AKSHAY N PATEL versus RESERVE BANK OF INDIA & ANR.

27. The Constitution Bench in Aadhar (5J) (supra) also undertook an integrated proportionality analysis to determine the proportionality of the State’s interference in the rights to privacy, dignity, choice and access to basic entitlements37. Hence, the Court can adopt an integrated proportionality analysis where the limitation on each of the rights is common and affects them in a similar way. In the present case, the limitation (i.e., Clause 2(iii) of the 2020 MTT Guidelines) is what affects the appellant’s rights under Articles 14, 19(1)(g) and 21. Further, the appellant has submitted that the limitation is arbitrary, not a reasonable restriction and violative of his liberty because the RBI has, without application of mind, linked the prohibition on import/export of a product to the prohibition of MTTs in relation to that product. It is thus clear that the appellant’s submissions for challenging the constitutionality of Clause 2(iii) rest on similar grounds, and hence an integrated proportionality analysis can be adopted. However, this Court must issue a note of caution – while an integrated proportionality analysis has been adopted for assessing the limitation on rights (under Articles 14, 19(1)(g) and 21) in this case, it may not be true for all cases where such limitations occur because the alleged violation of rights may be characteristically different or the alleged limitation may affect the rights in different ways.

28. The appellant has submitted that the precedents of this Court indicate that once the citizen can demonstrate that the restriction directly or proximately interferes with the exercise of their freedom of trade or to carry on a business, it is the State’s burden to demonstrate the reasonableness of the restriction and that it is in the interest of the general public38. The authority of the RBI in issuing the impugned notification is AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 37 Para 1277 38 Sukhnandan Saran Dinesh Kumar v. Union of India, AIR 1982 SC 902; Laxmi Khandsari v. State of Uttar Pradesh, AIR 1981 SC 860 not in challenge. Additionally, the legitimacy of the aim – of ensuring adequate domestic supplies of PPE products – is also not in challenge. The appellant assails the suitability of the measure restricting MTTs in ensuring domestic supplies and for being overbroad in its ambit, since an Indian entity acting as an intermediary in an MTT between two different countries does not impact the availability of PPE products in India. Thus, this Court will be relying on the justification furnished by the RBI in determining the proportionality of the impugned measure (Clause 2(iii) of the 2020 MTT Guidelines). This analysis will be structured along with the following questions: (i) Is the measure in furtherance of a legitimate aim?; (ii) Is the measure suitable for achieving such an aim?; (iii) Is the measure necessary for achieving the aim?; and (iv) Is the measure adequately balanced with the right of the individual? C.1 Legitimacy

29. This prong of the test entails an evaluation of the legitimacy of an aim that purportedly violates a fundamental right. The measure must be designated for a proper purpose, i.e., a legitimate goal. Five of the judges in the nine-judge Bench decision in K S Puttaswamy (9J)(supra) adopted the threshold of a “legitimate state interest” as the first prong for assessing proportionality. This state interest must also be of sufficient importance to override a constitutional right or freedom39. In this case, the ban on exports, imports and MTTs of PPE products is to ensure the availability of adequate domestic supplies during a global health pandemic. Adequate stocks of PPE products are critical for the healthcare system to combat the COVID-19 pandemic. The State’s aim of ensuring supplies is in furtherance of the right to life under Article 21 and the Directive Principles of State Policy mandating the State’s improvement of public health as a primary duty under Article 47. The appellant has not challenged the legitimacy of this aim of ensuring adequate PPE in India. The RBI, at the time of filing its affidavit on 30 January 2021, had elaborated on the state of the pandemic in the country and the necessity of ensuring adequate stock of PPE products. The executive’s aim to ensure sufficient 39 Aadhar (5J) (supra), paras 321-322 availability of PPE products, considering the ongoing pandemic, is legitimate. Accordingly, we hold that the impugned measure is enacted in furtherance of a legitimate aim that is of sufficient importance to override a constitutional right of freedom to conduct business. C.2 Suitability

30. In examining the aim of ensuring adequate supplies in India, we will now evaluate the suitability of the prohibition of MTTs in relation to PPE products. This would entail an analysis of whether the proposed measure can further the stated objective. To understand whether the prohibition of MTTs in relation to PPE products was suitable, we must first analyse the framework under which the RBI regulates MTTs in India.

31. MTTs are regulated by the RBI under FEMA, which came into force on 1 June 2000. Under FEMA, it is the duty of the RBI to manage, regulate and supervise the foreign exchange in India. Section 340 of FEMA provides, inter alia, that no person can deal in foreign exchange without the permission of the RBI. In accordance with Section 10(1)41, the RBI can grant permission to an entity to become an “authorized AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 40 3. Dealing in foreign exchange, etc.—Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall—(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person; (b) make any payment to or for the credit of any person resident outside India in any manner; (c) receive otherwise through an authorised person, any payment by order or on behalf of any person resident outside India in any manner; Explanation.—For the purpose of this clause, where any person in, or resident in, India receives any payment by order or on behalf of any person resident outside India through any other person (including an authorised person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorised person; (d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person. Explanation.—For the purpose of this clause, “financial transaction” means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt. 41 10. Authorised person.—(1) The Reserve Bank may, on an application made to it in this behalf, authorise any person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer, money changer or off-shore banking unit or in any other manner as it deems fit. person” who can deal in foreign exchange. Further, Section 10(4) provides that such authorized persons shall comply with all directions issued by the RBI while dealing in foreign exchange. Section 10(4) reads as follows: “10. Authorised person.—… (4) An authorised person shall, in all his dealings in foreign exchange or foreign security, comply with such general or special directions or orders as the Reserve Bank may, from time to time, think fit to give, and, except with the previous permission of the Reserve Bank, an authorised person shall not engage in any transaction involving any foreign exchange or foreign security which is not in conformity with the terms of his authorisation under this section.” The RBI is granted the power to issue directions to authorized persons under Section 11(1). Section 11(1) provides: “11. Reserve Bank’s powers to issue directions to authorised person.—(1) The Reserve Bank may, for the purpose of securing compliance with the provisions of this Act and of any rules, regulations, notifications or directions made thereunder, give to the authorised persons any direction in regard to making of payment or the doing or desist from doing any act relating to foreign exchange or foreign security.”

32. It is in the exercise of its powers under Section 10(4) read with Section 11(1), that the RBI issued a circular42 dated 24 August 2000, which provided guidance to authorized dealers in relation to FEMA. The relevant part of the circular in relation to MTTs is extracted below: “Part B – Merchanting Trade Authorised dealers may take necessary precautions in handling merchant trade transactions or intermediary trade transactions to ensure that (a) goods involved in the transaction are permitted to be imported into India, (b) such transactions do not involve foreign exchange outlay for a period exceeding three months, and (c) all Rules, Regulations and Directions applicable to export out of India are complied with by the export leg and all Rules, Regulations and Directions applicable to import are complied with by the import leg of merchanting trade transactions. Authorised 42 A.P. (DIR Series) Circular No 9 dealers are also required to ensure timely receipt of payment for the export leg of such transactions.” (emphasis supplied) From the above, it is clear that an MTT could only be in respect of goods whose import was permitted into India. A similar direction was retained in the circular43 dated 19 June 2003.

33. Thereafter, the RBI issued a circular44 dated 17 January 2014 titled “Merchanting Trade Transactions”, which revised the MTT guidelines in light of the recommendations of the Technical Committee on Services/Facilities to Exporters. Clause 2(i) of the circular noted: “i) Goods involved in the merchanting or intermediary trade transactions would be the ones that are permitted for exports/ imports under the prevailing Foreign Trade Policy (FTP) of India, at the time of entering into the contract and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) are complied with for the export leg and import leg respectively;” Hence, the circular modified the earlier requirement and now clarified that MTTs could not be conducted in respect of goods whose import and export are prohibited under the FTP. It is important to note that this was based on a suggestion made by the Technical Committee on Services/Facilities to Exporters, which stated as follows: “Issues Associated with Merchanting Trade 4.9 Goods covered under Merchanting trade should be allowed to be exported/imported into the country as per the prevailing Foreign Trade Policy (FTP) at the time of entering into the contract with the overseas suppliers, in order to avoid entering into trading contracts that are not permitted to be imported/exported under the FTP. To safeguard the interest of the exporter, the export leg of the transaction can be recommended to be covered by Letter of Credit (or) through insurance from ECGC.” AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 43 A.P. (DIR Series) Circular No 106 44 A.P. (DIR Series) Circular No. 95

34. These guidelines were soon revised through a circular45 dated 28 March 2014. However, there was no material change to the requirement that MTTs cannot be conducted in respect of goods whose import/export is prohibited under the FTP. The relevant clause of the circular is extracted as follows: “ii) Goods involved in the merchanting trade transactions would be the ones that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively;”

35. Subsequently, this circular was modified by the 2020 MTT Guidelines which introduced the impugned Clause 2(iii). On an analysis of the above circulars, it is clear that the RBI has never attempted to permit/prohibit MTTs into specific goods. Rather, from the very first circular, it has relied upon the goods’ position under India’s FTP to regulate MTTs. Till 2013, MTTs were prohibited in relation to goods whose import was not allowed under the FTP. Since 2013, they have also been prohibited in relation to goods whose export is not allowed under the FTP.

36. The RBI is responsible for issuing guidelines to authorized persons under FEMA. FEMA was introduced as an “Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”. Hence, the role of the RBI under FEMA is directed towards ensuring that India’s foreign exchange market is regulated, with a view to preserving India’s foreign exchange reserves. On a review of the guidelines which have been issued by the RBI in respect of MTTs since 2000, it is clear that most of them are technical in nature and seek to regulate the manner in which India’s foreign reserves are traded. Consequently, the RBI has not made the policy decision to classify products for which MTTs are impermissible but has opted to rely on the decision made by the UOI under the FTP. 45 A.P. (DIR Series) Circular No.115

37. Such a decision, regarding the products in which import or export is prohibited in India, is made by the UOI under Section 3(2) of the Foreign Trade Act. Section 3(2) provides as follows: “3. Powers to make provisions relating to imports and exports.—… (2) The Central Government may also, by Order published in the Official Gazette, make provision for prohibiting, restricting or otherwise regulating, in all cases or in specified classes of cases and subject to such exceptions, if any, as may be made by or under the Order, the import or export of goods or services or technology: Provided that the provisions of this sub-section shall be applicable, in case of import or export of services or technology, only when the service or technology provider is availing benefits under the foreign trade policy or is dealing with specified services or specified technologies.”

38. While exercising its powers under Section 3(2), the UOI issued multiple notifications commencing from 8 February 2020, which prohibited the export of all PPE products due to the need to maintain their domestic stock during the COVID-19 pandemic. Mr Vikramjeet Banerjee, learned ASG appearing on behalf of the Ministry of Commerce and DGFT, has pointed out that the notification46 dated 25 August 2020 now categorizes the export of PPE Masks and N-95/FFP 2 Masks as “Restricted” (instead of “Prohibited”) and limits their export to 50 lakh units per month, while medical coveralls of all classes/categories (including PPE overalls) are categorized under the “Free” category, i.e., they are freely exportable.

39. The appellant has challenged the suitability of the RBI’s decision to link the MTT of goods with their prohibition under India’s FTP by arguing that the objectives behind the two are entirely different. To support their argument, the appellant has relied on the nature of an MTT, where the goods do not enter or leave Indian territory and the Indian entity acts as an intermediary in an exchange between two foreign countries.

40. In its affidavit, the RBI has explained the genesis of MTTs in the following terms: AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 46 Notification No 29/2015-2020 “7. It is submitted that under the Merchanting Trade Transactions (hereinafter referred to as “MTT”) an Indian Citizen facilitates the export of good or material from a Company or individual of an exporting country (other than India) and then import/supply the said good or material to a Company or individual in another country, which is also other than India. In short, by MTT the Indian citizen while acting as intermediary, facilitates an international trade between two different countries. It is submitted that the MTTs are very closely analogous to, and have all the elements of, export as well as import except the fact that the goods are physically not located in India. The first leg of the transaction, known as import leg, requires outlay of foreign exchange by the entity located in India carrying on the transaction, for the purpose of making payment for the goods being purchased overseas. The payment is made by the Indian Entity by drawing foreign exchange or obtaining a letter of credit in India from its banker, authorised dealer of foreign exchange (i.e. authorised dealer bank) also located in India. Thus, there is a clear nexus of the first leg of the transaction to India and the involvement of its foreign exchange reserves. It is further submitted that in a successful trade, the Indian entity so purchasing the goods overseas recovers its money in the second leg of transaction, known as export leg, by selling the goods to its buyer, also located overseas, but the money is under the law to be repatriated to India to the credit of Indian entity, which is located in India, within a strict time frame.” From the above extract, the following salient features of MTTs emerge: (i) the original supplier and ultimate buyer of the goods are foreign entities, with the Indian entity acting as an intermediary between them; (ii) the goods do not enter the territory of India while shifting hands between the supplier and the buyer; (iii) Indian foreign reserves are implicated when payment is remitted outside India when the Indian entity initially pays the supplier for the goods; and (iv) foreign exchange is remitted to India when the Indian entity receives the payment from the buyer of the goods.

41. The respondents have argued that the above features make MTTs analogous to imports/exports, while the appellant has attempted to differentiate them by noting that the goods never enter India’s territory during an MTT. To resolve this, we must understand how MTTs are considered internationally.

42. The International Monetary Fund47 in its sixth edition of the Balance of Payments and International Investment Position Manual48 defines MTT in the following terms: “10.41 Merchanting is defined as the purchase of goods by a resident (of the compiling economy) from a nonresident combined with the subsequent resale of the same goods to another nonresident without the goods being present in the compiling economy. Merchanting occurs for transactions involving goods where physical possession of the goods by the owner is unnecessary for the process to occur.” Thereafter, it considers how MTTs should be recorded by noting: “10.44 The treatment of merchanting is as follows: (a) The acquisition of goods by merchants is shown under goods as a negative export of the economy of the merchant; (b) The sale of goods is shown under goods sold under merchanting as a positive export of the economy of the merchant; (c) The difference between sales over purchases of goods for merchanting is shown as the item “net exports of goods under merchanting.” This item includes merchants’ margins, holding gains and losses, and changes in inventories of goods under merchanting. As a result of losses or increases in inventories, net exports of goods under merchanting may be negative in some cases; and (d) Merchanting entries are valued at transaction prices as agreed by the parties, not FOB.” This makes it clear that while the goods involved in an MTT never enter the territory of the intermediary, they are still recorded as negative and positive exports from the territory of intermediary during the import and export leg of the MTT, which is similar to how ordinary imports and exports would be recorded.

43. This conclusion is also supported by the IMF’s accompanying Balance of Payments Compilation Guide49, which notes: AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 47 “IMF’’ 48 Pages 157-159, available at <https://www.imf.org/external/pubs/ft/bop/2007/pdf/ BPM6.pdf> accessed on 25 November 2021 49 Page 184, available at <https://www.imf.org/external/pubs/ft/bop/2014/pdf/ BPM6_11F.pdf> accessed on 25 November 2021 “Merchanting 11.29 Merchanting transactions—that is, the purchase of goods by a resident (of the compiling economy) from a nonresident combined with the subsequent resale of the same goods to another nonresident without the goods being present in the compiling economy—should be recorded in the balance of payments as transactions in goods. This a change from the BPM5, where merchanting was to be recorded as a service. The change in treatment is in line with the change of ownership rule that underpins the balance of payments conceptual framework. If there is a change in the physical form of the goods during the period they are owned by the merchant, as a result of manufacturing services, then the transaction should be classified as general merchandise, and not as merchanting. 11.30 For the economy of the merchant, goods acquired under merchanting should be recorded as a negative credit in the balance of payments in the period the merchant acquires the goods, and when they are sold they should be recorded in that period as goods sold under merchanting as a positive credit…” (emphasis supplied) It is evident that the role of an intermediary in MTTs was earlier only considered as providing a service. However, this has now evolved, where the intermediary is considered to be the owner of the goods during their transit from the supplier to the buyer. Hence, goods under MTTs are recorded as negative and positive exports from the intermediary’s resident country, even when they never physically enter their territory.

44. Therefore, the international opinion favours the position taken by the respondents that MTTs are analogous to traditional imports and exports. Therefore, it was suitable for the RBI to link the permissibility of MTT in goods to the permissibility of their import/export under the FTP. As noted earlier, the appellant has not challenged notifications prohibiting the export of PPE products under the FTP. Hence, the prohibition of their MTT under Clause 2(iii) of the 2020 MTT Guidelines is also considered suitable. C.3 The necessity of the measure

45. The prong evaluating necessity is often conflated with the prong evaluating the suitability of a measure. The analysis of necessity is an extension of evaluating the suitability of a restriction, coupled with an analysis of whether the proposed measure is the least restrictive manner of arriving at the intended legitimate State interest. This prong has traces of the “narrowly tailored” state interest50 that has often been used by this Court in evaluating claims of infringement of fundamental rights under Part III.

46. The appellant has contended that a prohibition of exports in PPE products was sufficient to achieve the objective of ensuring adequate supplies, and it was not necessary to also prohibit MTTs. Further, it is argued that the appellant facilitating an MTT of PPE products between two countries does not impact their stock in India. In any event, the appellant has argued that a less-intrusive alternative would be to ban MTTs only for goods whose imports have been prohibited under the FTP or allow individuals to seek exemptions from the RBI in relation to goods whose import/export has been prohibited by the FTP where the RBI can assess, on a case-by-case basis, whether their MTT should also be prohibited. While these measures have been suggested on a general basis, the appellant has limited his challenge in the present case only to the prohibition of PPE products. Hence, we shall be limiting our analysis in relation to that.

47. Having considered the nature of MTTs in Section C.2, we reject the appellant’s arguments for two reasons. First, while MTTs in PPE products may not directly reduce the stock of these products in India, it still does contribute to their trade between two foreign nations. In doing so, it directly reduces the available quantity of PPE products in the international market, which may have been bought by India, if so required. As such, MTTs contribute to reducing the available stock of PPE products in the international market that India could have acquired. Second, the UOI’s policy to ban the export of PPE products reflects their stance on the product’s non-tradability during the COVID-19 pandemic. It highlights a clear policy choice under which Indian entities shall not be allowed to export these products outside of India, in all probability to the highest buyers across the globe who may end up hoarding the global supply. Hence, banning MTTs in PPE products was critical in AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 50 Aadhar (5J) (supra), paras 420 and 424 ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations. A mere ban on exports would not regulate the utilisation of Indian foreign exchange. Hence, in order to keep India’s policy position consistent across the board, the prohibition of MTTs in respect of PPE products was necessary and the only alternative of ensuring the realisation of legitimate State interest. C.4 Balancing fundamental rights with State aims

48. The fourth and final prong of the proportionality analysis involves the crucial task of conducting a balancing exercise. The Court is called upon to legitimise the “social importance of the limitation on a constitutional right”51. A measure that fails to justify its existence on this prong is considered to have a disproportionate impact on the right-holder52.

49. Before we commence our analysis on the balancing of this right, we think it is critical for the Court to elaborate on the purpose and duties of the RBI, in order to better appreciate the objective behind its seemingly onerous restrictions and regulations. C.4.1 Regulatory Role of the RBI

50. The RBI was established by the Reserve Bank of India Act 193453. By way of an amendment in 201654, the preamble of the statute was amended to reflect the importance of a modern monetary policy framework in an increasingly complex economy. The RBI has been entrusted with the exclusive authority to operate the monetary policy framework of India55.

51. A Constitution Bench in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India56 considered a challenge to certain statutory provisions introduced in the Banking Companies Act 1949 which vested the RBI with the powers to file an application for winding-up of any 51 Aadhar (5J) (supra), paras 335 and 369 52 Ibid 53 “RBI Act’’ 54 Act 28 of 2016 55 Sections 45Z to 45Zo of the RBI Act 56 AIR 1962 SC 1371 company. Before conducting an analysis of the constitutional challenge under Articles 14 and 19, the Constitution Bench prefaced its analysis with the raison d’etre and importance of the RBI as a regulatory body. Justice M Hidayatullah (as the learned Chief Justice then was) observed the following: “16. Before we consider the arguments of the two sides in detail, we wish to say a few words about the position of the Reserve Bank in the financial affairs of India and also about its place in the scheme of the law. The Reserve Bank of India was established on April 1, 1935 by the Reserve Bank of India Act, 1934. Even before the establishment of the Reserve Bank, suggestions were made that there should be a central bank in India, and the Royal Commission on Indian Currency and Finance had recommended in 1926 that the currency and credit of the country could only be put on a firm foundation, if a central bank was established. The first Bill introduced in 1927 by Sir Basil Blackett was dropped. The Indian Central Banking Inquiry Committee, however, reported in 1931 that there was a need for a central banking institution in India “for securing the development of the Indian banking and credit system on a sound and proper basis”. The Committee pointed out that some of the Provincial Committees had also suggested the establishment of the Reserve Bank. The Committee ended by saying: “We accordingly consider it to be a matter of supreme importance from the point of view of the development of banking facilities in India, and of her economic advancement generally, that a Central or Reserve Bank should be created at the earliest possible date. The establishment of such a bank would by mobilization of the banking and currency reserves of India in one hand tend to increase the Vol. of credit available for trade, industry and agriculture and to mitigate the evils of fluctuating and high charges for the use of such credit caused by seasonal stringency.” (Vol. I, Part I. Chap. XXII, para 605) The White Paper on Indian Constitutional Reforms also recommended the establishment of a Reserve Bank “free from political influence”. As a result of these findings, when a fresh Bill was introduced by Sir George Schuster on September AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 8, 1933 it was accepted and received the assent of the Governor- General on March 6, 1934. 17. The functions of the Reserve Bank were generally indicated in the preamble as the regulation of the issue of the Bank notes and the keeping of the reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. But to enable the Reserve Bank to function in this manner, it had to be given other powers, so that it may function effectively as a central bank. To this end, the Reserve Bank was given the right to hold the cash balances of important commercial banks, a right to transact Government business in India which was also its obligation, and to enter into agreements with State Governments to transact their business. [……] 18. But the most important function of the Reserve Bank is to regulate the banking system generally. The Reserve Bank has been described as a Bankers’ Bank. Under the Reserve Bank of India Act, the scheduled banks maintain certain balances and the Reserve Bank can lend assistance to those banks “as a lender of the last resort”. The Reserve Bank has also been given certain advisory and regulatory functions. By its position as a central bank, it acts as an agency for collecting financial information and statistics. It advises Government and other banks on financial and banking matters, and for this purpose, it keeps itself informed of the activities and monetary position of scheduled and other banks, and inspects the books and accounts of scheduled banks and advises Government after inspection whether a particular bank should be included in the Second Schedule or not. […..]” (emphasis supplied) 52. A two-judge Bench of this Court in Peerless General Finance and Investment Co. Limited v. Reserve Bank of India57 considered an alleged constitutional infringement of Article 19(1)(g) in the context of RBI’s regulation of savings schemes run by Residuary Non-Banking Companies. The thrust of the impugned regulation was to regulate deposit 57 (1992) 2 SCC 343 investment schemes issued by Residuary Non-Banking Companies, in order to ensure the security of deposits made by consumers. Justice N M Kasliwal elaborated on the role of the Courts with specific reference to the regulatory powers of the RBI. The decision highlighted the importance of judicial abstinence from matters of economic policy requiring expertise: “30. Before examining the scope and effect of the impugned paragraphs (6) and (12) of the directions of 1987, it is also important to note that Reserve Bank of India which is bankers’ bank is a creature of statute. It has large contingent of expert advice relating to matters affecting the economy of the entire country and nobody can doubt the bona fides of the Reserve Bank in issuing the impugned directions of 1987. The Reserve Bank plays an important role in the economy and financial affairs of India and one of its important functions is to regulate the banking system in the country. It is the duty of the Reserve Bank to safeguard the economy and financial stability of the country [….] 31. The function of the Court is to see that lawful authority is not abused but not to appropriate to itself the task entrusted to that authority. It is well settled that a public body invested with statutory powers must take care not to exceed or abuse its power. It must keep within the limits of the authority committed to it. It must act in good faith and it must act reasonably. Courts are not to interfere with economic policy which is the function of experts. It is not the function of the courts to sit in judgment over matters of economic policy and it must necessarily be left to the expert bodies. In such matters even experts can seriously and doubtlessly differ. Courts cannot be expected to decide them without even the aid of experts.” (emphasis supplied) In his concurring opinion, Justice V Ramaswamy noted the statutory importance of the RBI and held that directions validly issued by the RBI are in the nature of statutory regulations: “51. This Court in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [1962 Supp 3 SCR 632 : AIR 1962 SC 1371 : (1962) 32 Comp Cas 514] held that the RBI is “a bankers’ bank and lender AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] of the last resort”. Its objective is to ensure monetary stability in India and to operate and regulate the credit system of the country. It has, therefore, to perform a delicate balance between the need to preserve and maintain the credit structure of the country by strengthening the rule as well as apparent creditworthiness of the banks operating in the country and the interest of the depositors. In underdeveloped country like ours, where majority population are illiterate and poor and are not conversant with banking operations and in underdeveloped money and capital market with mixed economy, the Constitution charges the State to prevent exploitation and so the RBI would play both promotional and regulatory roles. Thus the RBI occupies place of “pre- eminence” to ensure monetary discipline and to regulate the economy or the credit system of the country as an expert body. It also advices the government in public finance and monetary regulations. The banks or non-banking institutions shall have to regulate their operations in accordance with, not only as per the provisions of the Act but also the rules and directions or instructions issued by the RBI in exercise of the power thereunder. Chapter 3-B expressly deals with regulations of deposit and finance received by the RNBCs. The directions, therefore, are statutory regulations. 65. No one can have fundamental right to do any unregulated business with the subscribers/depositors’ money. [….]Thus there is a reasonable nexus between the regulation and the public purpose, namely, security to the depositors’ money and the right to repayment without any impediment, which undoubtedly is in the public interest. (emphasis supplied) Justice V Ramaswamy further articulated the role of judicial review in matters of economic legislation and the democratic necessity of judicial abstinence: 68. It is well settled that the court is not a tribunal from the crudities and inequities of complicated experimental economic legislation. The discretion in evolving economic measures, rests with the policy makers and not with the judiciary. Indian social order is beset with social and economic inequalities and of status, and in our socialist secular democratic Republic, inequality is an anathema to social and economic justice. The Constitution of India charges the State to reduce inequalities and ensure decent standard of life and economic equality. The Act assigns the power to the RBI to regulate monetary system and the experimentation of the economic legislation, can best be left to the executive unless it is found to be unrealistic or manifestly arbitrary. Even if a law is found wanting on trial, it is better that its defects should be demonstrated and removed than that the law should be aborted by judicial fiat. Such an assertion of judicial power deflects responsibilities from those on whom a democratic society ultimately rests. The Court has to see whether the scheme, measure or regulation adopted is relevant or appropriate to the power exercised by the authority. Prejudice to the interest of depositors is a relevant factor. Mismanagement or inability to pay the accrued liabilities are evils sought to be remedied. The directions are designed to preserve the right of the depositors and the ability of RNBC to pay back the contracted liability. It is also intended to prevent mismanagement of the deposits collected from vulnerable social segments who have no knowledge of banking operations or credit system and repose unfounded blind faith on the company with fond hope of its ability to pay back the contracted amount. Thus the directions maintain the thrift for saving and streamline and strengthen the monetary operations of RNBCs.” (emphasis supplied) 53. A three-judge Bench of this Court in Internet and Mobile Association of India v. Reserve Bank of India58 (“Internet & Mobile Association”) recently considered a challenge to the RBI’s ban of trading in cryptocurrencies. In examining this challenge, the Court detailed the regulatory importance of the RBI through a historical and textual analysis of the RBI Act. Justice V Ramasubramanian, speaking on behalf of the Court, observed that the RBI assumes a special role, compared to other statutory bodies. Its decisions are reflective of its AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 58 (2020) 10 SCC 274 expertise and guide the monetary policy of the country. Hence, a policy decision of the RBI warrants deference from this Court. The Court held: “84. A careful scan of the RBI Act, 1934 in its entirety would show that the operation/regulation of the credit/financial system of the country to its advantage, is a thread that connects all the provisions which confer powers upon RBI, both to determine policy and to issue directions. 189. It is contended by Shri Ashim Sood, learned Counsel for the petitioners that the impugned Circular does not have either the status of a legislation or the status of an executive action, but is only the exercise of a power conferred by statute upon a statutory body corporate. Therefore, it is his contention that the judicial rule of deference as articulated in R.K. Garg v. Union of India [R.K. Garg v. Union of India, (1981) 4 SCC 675 : 1982 SCC (Tax) 30] , Balco Employees’ Union v. Union of India [Balco Employees’ Union v. Union of India, (2002) 2 SCC 333] and Swiss Ribbons (P) Ltd. v. Union of India [Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] will not apply to the decision taken by a statutory body like RBI. If, a legislation relating to economic matters is placed at the highest pedestal, an executive decision with regard to similar matters will be placed only at a lower pedestal and the decision taken by a statutory body may not even be entitled to any such deference or reverence. 190. But given the scheme of the RBI Act, 1934 and the Banking Regulation Act, 1949, the above argument appears only to belittle the role of RBI. RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. This is why it is given a mandate — (i) under the Preamble of the RBI Act, 1934, to operate the currency and credit system of the country to its advantage and to operate the monetary policy framework in the country; (ii) under Section 3(1), to take over the management of the currency from the Central Government; (iii) under Section 20, to undertake to accept monies for account of the Central Government, to make payments up to the amount standing to the credit of its account and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union; (iv) under Section 21(1), to have all the money, remittance, exchange and banking transactions in India of the Central Government entrusted with it; (v) under Section 22(1), to have the sole right to issue bank notes in India and (vi) under Section 38, to get rupees into circulation only through it, to the exclusion of the Central Government. Therefore, RBI cannot be equated to any other statutory body that merely serves its master. It is specifically empowered to do certain things to the exclusion of even the Central Government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. [….] 192. But as we have pointed out above, RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source. The RBI Act, 1934 is a pre-constitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn. But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the Central Government, cannot be taken away. The sole right to issue bank notes in India, conferred by Section 22(1) cannot also be taken away and conferred upon any other bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the Central Government and conferred upon any other authority. Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act. In fact, all countries have Central banks/authorities, which, technically have independence from the Government of the country. To ensure such independence, a fixed tenure is granted to the Board of AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] Governors, so that they are not bogged down by political expediencies. […..]Therefore, we do not accept the argument that a policy decision taken by RBI does not warrant any deference. (emphasis supplied) In further analysing the wide-ranging powers entrusted with the RBI, the Court noted that its regulatory powers would be tested against the cornerstone of proportionality: “224. It is no doubt true that RBI has very wide powers not only in view of the statutory scheme of the three enactments indicated earlier, but also in view of the special place and role that it has in the economy of the country. These powers can be exercised both in the form of preventive as well as curative measures. But the availability of power is different from the manner and extent to which it can be exercised. While we have recognised elsewhere in this order, the power of RBI to take a pre-emptive action, we are testing in this part of the order the proportionality of such measure, for the determination of which RBI needs to show at least some semblance of any damage suffered by its regulated entities. But there is none. When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft Bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.” (emphasis supplied) 54. Thus, it is settled that the RBI is a special, expert regulatory body that is insulated from the political arena. Its decisions are reflective of its expertise in guiding the economic policy and financial stability of the nation. Adverting to the facts of this case, the RBI is empowered by FEMA to manage, regulate, and supervise the foreign exchange of India. It is trite law that courts do not interfere with the economic59 or regulatory60 policy adopted by the government. This lack of interference 59 R K Garg v. Union of India, (1981) 4 SCC 675; Balco Employees Union v. Union of India, (2002) 2 SCC 333 60 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Ebix Singapore v. Committee of Creditors of Educomp Solutions (P) Ltd., 2021 SCC OnLine SC 313 is in deference to the democratically elected government’s wisdom, reflecting the will of the people. As held by a three-judge Bench of this Court in Internet & Mobile Association (supra), the regulations introduced by RBI are in the nature of statutory regulation and demand a similar level of deference that is accorded to executive and Parliamentary policy. 55. This Court must be circumspect that the rights and freedoms guaranteed under the Constitution do not become a weapon in the arsenal of private businesses to disable regulation enacted in the public interest. The Constituent Assembly Debates had carefully curated restrictions on rights and freedoms, in order to retain democratic control over the economy. Regulation must of course be within the bounds of the statute and in conformity with executive policy. A regulated economy is a critical facet of ensuring a balance between private business interests and the State’s role in ensuring a just polity for its citizens. The Constitution Bench in Modern Dental College (supra) had remarked on the role of regulatory mechanisms in liberalized economies. Speaking for the Bench, Justice A K Sikri had observed: “87. Regulatory mechanism, or what is called regulatory economics, is the order of the day. In the last 60-70 years, economic policy of this country has travelled from laissez faire to mixed economy to the present era of liberal economy with regulatory regime. With the advent of mixed economy, there was mushrooming of the public sector and some of the key industries like aviation, insurance, railways, electricity/power, telecommunication, etc. were monopolised by the State. Licence/ permit raj prevailed during this period with strict control of the Government even in respect of those industries where private sectors were allowed to operate. However, Indian economy experienced major policy changes in early 90s on LPG Model i.e. liberalisation, privatisation and globalisation. With the onset of reforms to liberalise the Indian economy, in July 1991, a new chapter has dawned for India. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy. 88. When we have a liberal economy which is regulated by the market forces (that is why it is also termed as market economy), prices of goods and services in such an economy are determined AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] in a free price system set up by supply and demand. This is often contrasted with a planned economy in which a Central Government determines the price of goods and services using a fixed price system. Market economies are also contrasted with mixed economy where the price system is not entirely free, but under some government control or heavily regulated, which is sometimes combined with State led economic planning that is not extensive enough to constitute a planned economy. 89. With the advent of globalisation and liberalisation, though the market economy is restored, at the same time, it is also felt that market economies should not exist in pure form. Some regulation of the various industries is required rather than allowing self- regulation by market forces. This intervention through regulatory bodies, particularly in pricing, is considered necessary for the welfare of the society and the economists point out that such regulatory economy does not rob the character of a market economy which still remains a market economy. Justification for regulatory bodies even in such industries managed by private sector lies in the welfare of people. Regulatory measures are felt necessary to promote basic well being for individuals in need. It is because of this reason that we find regulatory bodies in all vital industries like, insurance, electricity and power, telecommunications, etc.” 56. Regulating the economy is reflective of the compromise between the interests of private commercial actors and the democratic State that represents and protects the interests of the collective. Scholars across the world have warned against the judiciary constitutionalising an unregulated marketplace61. This Court must be bound by a similar obligation, in order to preserve its fidelity to the Constitution. With the transformation in the economy, the Courts must also be alive to the socio- economic milieu. The right to equality and the freedom to carry on one’s trade cannot inhere a right to evade or avoid regulation. In liberalized economies, regulatory mechanisms represent democratic interests of setting the terms of operation for private economic actors. This Court does not espouse shunning of judicial review when actions of regulatory bodies are questioned. Rather, it implores intelligent care in probing the 61 Robert Post & Amanda Shanor, Adam Smith’s First Amendment, 128 HARVARD LAW REVIEW FORUM 165, 167 (2015), available at <https://harvardlawreview.org/2015/03/ adam-smiths-first-amendment/> bona fides of such action and nuanced deference to their expertise in formulating regulations. A casual invalidation of regulatory action in the garb of upholding fundamental rights and freedoms, without a careful evaluation of its objective of social and economic control, would harm the general interests of the public. 57. In the instant case, the RBI has demonstrated a rational nexus in the prohibition of MTTs in respect of PPE products and the public health of Indian citizens. The critical links between FTP and MTTs have been established by the respondents. Facilitating MTTs in PPE products between two distinct nations may prima facie appear as having no bearing on the availability of domestic stocks. However, the RBI has carefully established the connection between the use of Indian foreign exchange reserves, MTTs and the availability of domestic stocks (as noted in Sections C.2 and C.3). As a developing country with a sizeable population, RBI’s policy to align MTT permissibility with the FTP restrictions on import and export of PPE products cannot be questioned. Thus, this Court is constrained to defer to the regulations imposed by RBI and the UOI, in the interests of preserving public health in a pandemic. This deference is by no means uncritical. In fact, one of us (Justice D Y Chandrachud), in a three-judge Bench of this Court in Gujarat Mazdoor Sabha v. State of Gujarat62 had decried the State’s tenuous claim of a public health emergency to dilute welfare conditions in labour laws. This Court had stressed that balancing individual rights against measures adopted to combat the public health crisis must continue to satisfy the test of proportionality. Justice D Y Chandrachud noted: “30. Even if we were to accept the respondent’s argument at its highest, that the pandemic has resulted in an internal disturbance, we find that the economic slowdown created by the Covid-19 Pandemic does not qualify as an internal disturbance threatening the security of the State. The pandemic has put a severe burden on existing, particularly public health, infrastructure and has led to a sharp decline in economic activities. The Union Government has taken recourse to the provisions of the Disaster Management Act, 2005. [Ministry of Home Affairs, Order No. 40-3/2020-DM- I(A) dated 24-3-2020.] However, it has not affected the security of India, or of a part of its territory in a manner that disturbs the peace and integrity of the country. The economic hardships caused AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.] 62 (2020) 10 SCC 459 by Covid-19 certainly pose unprecedented challenges to governance. However, such challenges are to be resolved by the State Governments within the domain of their functioning under the law, in coordination with the Central Government. Unless the threshold of an economic hardship is so extreme that it leads to disruption of public order and threatens the security of India or of a part of its territory, recourse cannot be taken to such emergency powers which are to be used sparingly under the law. Recourse can be taken to them only when the conditions requisite for a valid exercise of statutory power exist under Section 5. That is absent in the present case. 40. The need for protecting labour welfare on one hand and combating a public health crisis occasioned by the pandemic on the other may require careful balances. But these balances must accord with the rule of law. A statutory provision which conditions the grant of an exemption on stipulated conditions must be scrupulously observed. It cannot be interpreted to provide a free reign for the State to eliminate provisions promoting dignity and equity in the workplace in the face of novel challenges to the State administration, unless they bear an immediate nexus to ensuring the security of the State against the gravest of threats.” Thus, it is not this Court’s stance that judicial review is stowed in cold storage until a public health crisis tides over. This Court retains its role as the constitutional watchdog to protect against State excesses. It continues to exercise its role in determining the proportionality of a State measure, with adequate consideration of the nature and purpose of the extraordinary measures that are implemented to manage the pandemic. Democratic interests that secure the well-being of the masses cannot be judicially aborted to preserve the unfettered freedom to conduct business, of the few. D Conclusion 58. Therefore, we find that the judgment dated 8 October 2020 of the Madhya Pradesh High Court was correct in holding that Clause 2(iii) of the 2020 MTT Guidelines was a proportionate measure in ensuring the availability of sufficient domestic stock of PPE products. The measure was validly enacted, in pursuance of legitimate state interest and did not disproportionately impact the fundamental rights of the appellant. Hence, Clause 2(iii) passes muster under Articles 14, 19(1)(g) and 21. For the reasons noted in this judgment, we see no need to interfere. 59. For the above reasons, we find no merit in the appeal. The appeal accordingly stands dismissed. 60. Pending application(s), if any, shall stand disposed of. Ankit Gyan Appeal dismissed. AKSHAY N PATEL v. RESERVE BANK OF INDIA & ANR. [DR. DHANANJAYA Y CHANDRACHUD, J.]