to the factors which are narrated hereinabove.

“If a prayer is entertained on the part of the defaulting unit/person to compel or direct the financial corporation/bank to enter into a one-time settlement on the terms proposed by it/him, then every defaulting unit/person which/who is capable of paying its/his dues as per the terms of the agreement entered into by it/him would like to get one time settlement in its/his favour. Who would not like to get his liability reduced and pay lesser amount than the amount he/she is liable to pay under the loan account?”

Ruling on facts

The original writ petitioner and her husband were making the payments regularly in two other loan accounts and those accounts are regularised. Despite having the capacity to make the payment even with respect to the present loan account, not a single amount/installment had been paid in the present loan account for which original petitioner was praying for the benefit under the OTS Scheme.

Further, merely because the proceedings under the SARFAESI Act have remained pending for seven years, the Bank cannot be held responsible for the same. No fault of the bank can be found. What was required to be considered is a conscious decision by the Bank that the Bank will be able to recover the entire loan amount by auctioning the mortgaged property and a due application of mind by the Bank that there are all possibilities to recover the entire loan amount, instead of granting the benefit under the OTS Scheme and to recover a lesser amount.

Hence, the High Court, had materially erred and had exceeded in its jurisdiction in issuing a writ of mandamus in exercise of its powers under Article 226 of the Constitution of India by directing the appellant-Bank to positively consider/grant the benefit of OTS to the original writ petitioner who was not just an NPA account holder but also a willful defaulter.

[Bijnor Urban Cooperative Bank Limited v. Meenal Agarwal, 2021 SCC OnLine SC 1255, decided on 15.12.2021]


Counsels

For Bank: Senior Advocate Meenakshi Arora,

For original writ petitioner: Senior Advocate V.K. Shukla


*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

Op EdsOP. ED.

1. Setting the stage

Cryptocurrency or virtual currency gained immense popularity after the 2008 financial crisis. Moreover, the sudden increase in the value of certain forms of virtual currency like Bitcoin has also made it a lucrative investment option. On the other hand, lack of accountability has also led to the employment of cryptocurrency for criminal and unethical activities. In light of this background, the Indian legislature has proposed a Bill banning all forms of private cryptocurrency in India which is pending before Parliament on the date of writing this paper.[1] Although the text of this proposed Bill is not available in the public domain, it is widely believed that the same is based upon a draft Bill which was proposed in 2019.[2]

This paper argues that instead of imposing a blanket ban on use or possession of cryptocurrency, appropriate regulatory framework would be a more suitable alternative. This regulatory framework maybe brought in by making suitable amendments to the existing legislation or by enacting a novel suigeneris legislation altogether. Furthermore, this short paper focuses on only one aspect of such regulation, namely, cross-border transactions through cryptocurrency. It is pertinent to mention here that though cryptocurrency is difficult to define and no universally accepted definition of cryptocurrency exists, however, cryptocurrency for the purposes of this paper would mean a financial instrument in intangible form produced and stored on servers using blockchain technologies and does not include digital currency or electronic currency like digital wallets, prepaid credit top-ups, loyalty points, etc.

Cross-border aspect of cryptocurrency regulation assumes importance as there is a growing consensus that there is an increase in cross-border trade via cryptocurrency. This is simply because in ordinary parlance, cryptocurrency can be understood as a private currency without backing of any sovereign guarantee. Thus, it overcomes the risk of failure of the entire payment system in case of any crisis wherein the sovereign is not able to fulfil its guarantee. One instance of such failure is the infamous 2016 demonetisation in India wherein the Government refused to honour its guarantee of payment in lieu of 500 and 1000 rupee bank notes. Such a unilateral revocation is not possible in case of cryptocurrency. Thus, by banning cryptocurrency instead of regulating it, India would be missing an opportunity on benefitting from this global currency.

In India, foreign trade, foreign investment and all forms of cross-border transactions are governed by the Foreign Exchange Management Act, 1999 (FEMA).[3] At the outset, it is pertinent to mention here that the applicability of FEMA and related rules on cross-border cryptocurrency transactions is still ambiguous as would be demonstrated in this paper. Therefore, even in the scenario that a blanket ban is imposed on cryptocurrency in India, short-term issues would arise pertaining to disposal of existing reserves of cryptocurrency in India. In other words, Indian entities currently possessing cryptocurrency would not be able to sell cryptocurrency amongst residents because of the ban and they might not be able to sell it across borders due to the looming ambiguity around FEMA.[4] Therefore, though the primary argument in this paper is to regulate cross-border transactions through FEMA, the suggestions and observations made in this paper would also be relevant to overcome the short-term problems in case of a blanket ban by providing an exit route to the existing holders of cryptocurrency in India.

2. Classifying cryptocurrency

The first step to proper regulation under FEMA is to adequately classify cryptocurrency within the framework of FEMA. This is important to determine applicable rules and regulations to cryptocurrency.

The first category of classification is “currency”. In this respect, Section 2(h) of FEMA5 prescribes an exhaustive definition of “currency” wherein a residuary power is given to Reserve Bank of India (RBI) to declare any instrument as currency. Historically, RBI has always maintained a sceptical attitude for classifying cryptocurrency as “currency” because the same would give it a status of fiat money or a legal tender. Moreover, this view is also supported by the Inter-Ministerial Committee Report6 because if cryptocurrency is considered as legal tender then it would have to be backed by sovereign guarantee which is very difficult given the volatile nature of cryptocurrency. Hence, as of today cryptocurrency cannot be classified as “currency”. At the same time, it is also pertinent to mention here that the Supreme Court in Internet and Mobile Assn. of India v. RBI7 had noted that RBI has abundant power to notify cryptocurrency as “currency” under FEMA. However, commentators have maintained that notifying cryptocurrency as “currency” is less likely as it would require complex framework, which would discourage use of cryptocurrency in India.8 Furthermore, as already noted above, one of the benefits of cryptocurrency is the lack of a sovereign guarantee that makes it arguably the most suitable medium of exchange for any cross-border transaction. In agreement with this observation, this paper does not support the argument that cryptocurrency should be conferred a status of “legal tender” rather it argues that there are alternative ways of regulating cryptocurrency under FEMA.

An allied argument with respect to the currency classification is classification as “foreign currency” or “foreign exchange”. Some authors have pondered on the possibility of cryptocurrency as “foreign currency”.9 To elaborate, Section 2(m) of FEMA10 defines “foreign currency” as any other currency except Indian currency. Nishith Desai Associates in their white paper have opined that where cryptocurrency creates a financial liability, it may amount to foreign currency as defined under FEMA.11 Similarly, the Supreme Court had opined that where cryptocurrency performs functions of money, it cannot be said that RBI has no power to regulate it merely because it is not a legal tender.12 Another argument put forth by supporters of this classification is that in case a foreign country recognises cryptocurrency as a legal tender then it would automatically come within the scope of “foreign currency” in India.13 In this respect, two arguments are put forth by the author. Firstly, till date no jurisdiction except El Salvador14 has notified cryptocurrency as a legal tender. Secondly, as it has already been established that cryptocurrency cannot be classified as “currency” unless until notified by RBI, therefore the question of it being regulated as a “foreign currency”, which is a subset of “currency”, becomes moot. Further, as per Section 2(n) of FEMA15, “foreign exchange” includes foreign currency and various instruments payable in foreign currency. Therefore, since it has been established that cryptocurrency is not “foreign currency”, by extension, cryptocurrency is also not “foreign exchange”.

Another alternative for classifying cryptocurrency under FEMA is by classifying it as “goods”. Although, FEMA does not define goods but it does talk about the import and export of goods.16 In this respect, Section 2(7) of the Sale of Goods Act, 1930 defines “goods” as “…every kind of movable property other than actionable claims and money….”17Again, Section 3(36) of the General Clauses Act, 1897 defines movable property as every kind of property except immovable property.18 Furthermore, Section 3(26) of the General Clauses Act, 1897 defines immovable property to include land and things attached to or fastened to land.19 Therefore, it can be easily said that cryptocurrency is not immovable property and given the broad definition of movable property, cryptocurrency would classify as movable property and by this extension “goods”. This would effectively mean that cryptocurrency transactions would be barter transactions. The implication of the same would be that these transactions would not be covered within the purview of Sale of Goods Act, 193020. This is because Sale of Goods Act, 1930 only applies to monetary transactions and not to barter transactions.21 Nevertheless, there is no prohibition in the Contract Act, 187222 pertaining to barter transactions and the parties to the crypto transaction? may contractually agree upon the exchange rate and other modalities of the transaction. Furthermore, this approach finds support in light of the fact that as per a recent news report, the Central Government is also considering classifying cryptocurrency as “commodity”.23

3. Regulating cryptocurrency under FEMA

From the above discussion it can be seen that cryptocurrency already falls within the regulatory ambit of import and export of goods under FEMA. However, the problem arises as there exists no specific regulations pertaining to import and export of cryptocurrency under FEMA which renders this “goods” classification as otiose. Moreover, as per Section 3 of FEMA24, only authorised persons or persons who have been permitted in this regard by RBI can deal in foreign exchange or cross-border transactions outside India.

a. RBI as the game changer

Theoretically, there can be two broad categories of cross-border cryptocurrency transactions. The first category would be purchase or sale of cryptocurrency itself from outside India. In simple words, currency or fiat money may be used to buy cryptocurrency from outside India or cryptocurrency already held may be sold outside India for foreign currency. The second category would involve using cryptocurrency like money i.e. for payment of goods and services across borders, for making investment, etc.

Regarding the first category of cases, there is nothing in FEMA which expressly prohibits purchase or sale of cryptocurrency through use of fiat money as long as such money is sent or received through authorised channels such as banks, etc. This is because these transactions can be considered akin to an ordinary transaction of buying and selling of goods for money. However, in respect of such transactions, it is imperative that necessary declarations are made while selling such cryptocurrency under the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015.25 These regulations do not contain any specific manner for disclosure of cryptocurrency but the general regulations regarding export disclosure are definitely applicable.

The real problem arises when cryptocurrency is sought to be used as a substitute for money. Cryptocurrency can be used for three broad purposes, namely, investment, purchase of assets/immovable property and for payment of goods. As already noted, it would not be expedient to classify or treat cryptocurrency as “currency” or legal tender. Therefore, it becomes imperative to analyse the relevant rules and regulations in respect of these transactions.

Investment by means of cryptocurrency can be a major inflow of cryptocurrency from outside India. This can be done to acquire shares, etc. One facet to be mentioned here is that in case of foreign investment, apart from RBI, Securities and Exchange Board of India (SEBI) also comes into the picture as it regulates the security market in India. The regulations provide that in case of both non-debt and a debt instrument including immovable assets, the mode of payment has to be through authorised bank channels and bank accounts.[5]26

Similarly, in case of payment for exports and imports, the Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016, state that receipt and payment for exports and imports have to be made in appropriate foreign exchange or currency.27 Thus, this regulation ipso facto prohibits any transaction via cryptocurrency as crypto is neither foreign exchange nor currency. However, these regulations also provide a residuary power to RBI to permit transactions through any other instrument authorised by it.28 At this juncture, it is noteworthy to discuss here that some authors while interpreting Regulation 5(2)(b) of the said Regulations have opined that payment can be made in cryptocurrency for imported goods if the exporting country recognises cryptocurrency as a valid mode of payment.29 Regulation 5(2)(b) provides that payment of import in case of countries other than members of Asian Clearing Union can be made “… in a currency appropriate to the country of shipment of goods”30. In this author’s opinion, the supporters of this argument have misinterpreted the term “currency”. The real test is to see as to whether cryptocurrency falls within the definition of “currency” as per Indian laws (more specifically FEMA) and it is only after the satisfaction of the first test, it is to be seen as to whether such “currency” is recognised as a valid mode of payment by the exporting/shipment country. Since, it has already been established that cryptocurrency cannot be treated as “currency” under FEMA, thus, the argument that exporting countries can be paid in cryptocurrency when recognised by such exporting country, fails.

Another instance of cross-border payments is remittance to persons in India. As per RBI liberalised remittance scheme,31 a non-resident Indian can remit up to USD 250,000 through an authorised channel to a person in India. Theoretically, such a remittance can be made through cryptocurrency. However, at present there is no authorised agent for such transfers. Therefore, RBI may designate certain cryptocurrency exchanges, public or private or both, as authorised agents for such cross-border payments.

The above analysis shows that the real problem lies in the fact that cryptocurrency has not been recognised and notified as a valid mode of payment. It is imperative to mention here that the phrase “mode of payment” has been used here because it has not been argued that cryptocurrency should be notified as a legal tender. It appears that the ball is in RBI’s court which can easily notify cryptocurrency as a valid mode of payment and can bring out additional regulations to promote cross-border transactions via cryptocurrency. Such tinkering would not change the status of cryptocurrency as “goods” which will imply that the cross-border transactions done via cryptocurrency are essentially barter transactions.

b. Why Regulation

Once, it has been established that regulation of cryptocurrency under FEMA is plausible, the next question that arises as to whether regulation is the better alternative or not. In this respect, it is noteworthy to mention here that a few years ago; a similar concern arose regarding the regulation of payment instruments like Paytm wallets, etc. Admittedly, there is a difference between the nature of digital currency like Paytm credits and cryptocurrency. Nevertheless, the principal point to be noted here is that instead of completely banning such digital currency, RBI had introduced spending limit and other formalities under the FEMA.32 Today, subject to fulfilment of KYC norms, there is no spending limit and digital currency has become an integral part of the Indian financial market. Therefore, considering the infancy of cryptocurrency in India, it would be suitable that appropriate regulations be introduced under FEMA. Furthermore, there should be separate regulations for retail investors and ordinary businessmen, wherein RBI may consider imposing an accumulation limit for cryptocurrency for retail investor and prescribe additional compliance regulations for businessmen. These regulations maybe eventually relaxed as and when the Indian crypto market matures.

In support of the above suggestion, it is pertinent to mention here that cryptocurrency exchanges in IMAI case33 had submitted that they had put in place measures like avoidance of cash transactions, enhanced KYC measures and limiting to transactions in India.34 The problem with such regulation is that it is a case of self-regulation and therefore, non-binding and non-uniform. Nevertheless, in the proposed system, RBI can easily introduce uniform regulations for all crypto exchanges and users based on such self-regulations.

Lastly, by not regulating cryptocurrency, India would be extinguishing a unique opportunity for Indian industry. At the same time by banning cryptocurrency, no difference would be made in curbing cross-border crimes which is the primary motivation for this drastic move. To illustrate, in a case before the Karnataka High Court,35 the accused had ordered certain drug packets from Netherlands by placing an order through cryptocurrency. Now in such a case, imagine that there had been a ban on cryptocurrency. In such a scenario, tracing of transaction through any other mode of payment would have been easier but in the alternative, a mandatory disclosure under FEMA regarding cryptocurrency would have also served the purpose. Moreover, a ban on cryptocurrency would not necessarily imply that criminal activities through cryptocurrency would be curbed. Instead, the criminals would still conduct the transactions through cryptocurrency as cryptocurrency being legal or illegal is not their primary concern rather it is the lack of traceability which is the primary advantage here. On the other hand, legitimate users would be denied the benefits of this cryptocurrency in case of a blanket ban. Thus, it is imperative that proper regulations are enacted to effectively prevent such cross-border crimes.

4. Conclusion

The Preamble to FEMA36 states that one of its objectives is to facilitate and promote foreign trade. By opting to ban cryptocurrency instead of adopting a regulatory route, the legislature would be violating the objectives of FEMA. While the paper has not discussed the legal validity of the potential ban, such ban would undoubtedly affect India’s capability to engage in foreign trade.

The discussion in the paper has also shown that RBI has ample powers under FEMA to regulate cross-border transactions conducted through cryptocurrency. This can be done by classifying and normatively accepting cryptocurrency as “goods”. In fact, it appears that though the legislature may consider enacting a new regulatory code for regulating domestic and cross-border cryptocurrency transactions, nevertheless, RBI can easily issue relevant rules and regulations under FEMA without any need for a formal legislative amendment.

Lastly, imposing a blanket ban on cryptocurrency without first permitting regulation of cryptocurrency under the FEMA would result in denial of an exit route to the existing cryptocurrency holders. Therefore, in case the legislature goes ahead with a blanket ban, it would still be required to clear the air with respect to the regulatory framework under FEMA along with an adequate buffer period so that existing users can liquidate their crypto holdings (by selling the same in foreign countries) without completely losing upon the value of their investments.


* Associate, KN Legal, New Delhi.

[1]India to Reportedly Propose Cryptocurrency Ban, Penalising Miners & Traders, CNBC (15-3-2021, 11:35 a.m.), <https://www.cnbc.com/2021/03/15/india-plans-cryptocurrency-ban-will-penalize-miners-and-traders.html#:~:text=India%20to%20reportedly%20propose%20cryptocurrency%20ban%2C%20penalizing%20miners%20and%20traders,-Published%20Sun%2C%20Mar&text=India%20will%20propose%20a%20law,senior%20government%20official%20told%20Reuters>.

[2]Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019.

[3]Foreign Exchange Management Act, 1999 (hereinafter “FEMA”).

[4]Jaideep Reddy, The Case for Regulating Crypto-Assets: A Constitutional Perspective, 15 Indian Journal of Law and Technology 379, 413-14 (2020).

5http://www.scconline.com/DocumentLink/k36NxTk7.

6Report of the Committee to Propose Specific Actions to be Taken in Relation to Virtual Currencies (28-2-2019).

7(2020) 10 SCC 274 (hereinafter “IMAI case”).

8Deepanshu Poddar and Advik Rijul Jha, Cryptocurrencies in Need of Regulation: A Primer to Bitcoins Regulation in India, 4 RGNUL Student Research Review 50, 65 (2018).

9Khyati Basant, RBI & Cryptocurrency: The Story so Far, IPleaders Blog (14-9-2020), <https://blog.ipleaders.in/rbi-and-cryptocurrency-the-story-so-far/#Laws_relevant_for_cryptocurrency>.

10http://www.scconline.com/DocumentLink/k36NxTk7.

11Nishith M. Desai, Vaibhav Parikh and Jaideep Reddy, Building a Successful Blockchain Ecosystem for India: Regulatory Approaches to Crypto-Assets, Nishith Desai Associates (December 2018), <https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Building-a-Successful-Blockchain-Ecosystem-for-India.pdf>.

12IMAI case, (2020) 10 SCC 274.

13Hatim Hussain, Reinventing Regulation: The Curious Case of Taxation of Cryptocurrencies in India, 10 NUJS Law Review 792, 802 (2017).

14Jay L. Zagorsky, Finally, Bitcoin is becoming Legal Tender in a Country, Scroll.in (6-9-2021), <https://scroll.in/article/1004520/finally-bitcoin-is-set-to-become-legal-tender-in-a-country>.

15http://www.scconline.com/DocumentLink/k36NxTk7.

16FEMA, Ss. 2(l) and (p).

17Sale of Goods Act, 1930, S. 2(7).

18General Clauses Act, 1897, S. 3(36).

19General Clauses Act, 1897, S. 3(26).

20http://www.scconline.com/DocumentLink/36uai836.

21Sale of Goods Act, 1930, S. 2(10).

22http://www.scconline.com/DocumentLink/xAi185p6.

23Saloni Shukla and Sachin Dave, Govt. Plans to Bring a Bill, Cryptocurrencies to be Treated as Commodity, The Economic Times (3-9-2021), <https://economictimes.indiatimes.com/news/economy/finance/virtual-currencies-govt-plans-to-bring-a-bill-cryptos-to-be-treated-as-commodity/articleshow/85885645.cms?from=mdr>.

24http://www.scconline.com/DocumentLink/XgtmMJs7.

25Foreign Exchange Management (Export of Goods and Services) Regulations, 2015,Gazette of India, Pt. II S. 3(i) (12-1-2016), Regn. 3.

26Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019, Gazette of India, Pt. II S. 3(i) (17-10-2019), Regn. 3; Foreign Exchange Management (Debt Instruments) Regulations, 2019, Gazette of India, Pt. II S. 3(i) (17-10-2019), Regn. 2, Sch. 1.

27Foreign Exchange Management (Manner of Receipt and Payment) Regulations, 2016, Gazette of India, Pt. II S. 3(i) (2-5-2016), Regns. 3 and 5.

29Amit K. Kashyap & Akanksha Goyal, India’s Discomfort with Blockchain Based Currency: A Vacuum on the Legality of Bitcoins, 6 GNLU Law Review216, 224 (2019).

30http://www.scconline.com/DocumentLink/v7ShgbZ1.

31Master Direction–Reporting under Foreign Exchange Management Act, 1999, Reserve Bank of India (1-1-2016),<https://rbidocs.rbi.org.in/rdocs/notification/PDFs/13MDRD77DCF42C4E64B6C9A83C24EF5D4E188.PDF>.

32N.S. Nappinai, Technology Laws Decoded, S. 1.9(e) (1st Edn., 2017).

33(2020) 10 SCC 274.

34IMAI case, (2020) 10 SCC 274.

35Aayush Ajit v. Inspector of Customs, 2020 SCC OnLine Kar 1940.

36http://www.scconline.com/DocumentLink/W82NXKH2.

Case BriefsHigh Courts

Delhi High Court: Getting indulged in Virtual Currencies even after receiving public notices not to deal in the same and further duping several people, the accused applied for bail. Anu Malhotra, J., denied application of the accused concerned by expressing that,

“…alleged commission of economic offences corrode the fabric of democracy and were committed with total disregard to the rights and interest of the nation and were committed by breach of trust and faith and were against the national economy and national interest, whereby a large number of innocent investors had been duped of their hard-earned money…”

Bail was sought through the present application with respect to an FIR under Sections 420, 406, 120B of the Penal Code, 1860.

Applicant along with the co-accused Bharat Verma and other associates were running a Crypto Currency chit fund company and held various meetings to explain their cryptocurrency business and also the alleged high rate of return being given to clients whereby they allegedly induced the complainants to invest in the cryptocurrency in their firm on the assurance of high return up to 20-30% per month.

Adding to the above, it was also stated that complainants were further allured on the assurance of extra commission, if more clients were brought for the investment in the firm.

Complainants gave their hard-earned money but never received the return on their respective investments as assured by the allege persons and later it was learnt that the accused persons including the present applicant closed the office of their firm and fled to Dubai without returning the amount of the complainants.

EOW sought the dismissal of the bail application as the applicant had collected huge amounts from gullible investors.

Analysis, Law and Decision

High Court noted that the applicant had indulged in trade of cryptocurrency despite public notices issued by the RBI as also issued on cautioning users/holders and traders of virtual currency including bitcoins regarding various risks associated in dealing with such virtual currencies with regulated entities already providing such services having been called upon to exit the relationship within 3 months.

In view of the associated risks, it was decided by the RBI with immediate effect that the entities regulated by the RBI would not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs and that such services included maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transferring/receipt of money in accounts relating to purchase/ sale of VCs with the transactions entered into by the applicant, coupled with the aspect that apart from the investments received by the applicant prior to the circular dated 06.04.2018, the applicant continued to take investments even after the RBI’s circular dated 06.04.2018 as per the statement of amount invested by complainants along with receipts as submitted by the applicant.

Court expressed that,

“…taking into account the allegations levelled against the applicant of he with his associates having duped the complainants allegedly to the tune of Rs 2.5 Crores in the instant case which were related to an alleged commission of an economic offence, which offences corrode the fabric of democracy and were committed with total disregard to the rights and interest of the nation and were committed by breach of trust and faith and were against the national economy and national interest, whereby a large number of innocent investors had been duped of their hard-earned money, it is not considered appropriate to release the applicant on bail.”

 In view of the above discussion, bail application was dismissed. [Umesh Verma v. State, 2021 SCC OnLine Del 4800, decided on 26-10-2021]


Advocates before the Court:

For the Petitioner:

Mr Raman Gandhi, Mr Anand Kumar Dubey, Advocates with applicant.

For the Respondent:

Ms Aashaa Tiwari, APP for State with SI Deepak Kumar.

Mr Archit Kaushik, Advocate for complainant

Legislation Updates

The Reserve Bank of India has issued the Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021 on October 26, 2021. The Master Directions shall be applicable to all Local Area Banks, licensed to operate in India by the Reserve Bank of India comes into effect from October 26, 2021. Key highlights:

  • This Master Direction covers instructions regarding the components of capital and the capital required to be provided for by banks for credit and market risks. These Directions serve to specify the prudential norms from the point of view of capital adequacy. Permission for LABs to undertake transactions in specific instruments/products shall be guided by the regulations, instructions and guidelines on the same issued by Reserve Bank from time to time.
  • Banks are required to maintain a minimum Capital to Risk Weighted Assets Ratio (CRAR) of 9 per cent on an ongoing basis. The capital funds shall consist of the sum of Tier I Capital and Tier II Capital.
  • Banks shall not enter into swap transactions involving conversion of fixed rate rupee liabilities in respect of Tier I/Tier II bonds into floating rate foreign currency liabilities.
  • Banks shall manage the market risks in their books on an ongoing basis and ensure that the capital requirements for market risks are maintained on a continuous basis, at the close of each business day. Banks shall also maintain strict risk management systems to monitor and control intra-day exposures to market risks.
  • The funds collected by various branches of the bank or other banks for the issue and held pending finalisation of allotment of the Tier I Preference Shares shall be taken into account for the purpose of calculating reserve requirements.
  • The total amount raised by the bank by issue of PNCPS shall, however, not be reckoned as liability for calculation of net demand and time liabilities for the purpose of reserve requirements and, as such, shall not attract CRR / SLR requirements.

Access the Reserve Bank of India (Prudential Norms on Capital Adequacy for Local Area Banks) Directions, 2021, HERE


Tanvi Singh, Editorial Assistant has reported this brief.

Business NewsNews

Acquisition approval by Competition Commission of India 


The Competition Commission of India (CCI) approves acquisition by HDFC Bank Limited (Acquirer) of shareholding in HDFC ERGO General Insurance Company Limited (Target) under Section 31(1) of the Competition Act, 2002.

The Proposed Combination involves acquisition of 4.99% of the outstanding equity share capital of the Target by the Acquirer from Housing Development Finance Corporation (HDFC).

Background of the Acquirer and Target

The Acquirer is a public listed banking company registered with the Reserve Bank of India which provides a wide range of banking services covering commercial and investment banking on the wholesale side and transactional / branch banking on the retail side. As a part of the retail banking segment, the Acquirer also engages in the distribution of life and general / non-life insurance products.

The Target is a joint venture between HDFC and ERGO International AG and is engaged in the business of general / non-life insurance in India and offers a complete range of general / non-life insurance products.


Competition Commission of India 

[Source: PIB]

[Dt. 25-10-2021]

Legislation UpdatesNotifications

On September 24, 2021, the Reserve Bank of India (RBI) has issued the Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021. These directions come into immediate effect replacing the existing instructions on the matter of sale / transfer of loan exposures.

Applicability

The provisions of these directions shall apply to the following entities (collectively referred to as lenders in these directions), unless specified otherwise:

(a) Scheduled Commercial Banks;

(b) Regional Rural Banks;

(c) Primary (Urban) Co-operative Banks/State Co-operative Banks/District Central Co-operative Banks;

(d) All India Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);

(e) Small Finance Banks; and

(f) All Non Banking Finance Companies (NBFCs) including Housing Finance Companies (HFCs).

General Requirements:

  • Lenders must put in place a comprehensive Board approved policy for transfer and acquisition of loan exposures under these guidelines. Further, the policy must also ensure independence of functioning and reporting responsibilities of the units and personnel involved in transfer / acquisition of loans from that of personnel involved in originating the loans. All transactions must meet the requirements as detailed in the policy.
  • Loan transfers should result in transfer of economic interest without being accompanied by any change in underlying terms and conditions of the loan contract usually.

Minimum Holding Period

The transferor can transfer loans only after a minimum holding period (MHP), as prescribed below, which is counted from the date of registration of the underlying security interest:

  1. Three months in case of loans with tenor of up to 2 years;
  2. Six months in case of loans with tenor of more than 2 years.

Disclosures and Reporting

  • The lenders should make appropriate disclosures in their financial statements, under ‘Notes to Accounts’, relating to the total amount of loans not in default / stressed loans transferred and acquired to / from other entities as prescribed in the Directions, on a quarterly basis starting from the quarter ending on December 31, 2021.

For more details, refer HERE

Legislation UpdatesRules & Regulations

On September 08, 2021, the Reserve Bank of India has notified the Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2021 to amend the Foreign Exchange Management (Export of Goods and Services) Regulations, 2015.

The Foreign Exchange Management (Export of Goods and Services) (Amendment) Regulations, 2021 amend regulation 15 of Foreign Exchange Management (Export of Goods and Services) Regulations, 2015 which deals with advance payment against exports in the following manner:

In cases where an exporter receives advance payment, the exporter shall be under an obligation to ensure that the rate of interest, if any, payable on the advance payment shall not exceed 100 basis points above the London Inter-Bank Offered Rate (LIBOR) or other applicable benchmark as may be directed by the Reserve Bank, as the case may be.


*Tanvi Singh, Editorial Assistant has reported this brief.

Op EdsOP. ED.

Introduction

Passing years and seasons have proved the worth of cryptocurrency, especially Bitcoin, with more than 18 million of it being circulated today. It has progressed quicker than any financial ecosystem in history, from being a buzz phrase used among techies it has managed to attract general attention too. The majority of the contemporary market capitalisation has been driven by investors anticipating the prospects of blockchain technology.

Since the inception of cryptocurrency, from the leading experts to outsiders, all have witnessed its pricing figure that oscillates every few minutes. There would not be a crypto investor who has not tried to get to the root of this problem. Investors have been trying their luck hard to crack the code and decipher why cryptocurrency fluctuates and use that strategy to generate profitable bets in the crypto market. Its nascent stage is the highest contributing factor changing its value but it is not the only one. The presumption goes that such a volatile behaviour of cryptocurrency is likely to be in motion until a sufficient amount of pricing stability and acceptability is attained in the market.

When it comes to the administration and legality of crypto currencies, government perspectives vary throughout the world. Regulations are developing at an unprecedented rate in many parts of the world. Globally, various approaches have come into play such as setting up a body to monitor the Initial Coin Offerings, constituting cyber units to track unregistered securities. Such steps mark an attempt to protect the technology providers, financial institutions, and investors.

European Union (EU) Governments have been unified in their cautious optimism towards blockchain technology, willing to support the new field while avoiding wrongdoing and alerting potential investors of associated risks. In terms of cryptocurrency regulations, Asia has adopted a varied approach, with some nations outright outlawing trade such as China while others showed acceptance and encouragement.

In the Asian sub-continent Japan has the most proactive regulatory environment for cryptocurrencies. Though in past the country faced waves of scams; yet has learned its lessons well which is visible in the fiscal earnings released by Monex Group in April 2021. In comparison to prior years, coin-check revenues rose by more than fivefold to ¥20.8 billion. About 210,000 of the 260,000 subscribers it attracted were concentrated in the second part of the fiscal year, signifying that several people had jumped upon the new crypto bandwagon.

Hong Kong too has been relatively supportive of cryptocurrency. According to the recent government proposals, in Hong Kong, cryptocurrency exchanges will be required to get a licence from the city’s market authority and will only be permitted to provide facilities to professional investors.

Undoubtedly, the spectacular rise of cryptocurrencies in the past few years has piqued the interest of the investing public and financial institutions. Eventually, in most countries, the debate is no more about if a cryptocurrency will survive, rather about measures that will advance, thereby affect the institutions as it attains market maturity with time.

It is noteworthy to observe that with India’s rapid technological progress and extraordinary breakthroughs, particularly due to COVID-19 pandemic, the fintech sector has been on a steady upward trajectory. Nearly 7 million Indians have already invested roughly one thousand million dollars in cryptocurrency the Government is facing a complex challenge to allow the fintech sector to thrive in India while ensuring that it is done safely. However, in India, the story seems to be half-cooked. Though off lately the story has begun to cook more than it was earlier.

Position of cryptocurrency in India

Invariably, the traditional investors hold a conservative view propounding that the Government of India, will sooner or later introduce a Bill concerning cryptocurrency, and such a Bill will put a wet blanket on crypto and thereby banning it. This school of thought believes that Government can never be in a position to legalise cryptocurrency for it will lead to devaluation of Indian rupee. The Finance Minister in 2018 strengthened this lobby when it stated that:

The Government does not consider cryptocurrencies “as legal tender or coin” and will take all measures to eliminate the use of those crypto assets in financing “illegitimate activities” or a part of the payment system. The Government will explore the use of blockchain technology proactively for assuring in digital economy.1

This statement was succeeded by a circular from Reserve Bank of India (RBI).

The notification was pertaining to the Prohibition on dealing with Virtual Currency (VCs). While cautioning the user availing virtual currency services it decided to restrict its entities from dealing in VCs or providing services to assist anyone in dealing with or settling VCs. Maintaining accounts, trading, settling, registering, lending against virtual tokens, clearing, taking them as collateral, creating accounts with exchanges that deal with them, and transferring/receiving money in accounts connected to the purchase/sale of VCs are all elements of such services. Regulating entities that provided such services were also asked to exit the relationship by July 2020. RBI time and again has reflected upon the displeasing nature of cryptocurrency and its dissatisfaction in matters of legalising the same.

Nevertheless, the Supreme Court in Internet and Mobile Assn. of India v. RBI2 revoked this order in March 2020. The Court observed that, although Reserve Bank has the power and right to issue such circulars but the notification beforehand lacked the proof of the damage or adversity faced by regulating entities directly or indirectly while operating cryptocurrency.

For both Indian users and crypto firms who wish to serve them, the Supreme Court’s judgment is a huge step in the right direction. The move will not only increase the everyday usage of cryptocurrencies in India, but it will also draw fresh expertise and creativity to the nation’s blockchain endeavours.

Experts believe that as a natural development India will progress to become one of the leading countries for cryptocurrency and digital asset adoption in the near future and it will advance in the direction of a cashless economy if the Government does not take a step backward from cryptocurrency.

After the Supreme Court’s judgment, RBI further cleared the air surrounding its earlier circular by issuing a circular on Customer Due Diligence for Transactions in Virtual Currencies (VC).3 By reference to RBI Circular DBR.No.BP.BC.104/08.13.102/2017-18 dated 6-4-2018, Reserve Bank took notice of the fact that various banks/regulated companies have warned their clients against trading in virtual currencies. It further pointed out that all such notifications were not in congruence as the earlier circular that was issued by RBI back in 2018 was no more valid as it was set aside by the Supreme Court in March 2020.  However, banks and entities, on the other hand, were directed to proceed with proper conduction of due diligence as per guiding norms for anti-money laundering (AML), know your customer (KYC), combating of financing of terrorism (CFT), and regulated entities’ obligations together under the Prevention of Money-Laundering Act, 2002 (PMLA)4, in addition to ensuring compliance with relevant provisions under Foreign Exchange Management Act, 1999 (FEMA)5 for overseas remittances.

Cryptocurrencies are not illegal in India but it is important to note that India currently lacks a regulatory architecture to manage cryptocurrencies. In November 2017, the Government formed an Inter-Ministerial Committee (IMC) to analyse currencies.

The Ministry of Corporate Affairs — General Notification dated 24-3-2021, remains the only official word conveyed from the end of Government of India (GoI). The notification made it compulsory for companies to disclose their crypto trading/investment during the financial year. The notification proclaimed “Details of Cryptocurrency or Virtual Currency where the company has traded or invested in cryptocurrency or virtual currency during the financial year, the following shall be disclosed—

(a) Profit or loss on transactions involving cryptocurrency or virtual currency.

(b) Amount of currency held as at the reporting date.

(c) Deposits or advances from any person for the purpose of trading or investing in cryptocurrency/virtual currency.”6

In the eye of some, the move has been seen as a ray of hope which foreshadows taxation rules. Investors, economic, and political thinkers are also channelising their energy to understand if the grappling global developments of crypto will incite the Indian Government to soon come with a more unblurred stance on blockchain technology.

Recently, Central American country — El Salvador positioned itself as a first one to accept bitcoin as a legal tender. Legalising bitcoin though is only a chapter in the story of Salvadoran book yet many propound that it is less about the currency game rather more so about motivating people to use crypto. This will allow them to grasp the air of innovation and step their foot forward in the ground of opportunities and thereby tapping the technology sector of the country. Global debates as to whether or not this move is going to be attractive for the investors are going to depend on the leadership’s ability to utilise their irrefutable political capital to bring a large consolidated fiscal deficit into control.

After El Salvador’s bold step, there have been numerous discussions and deliberations if this step is going wake the Indian Government and think rapidly of crypto prospects. Recently many reports hold apprehensions about Indian Government’s inclination to classify bitcoin as an asset class in the future. Those who might believe that crypto deserves to have a transactional value might not be too satisfied nevertheless ones who think it has nothing but a stored asset value might appreciate the decision if implemented. An asset class is nothing but a mere collection of financial products with comparable financial attributes in the market. Just like one holds an asset such as real estate or precious metals, people might be able to hold money in crypto as an asset. It is no secret that cryptocurrencies such as bitcoins have outperformed all the conventional assets.

If India classifies cryptocurrency as asset class then the step can set a departure from its previous harsh posture against cryptocurrencies. The investors have always been on the lookout for such resolves on the cards from the end of the Government. The global developments in the cryptocurrency have the calibre to escalate the Government’s view to recognise the potential that exists in blockchain technology as a decentralised system.

Though the idea of India accepting cryptocurrency as a legal tender seems to be minute considering it has the propensity in devaluation of the Indian rupee. In an intercontinental view as well, accepting bitcoin or any other cryptocurrency as a legal tender is a concept more suitable to those countries that does not have a currency of their own. In upcoming days embracing cryptocurrency if not as a legal tender but a presumptive asset class seems to be more pragmatic. The step no matter how trivial in nature will certainly get the ball rolling and stimulate the market.

Explicitly, there exist numerous poles opposite theories in the market. As the story of crypto in India remains half-cooked none stands the test of time.

The way forward

We should not compare crypto to a fiat currency because it is a contemporary asset class. Cryptocurrency is simply one of many conceivable applications. Its potential must not be undermined by the Indian Government.

The Financial Action Task Force (FATF) standards say unequivocally that cryptocurrency poses no harm to the global economy and can be adequately controlled. It is also interesting to note that FATF has presented a Crypto Standard Regulatory Report in G20 countries to which India a member. Crypto and fiat can both be synchronised in one ecosystem and crypto can even assist banks in resolving current issues for millions of unbanked individuals.

The market anticipates further guidelines from Indian authorities in the future and an expansion in enforcement. While it is unclear whether a new regulatory framework will emerge in India, ICO issuers, trading platforms, and other businesses that deal with cryptocurrencies should start improving their anti-money laundering, anti-fraud, cybersecurity, and reporting initiatives at the earliest to regulate the market. Though the self-regulation will be a precaution but not a permanent cure, the Government needs to step in at the earliest to combat the wrongdoings.


Managing Associate, L&L Partners, New Delhi. Author can be reached at chatterjeeaor@swarnendu.co.

†† BA LLB (Hons.) 3rd year student,  Amity Law School, New Delhi. Author can be reached at   yashikabhardwaj06@gmail.com.

1 The Economic Times, “Are Your Crypto Investments Legal? Here is Everything You Need to Know”, available at <https://economictimes.indiatimes.com/markets/forex/forex-news/are-your-crypto-investments-legal-heres-everything-you-need-to-know/articleshow/82259869.cms> (last visited on 8-6-2021, 10.40 a.m.).

2 (2020) 10 SCC 274.

3 Reserve Bank of India, Customer Due Diligence for Transactions in Virtual Currencies (VC), DOR. AML.REC 18/14.01.001/2021-22, (Issued on 31-5-2021).

4 Prevention of Money-Laundering Act, 2002. <http://www.scconline.com/DocumentLink/RE7jhkh0>.

5 Foreign Exchange Management Act, 1999.  <http://www.scconline.com/DocumentLink/pIrl0KB8>.

6 Ministry of Corporate Affairs, Gazette of India, Extraordinary, Part II, S. 3, sub-s. (i) (Issued on 24-3-2021).

Case BriefsDistrict Court

Abhinav Pandey, MM, Tis Hazari Court directs Delhi Police to lodge FIR and investigate allegations of fraud in crypto transactions.

Complainant sought directions to the police for registration of FIR and commencement of investigation, into the offences alleged by the complainant to have been committed by the accused.

It was submitted by the complainant that he deals in the sale and purchase of bitcoins, and while doing that he always takes proof of identity before entering into any trade transactions and that he also pays taxes on the gains that he makes in such trade.

Further, it was added that the accused had purchase bitcoins on several occasions, and he used to transfer funds to the bank account of the complainant, in return for which, complainant used to transfer bitcoin to the accused’s virtual wallet on the online transaction portal “Binance”.

Complainant submitted that his bank accounts were frozen on the ground of his transaction in bitcoins to be marked as illegal transactions.

On confronting accused on the legality of the money paid by the accused against bitcoins, the accused admitted that the payments were a ‘scam’ and further he refused to return the bitcoins transferred by the complainant.

Complainant states that he was cheated by the accused and Court intervention was sought in view of the same.

Analysis, Law and Decision

Bench on perusal of the facts and submissions of the matter opined that its jurisdiction was made out in view of the provisions of Section 179, 180 and 182 of CrPC, and due to the absence of any material filed by the police to suggest to the contrary.

CRUX

Whether the complainant himself was carrying out a lawful activity, and whether he himself has come to this Court with clean hands?

Bench noted that RBI in its’ circular dated 6-04-2018 had cautioned the users, holders and traders of virtual currencies while directing the banks and financial institutions regulated by it, not to deal in virtual currencies and not to provide services eg. maintaining accounts, registering, trading, settling, clearing, giving loans and accepting VCs as collaterals, opening accounts of exchanges dealing with them etc., for facilitating any person or entity in dealing with virtual currencies.

Though, the above-stated circular was set aside by the Supreme court in its decision of Internet & Mobile Assn. of India v. Reserve Bank of India, (2020) 10 SCC 274.

But another fact observed by the Court was that the above decision of the Supreme Court did not adjudicate upon the legality of the virtual currency and there was no specific legislation too, as on date, specifically dealing with the legality and regulation of cryptocurrency.

Further, the Bench remarked that the cryptocurrency transaction will comply with the general law in force including PMLA, IPC, FERA, NDPS Act, Tax laws, and with the RBI regulations regarding KYC (know your customer), CFT (Combating of funding of terrorism) and AML (Anti-money laundering requirements).

KYC is the responsibility of the intermediary and cannot be left to the individuals be it institutional transfer or person to person trade, with the intermediary shying away from the responsibility to ensure legitimacy of the source of money and establishment of real identity of the parties.

BINANCE

Responsibility of ‘BINANCE’ is to ensure adequate safeguards against activities such as ‘mixing’ and other random cryptocurrency exchanges, which change the identity of bitcoins being held by a virtual wallet, making tracing of any illegal proceeds and any bitcoins, purchased through it, extremely difficult.

Legal and Regulatory Escape: Is there an existence?

Proceeding to make some more significant observations, Court stated that the opportunistic activities, aimed at exploiting the lack of legal regulation, with utter disregard to the identity of parties, sources and destination of funds, and illegal purposes e.g. terrorism, narcotics, illegal arms, cross-border illegal transactions for which it may be used, still do not enjoy any route for legal and regulatory escape.

Therefore, the aforementioned aspects have to be investigated in detail, and any negligence or complicity of the online VC transaction portal “BINANCE” in perpetration of hiding the proceeds of crime, and in the funding of any illegal activities through cryptocurrency has to be inquired into.

Culpability of accused

Prima facie the screenshots of the conversation with the accused imply the knowledge of the accused regarding the source of money.

Bench noted that the accused was already an accused in two other cybercrime FIRs, hence,

it is quite possible that apart from being involved in the aforesaid cyber offences, the accused may have hid the factum of illegality of money from the complainant, thereby inducing him to deliver bitcoins in exchange of money, while being aware of the fact that it may, sooner or later come under the radar of the banking system, and so it is better to get rid of the same, purchase bitcoins and multiply/ mix transactions to hide its source, and to encash it from ‘safe haven’ countries, where there is absence or lack of regulations.

 As per the Court, there was a possibility that the complainant was unaware of the designs of the accused and fell into his trap.

But complainant’s possibility of giving his consent in the entire gamut of activities could not be ruled out since he did not reveal the complete facts to the Court as he went on accepting the amount from different accounts which may not have been a mere lack of caution or due diligence.

In one of the WhatsApp conversations annexed alongwith the complainant, the accused is seen advising the complainant to clear his bank accounts immediately on receipt of any consideration against sale of bitcoins, and the complainant fails to be alarmed, thanks the accused for such advice, and admits that he immediately converts any such consideration back to cryptocurrency.

 Yet, the complainant on being fully aware of the legal consequences has approached the Court.

While concluding the matter, Bench held that cognizable offence under Sections 403, 411 and 420 of Penal Code, 1860 were prima facie committed and the real culprits need to be identified.

Bench made another crucial observation that the possibility of the complainant, accused and the online intermediary, being hand in glove cannot be denied too, whereby the accused may have been involved in hacking/cyber-crimes against unsuspecting persons, and transferring the same immediately to the complainant against bitcoins, thus creating a chain of transactions difficult to follow up till the amount is invested in any illegal activity, or is withdrawn in a ‘safe haven’ jurisdiction. The exchange intermediary may either be involved, or may just be keeping its eyes shut to all such activities carried out through it.

Lastly, the Court stated that it is possible that any of the said persons/intermediaries may come out to be innocent or just negligent, hence there is a need for police investigation to be extremely technical.

Registration of FIR does not mean that the accused is to be automatically arrested, and the concerned provisions of CrPC shall apply.

Status of investigation to be informed on 6-08-2021. [Hitesh Bhatia v. Kumar Vivekanand, Case No. 3207 of 2020, decided on 1-07-2021]


Counsel for the Complainant: Mr. Bharat Chugh and Advocate Sai Krishna.

Case BriefsHigh Courts

Delhi High Court: Prateek Jalan, J., reiterated the position of law laid down in the decision of Vandana Tyagi v. GNCTD, [WP (C) 1103 of 2019, decided on 07-01-2020.

Petitioner sought direction upon the respondent/State Bank of India [Bank] to release an amount of Rs 30,000 per month to him from the bank account of his incapacitated nephew, Mr Ajit Kumar Singh [AKS].

Petitioner submitted that AKS had been bedridden and incapacitated as he was suffering from acute ischemic strokes since 2018 and his health worsened in November 2020. It was also stated that an amount of ₹30,000 per month would be required so as to meet AKS’s daily and medical expenditure, including doctor’s fees, medicines, food, therapist, nurse etc.

Petitioner being the paternal uncle of AKS stated that he had been taking care of his nephew and had been acting as his guardian, in addition to maintaining his own family, but was not in a position to financially sustain his nephew indefinitely, and meet his medical expenditure as well.

Bank denied the request for withdrawal of the said amount from the bank account of AKS on the ground that there was no policy that allowed such withdrawals, even by family members in cases of medical emergencies.

Instant petition was filed in view of the above circumstances.

Mr Ramesh Singh, Standing Counsel for GNCTD drew the Court’s attention to Clause 5.7 of the Master Circular on Maintenance of Deposit Accounts – UCB dated 01-07-2009 [Master Circular] issued by RBI which was in respect to  “Operation of Bank Accounts by Old/Sick/Incapacitated Customers”

On examination by the medical board it was found that AKS was virtually in a comatose state and would not be able to indicate the person who would be entitled to operate his bank account in terms of Clause 5.7.3 of the Master Circular.

In view of the above stated circumstances and facts, reliance was placed on the decision of Delhi High Court in Vandana Tyagi v. GNCTD, [WP (C) 1103 of 2019, decided on 07-01-2020] which laid down guidelines that may be used to deal with situation such as the present one where a person is unable to discharge his/her functions with respect to his/her assets.

On 04-03-2021, this Court prima facie had opined that the aforesaid decision was applicable to the present matter.

In view of the facts and circumstances of the present case, Bench held that the guidelines issued in Delhi High Court’s decision of Vandana Tyagi v. GNCTD, [WP (C) 1103 of 2019, decided on 07-01-2020] will be applicable to the present case.

Bench was satisfied with the report from the Medical Board that AKS was in a comatose state and incapable of operating his bank account himself or giving necessary directions for this purpose. Tehsildar’s report corroborated the information placed on record.

AKS and his wife had discord in their marital relations and the same was a subject matter of legal proceedings wherein they mutually agreed to divorce upon certain terms and conditions. His adult son stated vide an affidavit that he had no objection to the petitioner being appointed as legal guardian of AKS.

In Court’s opinion, neither AKS’s spouse nor his children were in a position to take care of him and also they had no objection to petitioner taking on the role of guardian to AKS.

High Court held that petitioner shall be appointed at the guardian of AKS for the purpose of withdrawal of a fixed monthly amount from the savings account of AKS, subject to safeguards contained in the guidelines incorporated in Vandana Tyagi case.

Court directed that the petitioner may be permitted to withdraw Rs 20,000 per month from AKS’s account.

  • Bank will file the statement of accounts of the aforesaid account before the Registrar General of this Court every three months to monitor the aforesaid aspect.
  • Petitioner will also file a statement of accounts before the Registrar General every three months stating the items of expenditure with regard to the aforesaid amount of ₹20,000
  • In the event, the petitioner misuses his power or misappropriates, siphons or misutilizes the assets of AKS or fails to utilize the assets in AKS’s best interests, the Court would have the power to remove him as the guardian and appoint another person in his place.
  • Petitioner shall intimate his appointment to the Director, Department of Social Welfare, GNCTD
  • A representative of the Department of Social Welfare, GNCTD, shall visit the residence of the petitioner at least once every quarter, and make a report regarding the condition of AKS, which will be placed before the Director, Department of Social Welfare, GNCTD
  • In case any other relative or a next friend of AKS finds that the petitioner is not acting in the best interests of AKS, such person will also have the locus to approach the Court for issuance of appropriate directions and/or for removal of the petitioner as the guardian.
  • In case, the petitioner wishes to move AKS to another state or even to another country for the purposes of securing better medical treatment for him, he would approach the Court for necessary permission before undertaking such an exercise.

In view of the above terms, petition was disposed of.[Bhim Singh v. AGM State Bank of India, 2021 SCC OnLine Del 1552, decided on 08-04-2021]


Advocates before the Court:

For the Petitioner: Dhruv Dwivedi, Advocate

For the Respondents: Rajiv Kapur and Akshit Kapur, Advocates for R-1 and R-2.

Ramesh Singh, Senior Advocate, Amicus Curiae with Tara Narula, Advocate

Case BriefsHigh Courts

Bombay High Court: The Division Bench of R.D. Dhanuka and V.G. Bisht, JJ., while addressing the instant matter, expressed that:

The Registrar, Co-operative Societies has not acted as a rubber stamp of the RBI.

Petitioners sought writ of certiorari or any other appropriate writ with the objective of quashing and setting aside the order passed by the Commissioner for Co-operation and Registrar of Co-operative Societies under Section 110A (1)(iii) of the Maharashtra Co-operative Societies Act, 1960 (MCS Act).

Petitioners claimed to be the Board of Directors of Nashik District Central Co-operative Bank Limited (respondent 4) registered under the MCS Act.

NABARD | Financial Health of Nashik District Central Co-operative Bank Limited

Further, the respondents submitted that NABARD had examined the affairs of respondent 4 and submitted a detailed report along with issues of supervisory concerns. It was NABARD’s opinion that the Board of Directors of respondent 4 had affected the financial health of respondent 4.

29-04-2017 Co-operative Societies, Divisional Joint Registrar’s Officer pointed out the following with regard to the bank:

·      the financial irregularities and loss suffered by respondent 4 bank

·      that the said Bank was left with no liquidity.

·      Not in a position to clear daily transaction

·      For the larger interest of members particularly farmer, existing inefficient Board of Directors were to be removed.

·      Divisional Joint Registrar, Co-operative Societies requested to submit proposal to RBI for the removal.

6-07-2017 ·      NABARD prepared report seeking opinion of G.M. of Additional Chief Secy., Corpn., Government of Maharashtra requesting Government to advice the respondent 4 bank to augment capital funds to improve the financial position.

 

12-07-2017 ·      Office of the Commissioner for Co- operation and Registrar of Co-operative Societies, Maharashtra State by NABARD, stated that in order to secure proper management of respondent 4 and to protect the interest of depositors as well as that of the Bank, prevention of further deterioration was necessary.
11-10-2017 ·      NABARD pointed out financial irregularities and recommended RBI to consider recommending Government of Maharashtra for supersession of Board of Directors.
19-12-2017 ·      RBI passed an order wherein it held that the Commissioner for Corporation and Registrar, Co-operative Societies, Maharashtra State to make an order for supersession of the Board of Directors of the respondent no.4 and for appointing ‘Board of Administrators’, in terms of the provisions of sub-section (1)(iii) of Section 110A of the MCS Act.
27-12-2017 ·      RBI passed an order.
29-12-2017 ·      Commissioner for Co-operation and Registrar, Co-operative Societies, Maharashtra State, Pune passed an order as per the directives issued by RBI under Section 110A(1)(iii) of the MCS Act thereby superseding the then Board of Directors of the respondent 4.

·      Milind Bhalerao, Divisional Joint Registrar, Co-operative Societies, Nashik as Administrator in place of the Board of Directors to manage the affairs of the bank

Senior Counsel, Anturkar submitted that Registrar (respondent 2) could not have superseded the Board of Directors of respondent 4 without applying his mind and without coming to a conclusion whether supersession was necessary or whether suspension of the Board of Directors would be sufficient.

Questions for consideration:

  • Whether respondent 2, Commissioner for Cooperation & Registrar of Cooperative Societies was required to issue any show cause notice and grant personal hearing to the petitioners before passing the impugned order of suppression of the Board of Directors and appointment of an administrator?
  • Whether the Commissioner for Cooperation & Registrar of Cooperative Societies has any discretionary power not to follow the directives issued by the RBI or in case of any directives to supersede or suspend the Board of Directors of the Co-operative Bank, the Registrar could only suspend the Board of Directors of the co-operative bank ?
  • Whether the amendment to Section 110A(1)(iii) of the Maharashtra Co-operative Societies Act, 1960 substituting the period of 5 years by one year was in conformity and compliance with the Article 243ZL of the Constitution of India ?
  • If the amendment to Section 110A(1)(iii) of the MCS Act is not in conformity with or in compliance with the amendment to Article 243 ZL, whether the Registrar Co-operative Societies was bound to issue show cause notice followed by the personal hearing to the petitioners ?
  • Whether there is repugnancy in the provisions of Article 243ZL and Section 110(1)(iii) of the MCS Act and if so, whether Article 243ZL of the Constitution of India would prevail ?
  • Whether order passed by the Commissioner for Cooperation & Registrar of Cooperative Societies appointing the sole administrator of the respondent 4 bank is quasi-judicial order or the executive/administrative order and thus does not contemplate any show cause notice or personal hearing before passing the order of supersession of Board of Directors and appointment of an administrator?
  • Whether RBI is empowered to issue directives to the Registrar of Cooperative Societies to superseded the Board of Directors of the Co-operative Bank and to appoint Board of Administrators under the provisions of the Banking Regulation Act, 1949 read with Section 110A of the MCS Act or not?
  • Whether the Registrar, Co-operative Societies is required to follow the procedure prescribed under Section 102 of the MCS Act while complying with the directives issued by the RBI Section 110A(1) (iii) of the MCS Act and superseding the Board of Directors of the Co-operative Bank or while appointing board of administrators/sole administrator of a co-operative bank or not ?

Bench noted that, under Article 243 ZL of the Constitution of India, it is provided that notwithstanding anything contained in any law for the time in force, no board shall be superseded or kept under suspension for a period exceeding six months subject to various provisos. In the fourth proviso of the said Article, it is provided that in case of a co-operative society, other than a multi-State co-operative society, carrying on the business of banking, the provisions of this clause shall have the effect as if for the words “six months”, the words “one year” had been substituted.

Further, the Court added that a conjoint reading of the unamended Section 110A(1)(iii) with the amended Section 110A(1)(iii) would clearly indicate that the period of 5 years originally prescribed under the said provision was substituted by a period of not exceeding 1 year in conformity with period of 1 year under Article 243ZL of the Constitution of India.

By referring to the decision in Arun T. Dhumale v. State of Maharashtra, WP (Stamp) No. 95405 of 2020, it was held that the Registrar, Co-operative Societies is bound by the directives issued by the RBI under Section 110(1)(ii) of the MCS Act and cannot refuse to abide such directives.

In Court’s opinion, the decision of Namdeo Natha Sanap v. State of Maharashtra, 2015(1) Mh.L.J. 838 which was delivered post to Section 110A(1)(iii) of the MCS Act also applies to the facts of the present matter

Order passed by the Registrar, Co-operative Societies is an executive and administrator order, which was passed so as to comply with the mandatory directives issued by the RBI and was thus not a quasi-judicial order.

Hence, Registrar Co-operative Societies was neither required to issue any show-cause notice nor to grant any personal hearing to the petitioners before passing the impugned order.

Section 110A(1)(iii) of the MCS Act clearly indicates that if it is required by the RBI in public interest or for preventing the affairs of the bank being conducted in a manner detrimental to the interest of the depositors or for securing the proper management of the bank, the discretion vests in the RBI to pass an order or directives against the Registrar, Co-operative Societies either for suspension or supersession of the Board of Directors, as the case may be. Such discretion under the said provision does not vest in the Registrar, Co-operative Societies either to suspend or supersede the Board of Directors upon receipt of such directives from the RBI under the said provision.

Since, High Court found that there was no repugnancy in the provisions of Article 243 ZL and Section 110A(1)(iii) of the MCS Act, Article 243 ZL of the Constitution of India does not prevail over the Section 110A(1)(iii) of the MCS Act.

Bench found no infirmity in the order passed by the Registrar, Co-operative Societies in appointing sole administrator.

“…appointment of a sole administrator made by the Registrar, Co-operative Societies cannot be set aside on the ground that the RBI had directed the Registrar, Co-operative Societies to appoint Board of Administrators.”

Under Section 110(A)(1)(iii) of the MCS Act, the Registrar, Co-operative Societies is bound to comply with the directives issued by the RBI under the said provisions and has no discretion.

The order passed by the Registrar, Co-operative Societies to supersede or suspend the Board of Directors in compliance with the directives issued by the RBI is an administrative or executive order.

Further, the Court also explained that Registrar, Co-operative Societies is empowered to pass an order of winding up of such co-operative bank.

Powers of the Registrar under Section 102 of the MCS Act cannot be equated with the duty of the Registrar, Co-operative Societies to comply with the directives issued by the RBI under Section 110A (1)(iii) of the MCS Act.

The Registrar, Co-operative Societies is thus not bound to follow the procedure prescribed under Section 102 of the MCS Act while complying with the duties under Section 110A(1)(iii) of the MCS.

In High Court’s opinion, Senior Counsel, Mr Dhond rightly placed reliance upon Section 56(zb) and 56(za) in support of submission that in case of Multi State Co-operative Bank, the RBI is empowered to exercise the powers under Section 110A (1)(iii) of the MCS Act in directing the Registrar, Co-operative Societies in superseding or suspending the Board of Directors of such Multi-State Co-operative Bank and in case of Single State Co-operative Society, RBI has no power under the provisions of the MCS Act to supersede the Board of Directors of such co-operative bank.

Provisions of the Banking Regulation Act are preserved by virtue of the said third proviso to Article 243 ZL of the Constitution of India and does not affect the power of the RBI to take any action under the provisions of the Banking Regulation Act or under Section 110A(1)(iii) of the MCS Act.

Adding to the above analysis, Bench also stated that the word ‘shall’ in Section 110A(1)(iii) would clearly indicate that the Registrar, Co-operative Societies is bound to comply with the directives of the RBI and mandatorily.

“…amendment carried out by the State Government to Section 110A(1)(iii) of the MCS Act in the year 2013 is in conformity with the provisions of Article 243 ZL of the Constitution of India and is in tune with fourth proviso to Article 243 ZL of the Constitution of India.”

While parting with the decision, High Court stated that since the order passed by the Registrar, Co-operative Societies was in mandatory compliance with the directives issued by the RBI to supersede or suspend the Board of Directors of respondent 4 by Co-operative Societies, Court could not interfere with such order passed by the Registrar, Co-operative Societies.

Petition was found to be devoid of merit and the petitioners were directed to handover the charge of affairs and management of respondent 4 to the administrator appointed by respondent 2. [Keda Tanaji Aher v. State of Maharashtra, 2021 SCC OnLine Bom 413, decided on 19-03-2021]


Advocates before the Court:

Mr. Ashutosh A. Kumbhakoni, Advocate General a/w Mr. Akshay Shinde, ‘A’ Panel a/w Mr. Yuvraj D. Patil, AGP for the Applicants-State in CAW/271/2019 and for Respondent Nos.1 to 3 in WP/2301/2018. Mr. Anil V. Anturkar, Senior Advocate a/w Mr. Yatin Malvankar i/by

Mr. I. M. Khairdi for the Petitioners in WP/2301/2018.

Mr. Ritesh Wagh h/for Mr. Tejpal S. Ingale for the Applicants in CAW/ 1275/2018.

Mr. Shrinivas S. Patwardhan a/w Mr. Bhooshan R. Mandlik for Respondent No.4.

Mr. Venkatesh Dhond, Senior Advocate a/w Mr. Prasad Shenoy, Ms.Aditi Phatak and Ms. Kirti Ojha i/by Udwadia and Co. for the Respondent No.5-Reserve Bank of India.

Mr. Girish S. Godbole i/by Mr. Vishwajeet Mohite and Ms. Pooja Mankoji for the Respondent Nos. 6 and 7 in WP/2301/2018.

Mr. Girish S. Godbole i/by Mr. Ketan Joshi and Ms. Pooja Mankoji for the Respondent Nos. 8 and 9 in WP/2301/2018.

Hot Off The PressNews

Extension of Cheque Truncation System (CTS) across all bank branches in the country.

What is Cheque Truncation System (CTS)?

Cheque Truncation System of Image-based Clearing System is for faster clearing of cheques.

Cheque Truncation speeds up the process of collection of cheques resulting in better service to customers, reduces the scope of loss of instruments in transit, lowers the cost of collection of cheques, and removes reconciliation-related and logistics-related problems, thus benefitting the system as a whole.

When was CTS implemented?

The CTS is in use since 2010 and presently covers around 1,50,000 branches. All the erstwhile 1219 non-CTS clearing houses (ECCS centres) have been migrated to CTS effective September 2020. It is, however, seen that there are branches of banks that are outside any formal clearing arrangement and their customers face hardships due to longer time taken and cost involved in collection of cheques presented by them.

CTS to extend across all bank branches

To leverage the availability of CTS and provide uniform customer experience irrespective of location of her/his bank branch, it has been decided to extend CTS across all bank branches in the country. To facilitate this, banks shall have to ensure that all their branches participate in image-based CTS under respective grids by September 30, 2021. They are free to adopt a model of their choice, like deploying suitable infrastructure in every branch or following a hub & spoke model, etc. and concerned banks shall coordinate with the respective Regional Offices of RBI to operationalise this.


Reserve Bank of India

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of AM Khanwilkar*, Indi Malhotra and Ajay Rastogi has held that the condition predicated in Section 31 of the Foreign Exchange Regulation Act, 1973 of obtaining “previous” general or special permission of the RBI for transfer or disposal of immovable property situated in India by sale or mortgage by a person, who is not a citizen of India, is mandatory.

“Until such permission is accorded, in law, the transfer cannot be given effect to; and for contravening with that requirement, the concerned person may be visited with penalty under Section 50 and other consequences provided for in the 1973 Act.”

The important question to be decided before the Court was whether transaction specified in Section 31 of the 1973 Act entered into in contravention of that provision is void or is only voidable and it can be voided at whose instance.

Object of the Statute

1973 Act was brought into force to consolidate and amend the law relating to certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country.

Object of Section 31

While introducing the Bill in the Lok Sabha and explaining the object of Section 31 of the 1973 Act,  Mr. Y.B. Chavan, the then Minister of Finance stated:

“As a matter of general policy it has been felt that we should not allow foreign investment in  landed property/buildings constructed by foreigners and foreign controlled companies as such investments offer scope for considerable amount of capital liability by way of capital repatriation. While we may still require foreign investments in certain sophisticated branches of industry, there is no reason why we should allow foreigners and foreign companies to enter real estate business.”

The object of Section 31 of the 1973 Act was thus to minimise the drainage of foreign exchange by way of repatriation of income from immovable property and sale proceeds in case of 16 disposal of property by a person, who is not a citizen of India.  Section 31, hence, puts restriction on acquisition, holding and disposal of immovable property in India by foreigners – non citizens.

Absence of explicit mention of failure to seek previous permission

It is true that the consequences of failure to seek such previous permission has not been explicitly specified in the same provision or elsewhere in the Act, but then the purport of Section 31 must be understood in the context of intent with which it has been enacted, the general policy not to allow foreign investment in landed property/buildings constructed by foreigners or to allow them to enter into real estate business to eschew capital repatriation, including the purport of other provisions of the Act, such as Sections 47, 50 and 63.

Section 47

Sub-Section (1) clearly envisages that no person shall enter into any contract or agreement which would directly or indirectly evade or avoid in any way the operation of any provision of the 1973 Act or of any rule, direction or order made thereunder.  What is significant to notice is that sub¬Section (2) declares that the agreement shall not be invalid if it provides that thing shall not be done without the permission of the Central Government or the RBI.  That would be the implied requirement of the agreement in terms of this provision.

In other words, though ostensibly the agreement would be a conditional one made subject to permission of the Central Government or the RBI, as the case may be and if such term is not expressly mentioned in the agreement, it shall be an implied term of every contract governed by the law — of obtaining permission of the Central Government or the RBI before doing the thing provided for in the agreement.

In that sense, such a term partakes the colour of a statutory contract. Notably, Section 47 of the 1973 Act applies to all the contracts or agreements covered under the 1973 Act, which require previous permission of the RBI.

Section 50

Section 50 reinforces the position that transfer of land situated in India by a person, who is not a citizen of India, would visit with penalty. Indeed, inserting such a provision does not mean that the 1973 Act is a penal statute, but is to provide for penal consequence for contravention of provisions, such as Section 31 of the 1973 Act.

Section 63

Section 63 of the 1973 Act empowers the court trying a contravention under Section 56 which includes one under Section 51 of the 1973 Act, to confiscate the currency, security or any other money or property in respect of which the contravention has taken place. The expression “property” in Section 63, takes within its sweep immovable property referred to in Section 31 of the 1973 Act.

Effect of reading Section 31 with Sections 47, 50 and 63 

“The requirement specified in Section 31 is mandatory and, therefore, contract or agreement including the gift pertaining to transfer of immovable property of a foreign national without previous general or special permission of the RBI, would be unenforceable in law.”

From the analysis of Section 31 of the 1973 Act and upon conjoint reading with Sections 47, 50 and 63 of the same Act, we must hold that the requirement of taking “previous” permission of the RBI   before executing the sale deed or gift deed is the quintessence; and failure to do so must render the transfer unenforceable in law.

“The dispensation under Section 31 mandates “previous” or “prior” permission of the RBI before the transfer takes effect.  For, the RBI is competent to refuse to grant permission in a given case. The sale or gift could be given effect and taken forward only after such permission is accorded by the RBI. There is no possibility of ex post facto permission being granted by the RBI under Section 31 of the 1973 Act.”

Before grant of such permission, if the sale deed or gift deed is challenged by a person affected by the same directly or indirectly and the court declares it to be invalid, despite the document being registered, no clear title would pass on to the recipient or beneficiary under such deed. The clear title would pass on and the deed can be given effect to only if permission is accorded by the RBI under Section 31 of the 1973 Act to such transaction.

“Merely because no provision in the Act makes the transaction void or says that no title in the property passes to the purchaser in case there is contravention of the provisions of Section 31, will be of no avail. That does not validate the transfer referred to in Section 31, which is not backed by “previous” permission of the RBI.”

In light of the general policy that foreigners should not be permitted/allowed to deal with real estate in India; the peremptory condition of seeking previous permission of the RBI before engaging in transactions specified in Section 31 of the 1973 Act and the consequences of penalty in case of contravention, the transfer of immovable property situated in India by a person, who is not a citizen of India, without previous permission of the RBI must be regarded as unenforceable and by implication a prohibited act. That can be avoided by the RBI and also by anyone who is affected directly or indirectly by such a transaction. There is no reason to deny remedy to a person, who is directly or indirectly affected by such a transaction.  He can set up challenge thereto by direct action or even by way of collateral or indirect challenge.

“In other words, until permission is accorded by the RBI, it would not be a lawful contract or agreement within the meaning of Section 10 read with Section 23 of the Contract Act. For, it remains a forbidden transaction unless permission is obtained from the RBI. The fact that the transaction can be taken forward after grant of permission by the RBI does not make the transaction any less forbidden at the time it is entered into. It would nevertheless be a case of transaction opposed to public policy and, thus, unlawful.”

[Asha John Divianathan v. Vikram Malhotra, 2021 SCC OnLine SC 147, decided on 26.02.2021]


*Judgment by: Justice AM Khanwilkar

Know Thy Judge| Justice AM Khanwilkar

Appearances before the Court by:

For appellant: Advocate Navkesh Batra

For respondent: Senior Advocate C.A. Sundram