The Section-7 question: Can the Centre issue orders to the Reserve Bank by law?

Published: November 2, 2018 1:38 AM

The High Court went forward and noted that, prima facie, there exists material which deserves to be taken into consideration.

In the past, there have been murmurs of the government giving unofficial directions to regulators to do their bidding.

By Vaneesa Agrawal

A previously obscure provision of the Reserve Bank of India Act, 1934, has gained prominence in the past few days. As it has been widely reported, section 7 of the Act empowers the Central government to issue directions to RBI. The use of this power has two safeguards. Firstly, the Central government has to hold prior consultations with RBI and, secondly, the directions have to be necessary in the name of public interest.
Interestingly, the use of this provision was suggested by the Allahabad High Court in its order in the matter of Independent Power Producers Association of India vs Union of India, 2018. In its judgment, the High Court observed that, “It would, therefore, be appropriate for the Central government to step in, in exercise of the powers under Section 7 of RBI Act, and after consultation with the Governor of RBI, to take an appropriate decision or issue directions, as it deems fit and proper in the larger public interest”. However, the Court had cautioned regarding the scope of such powers. It had made it clear that the Central government is not expected to issue any directions, as contemplated under Section 7(1), indiscriminately or randomly. Such directions are possible only when there exists sufficient material in support. The High Court went forward and noted that, prima facie, there exists material which deserves to be taken into consideration.

Although the provision in the RBI Act has been in the statute book for a long time, it is interesting to note that even newer legislations contain similar provisions. For example, in terms of section 55 and 56 of the Competition Act, 2002, the Central government has the power to give directions to Competition Commission of India (CCI) on questions of policy and supersede the CCI in “public interest”. Similarly, the Central government has the power to give directions to the Securities and Exchange Board of India (SEBI) and supersede SEBI under section 16 and 17 of the SEBI Act, 1992.

The Parliamentary Standing Committee on the Competition Bill, 2001, had raised concerns that giving such enormous powers to the Centre, in terms of giving directions on policies to the CCI and of superseding the CCI in special circumstances, would undermine the independence of the CCI. The reasons for inclusion of these powers as pointed out in the report (2002) are that the “Government may have security concerns or reason of public interest, on account of which intervention becomes necessary”, the provision already exists in many other Acts and that the “Government rarely resorts to such extraordinary powers, and if it does, its decisions are subject to examination in the media, Parliamentary scrutiny and judicial review”.
In fact, the exercise of power under a similar provision contained in Section 20 of the University Grants Commission Act, 1956, was challenged before the Allahabad High Court in the matter of Ramesh Kumar Yadav and another vs University of Allahabad and others, 2012. The High Court held that the Central government, in its letter dated November 3, 2010, clearly overstepped its powers under Section 20 (1) in overruling the University Grants Commission (UGC). The High Court interpreted the phrase “policy relating to national purpose” strictly and held that UGC, as an expert body, is required to perform the statutory functions of prescribing the minimum qualifications for appointment to teaching posts and also possesses the powers and duties to prescribe relaxation. The opinion of the UGC in such case has to be treated as an opinion of experts and unless there is anything to the contrary, which does not serve the national interest, it does not fall within the power of Section 20 of the Act, for the Central government to record its disagreement with such relaxation.

On appeal, the Supreme Court overruled the decision of the High Court in the matter of P Suseela vs University Grants Commission, 2015. The Supreme Court held that the directions of the Central government under Section 20 of the UGC Act pertain to questions of policy relating to national purpose. The court also pointed out that the regulation making power is subservient to directions issued under Section 20 of the Act. It further observed that the UGC Act contemplates that such an expert body will have to act in accordance with directions issued by the Central government. The Court was of the view that even after a regulation becomes law, the government has the power to issue directions and the regulations would have to be modified in accordance with such directions. This decision of the Supreme Court does seem to indicate that the power of the Central government to issue directions is broad enough to direct RBI to modify its contentious February 12, 2018, circular.

In the past, there have been murmurs of the government giving unofficial directions to regulators to do their bidding. The fact that the Central government may have to resort to the use of its powers under Section 7 is a testament to the autonomy of RBI. Equally, the power to issue directions has legislative backing and is also supported by judicial precedents. The government may be emboldened since the Allahabad High Court has already given its view that there does exist prima facie material to at least consider such an extreme step.

While the Central government may have the power to issue directions to RBI, these powers are indeed to be exercised with great care. The exercise of such power has already been subject to intense debate in the media and if the government decides to issue such a direction, it is likely to be subject to judicial scrutiny as well. It may also lead to a broader discussion on whether such powers given to the Central government under various legislations should be removed from the statute books altogether.

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