Internet and Mobile Association of India v Reserve Bank of India (2020)

1. Case Title and Citation

Internet and Mobile Association of India v Reserve Bank of India, (2020) 10 SCC 274[1]

2. Court Name and Bench

The case was decided by the Supreme Court of India, which is the apex judicial authority responsible for constitutional interpretation and protection of fundamental rights.

The matter was heard by a Division Bench comprising:

• Justice Rohinton Fali Nariman
• Justice Aniruddha Bose

The court examined the constitutional validity of the Reserve Bank of India’s circular restricting access to banking services for crypto currency-related businesses.

3. Date of Judgment

The judgment was delivered on 4 March 2020.

4. Parties Involved

Petitioner: The Internet and Mobile Association of India (IAMAI), a not for profit organization representing various digital service providers, including crypto currency exchanges operating in India.

Respondent: The Reserve Bank of India (RBI), the central banking authority responsible for regulating banks, financial institutions, and payment systems to ensure monetary and financial stability.

The petitioner challenged RBI’s circular dated 6 April 2018, which restricted regulated entities from providing services to crypto currency businesses.[2]

5. Facts of the Case

Crypto currencies such as Bit coin emerged as decentralized digital assets that operate independently of central banking systems. Crypto currency exchanges functioned as intermediaries facilitating the purchase, sale, and storage of virtual currencies.

Between 2013 and 2017, the Reserve Bank of India issued multiple warnings to the public regarding potential risks associated with crypto currencies, including volatility, fraud, and financial instability. However, RBI did not impose direct ban crypto currencies during the period.

On 6 April 2018, RBI issued a circular under its regulatory powers directing all entities regulated by it, including banks and payment service provider, not to provide services to individuals or businesses dealing with crypto currencies. The circular required regulated entities to terminate existing relationships with crypto currencies exchanges within three months.

Although the circular did not explicitly prohibit crypto currency trading, it effectively prevented crypto currency exchanges from accessing banking services essential for their operations, such as maintaining bank accounts and processing payments.

As a result, many crypto currency exchanges were forced to suspend operations or shift their businesses outside India.

The Internet and Mobile Association of India filed a writ petition under Article 32 of the Constitution, challenging the constitutional validity of the RBI circular on the grounds that it violated their fundamental right to carry on trade and business.

6. Issues Raised

The Supreme Court considered the following key legal issues:

• Whether the Reserve Bank of India had the statutory authority to regulate or prohibit crypto currency-related activities.
• Whether the RBI circular dated 6 April 2018 violated the fundamental right to carry on trade and business under Article 19(1) (g) of the Constitution of India.
• Whether the RBI circular satisfied the test of proportionality.
• Whether RBI’s action was justified in the absence of any legislative prohibition on crypto currencies.

7. Arguments of the Parties

Arguments by the Petitioner

The petitioner contended that crypto currency exchanges were engaged in lawful business activities and there was no legislation prohibiting crypto currency trading in India.

It was argued that the RBI circular imposed a complete restriction on access to banking services, which effectively destroyed the business operations of crypto currency exchanges.

The petitioner further argued that this restriction violated Article 19(1) (g), which guarantees the fundamental right to practice any profession or carry on any occupation, trade, or business.

The petitioner also argued that RBI had not presented empirical evidence demonstrating actual harm caused by crypto currency exchanges to the banking system.

The petitioner relied on the doctrine of proportionality, arguing that RBI’s action was excessive and unreasonable. It was contended that less restrictive alternatives could have been adopted, such as regulation instead of complete exclusion.

The petitioner also argued that crypto currencies function as digital assets and do not pose inherent risks sufficient to justify such severe restrictions.

Arguments by the Respondent (Reserve Bank of India)

The Reserve Bank of India argued that it has wide regulatory powers under various statutes, including[3]:

• Reserve Bank of India Act, 1934
• Banking Regulation Act, 1949
• Payments and Settlement Systems Act, 2007

RBI contended that its primary responsibility is to ensure financial stability and protect the banking system from risks.

It argued that crypto currencies posed potential threats such as:

• Money Laundering
• Terrorist financing
• Fraud and cybercrime
• Consumer protection risks
• Threats to monetary sovereignty

RBI argued that preventive regulatory action was justified even in the absence of actual damage. It also emphasized that it did not prohibit crypto currencies directly but only restricted regulated entities from dealing with crypto currency businesses.

8. Judgment of the Court

The Supreme Court allowed the petition and set aside the RBI circular dated 6 April 2018.

The Court held that although RBI had the statutory authority to regulate crypto currency related activities, the circular imposing a complete restriction on banking services was disproportionate and unconstitutional.

The Court ruled that the circular violated Article 19(1) (g) of the Indian Constitution, which guarantees the right to carry on trade and business.[4]

The Court emphasized that regulatory action must satisfy constitutional standards, including the doctrine of proportionality.

9. Legal Reasoning and Ratio Decidendi

The Supreme Court’s reasoning focused on four key legal principles.

RBI’s Statutory Authority

The Court recognized RBI as an expert regulatory authority with broad powers under its governing statutes.

The Court held that RBI has the authority to regulate financial systems and take preventive measures to protect the banking system.

The Court also held that crypto currency activities could fall within RBI’s regulatory scope if they affected financial stability.

However, the Court clarified that the exercise of such power must comply with constitutional limitations.

Regulatory power is not absolute and must be exercised reasonably.

Application of Doctrine of Proportionality[5]

The Court applied the doctrine of proportionality, which requires that restrictions on fundamental rights must satisfy four essential elements:

• The measure must pursue a legitimate objective.
• There must be a rational connection between the measure and the objective.
• The measure must be necessary, meaning no less restrictive alternative is available.
• The measure must balance the importance of the objective and the severity of the restriction.

The court accepted that RBI’s objective of protecting financial stability was legitimate.

However, the Court found that RBI failed to demonstrate that crypto currency exchanges had casual actual harm to regulated entities.

The Court observed that RBI had consistently expressed concerns but had not provided empirical evidence showing damage to the banking system.

The Court held that denying banking access entirely was not a proportionate response.

Absence of Legislative Ban

The Court observed that Parliament had not enacted any legislation prohibiting crypto currency trading.

In the absence of legislative prohibition, RBI’s action indirectly achieved the same result through regulatory restrictions.

The Court held that regulatory authorities cannot impose disproportionate restrictions without legislative backing.

10. Ratio Decidendi

The ratio decidendi established in this case is:

Although the Reserve Bank of India has the authority to regulate financial systems, any restriction imposed by it must satisfy the doctrine of proportionality. Regulatory action that disproportionately restricts fundamental rights under Article 19(1) (g), without sufficient empirical justification, is unconstitutional.

11. Significance and Impact of the Judgment

This judgment has significant implications for constitutional law, financial regulation, and emerging technologies.

Reinforcement of Constitutional Protection

The judgment strengthened protection under Article 19(1) (g) and reaffirmed that regulatory authorities must respect fundamental rights. It ensured that businesses cannot be arbitrarily restricted without sufficient justification.

Limitation on Regulatory Powers

The judgment clarified that even expert regulatory authorities like RBI are subject to constitutional limitations. It established that regulatory action must satisfy the proportionality test.

Recognition of Fin tech and Crypto currency Sector

The judgment enabled crypto currency exchanges to resume operations in India. It provided legal protection to emerging fin tech businesses.

Strengthening Doctrine of Proportionality

The judgment reinforced proportionality as an essential constitutional principle.

It established that regulatory measures must be reasonable and necessary.

Importance for Corporate and Financial Law

This judgment is highly relevant in modern financial regulation. It has influenced legal understanding in areas such as:

• Crypto currency regulation
• Financial technology law
• Banking regulation
• Corporate regulation
• Digital economy governance

12. Conclusion

In terms of constitutional and financial regulatory legislation, the Supreme Court’s 2020 decision in Internet and Mobile Association of India v. Reserve Bank of India is historic. Although the Court recognized the RBI’s regulatory power over financial systems, it insisted that this power is constrained by the constitution. The RBI circular, according to the Court’s application of the proportionality criterion, was disproportionate and infringed upon the basic right to engage in commerce and business that is protected by Article 19(1) (g) of the constitution. The ruling reaffirmed the requirements that regulatory bodies behave sensibly and refrain from enforcing undue limitations.

Even an informed regulatory body, such as the RBI, is amenable to legal and constitutional review, as was made clear in the judgment. The Court held that regulatory measures must be supported by empirical evidence and cannot unnecessarily obstruct business activities, although the RBI’s objective of maintaining financial stability was a valid one. The judgment underlines the importance of maintaining a balance between the protection of basic rights and regulatory measures.

Moreover, this particular case has proved to be an important factor in the development of the legal environment in India regarding the regulation of crypto currencies and the fin tech industry as a whole. This case made it clear that new digital technologies cannot be limited arbitrarily without appropriate legal and constitutional grounds. Therefore, this case remains an important precedent in the regulation of the relationship between regulatory power and the protection of fundamental rights. It continues to shape the regulation of financial innovation and digital assets in India.

Reference(S):

[1] Internet and Mobile Association of India v Reserve Bank of India (2020) 10 SCC 274 (SC).

[2] Reserve Bank of India, ‘Prohibition on dealing in Virtual Currencies (VCs)’ RBI/2017-18/154, Circular DBR.No.BP.BC.104/08.13.102/2017-18 (6 April 2018).

[3] Reserve Bank of India Act 1934; Banking Regulation Act 1949; Payment and Settlement Systems Act 2007.

[4] Constitution of India 1950, art 19(1)(g)

[5] Modern Dental College and Research Centre v State of Madhya Pradesh (2016) 7 SCC 353 (SC).