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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGNAL CIVIL JURISDICTION
WRIT PETITION (LODG.) NO.1365 OF 2011
Speak Asia Online Pte Limited and others ..Petitioners.
versus
Reserve Bank of India ..Respondent.
.....
Mr. Iqbal Chagla, Senior Advocate with Mr. Janak Dwarkadas, Senior
Advocate with Mr. Zal Andhyarujina, Ms. Jyoti Singh and Ms. Shruti
Sardesai i/b Phoenix Legal for the Petitioners.
Mr. Shyam Mehta with Mr. Mihir Mody and Ms. Ludnn Crasto i/b
M/s. K. Ashar & Co. for the Respondent.
......
CORAM : DR.D.Y.CHANDRACHUD &
ANOOP V. MOHTA, JJ.
14 July 2011.
P.C. :
1. In these proceedings the Petitioners question the legality of a
circular issued on 23 May 2011 by the Reserve Bank of India to the
chairpersons of scheduled commercial banks. The circular begins
with a factual background of certain circumstances which were
brought to the notice of the bank in relation to the activities of multi
level marketing companies, some of them based in Singapore which
were operating in India through agents who purported to conduct
online surveys. The circular sets out that the typical modus operandi
is to ask prospective customers to deposit an amount in a designated
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account to gain access to a portal and password and download a
survey form. For every form filled in and uploaded a certain payment
is made and those who have filled in surveys have to multiply the
users to get back their deposits. The Reserve Bank has drawn focus
on the fact that the agents are opening accounts with various banks
and have collected large sums of money which proceeds are
aggregated into a central pooling account and remitted overseas as
subscription charges. On this basis, the Reserve Bank has formed an
opinion (a prima facie opinion as counsel for the Reserve Bank
submits) that such schemes are akin to money circulation schemes in
respect of which authorised dealers should not allow remittances to
the operators of such schemes. The bank has also taken the view
that money circulation schemes are banned under the Prize Chits and
Money Circulation Schemes (Banning) Act, 1978. On this basis the
following directions were issued to the scheduled banks :
In view of the above, we advise that banks “ should be more
careful in opening and operating accounts for such schemes
specifically the type of business and inherent risk associated
with such activity. Further, we advise that bank/s will be held
responsible for losses incurred by customers by way of deposits
in / remittances from such accounts if they are found to be in
violation of regulations, KYC/ AML and/or other regulatory /
statutory requirements. Banks are advised to be extra careful
and may also improve their existing KYC/ AML drill and
transaction sanctity to examine the business practices of
prospective customers so as to ensure that no unauthorized/
illegal activity is being carried out. Existing accounts may be
reviewed to ascertain and ensure that these are not related to
unauthorized / prohibited / illegal schemes. Further, adherence
to requirements under FEMA 1999, other applicable statutory/
regulatory requirements and KYC/AML compliance in the
strictest form needs to be ensured. Failure to adhere to the
regulatory restrictions will invite supervisory action.”
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2. Counsel appearing on behalf of the Petitioners submitted that if
the bank were to furnish an opportunity of being heard to the
Petitioners, they would have been in a position to dispute the
correctness of the facts on the basis of which action has been taken
by issuing the circular in question. On the other hand, it has been
submitted on behalf of the Reserve Bank that the directions are
relatable to powers vested in the bank under Section 35 A of the
Banking Regulation Act, 1949 and Section 11(1) of the Foreign
Exchange Management Act 1999. Moreover, it has been submitted
that at present investigations are being conducted by the Directorate
of Enforcement, the Registrar of Companies and by the law enforcing
authorities in several states in respects of the activities of the
Petitioners. The Reserve Bank, it has been submitted, had formed a
prima facie view which is reflected in paragraph 2 of the impugned
circular and has by its directions ensured that pending the
completion of the investigation remittances do not proceed outside
the country.
3. Section 35A of the Banking Regulation Act 1949 empowers the
Reserve Bank to issue directions in the public interest, and in the
interest of banking policy to prevent the affairs of any banking
company being conducted in a manner detrimental to the interests of
the depositors; or in a manner prejudicial to the interests of the
banking company; or to secure the proper management of the
banking company. Under sub section (2) the Reserve Bank is
empowered on a representation made to it or on its motion to
modify or cancel any direction issued under sub section (1). Section
11 of the Foreign Exchange Management Act 1999 empowers the
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Reserve Bank of India for the purpose of securing compliance with
the provisions of the Act and of any rules, regulations, notifications or
directions, to give to authorised persons any direction in regard to
the making of payment or the doing or desisting from doing any act
relating to foreign exchange or foreign security. Under Section
10(4), an authorized person is required in all his dealings in foreign
exchange to comply with such general or special directions or orders
as the Reserve Bank may issue from time to time.
4. These powers have been vested in the Reserve Bank as the
custodian of public interest in order to ensure that the operation of
the banking system does not result in detriment to interest of the
public and to secure proper regulation, in accordance with law. The
powers of the Reserve Bank have been cast in broad terms and
cannot be constricted. As expert body the Bank is entitled to issue
such directions as it has in the present case. The Bank is
legitimately entitled to protect the integrity of the financial set up
pending an investigation. Neither an investigation nor the directions
issued by the Reserve Bank to facilitate it should be obstructed or
curtailed. The Bank has in our view acted within its statutory power
to caution against remittances abroad in the case at hand.
The Reserve Bank may in certain situations be required to act with
urgency such as where it seeks to prevent a remittance flowing
abroad from out of the country. Obviously in such cases, there could
be no requirement of a predecisional
hearing since the grant of such
hearing may well defeat the object underlying the conferment of
power on the Reserve Bank of India.
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5. The Court has been informed by counsel for the Reserve Bank
of India that the Bank has formed a prima facie opinion based on
the facts which have come to its notice. Moreover, counsel appearing
on behalf of Reserve Bank of India has stated that there was no
direction by the Reserve Bank to freeze the bank accounts of the
Petitioners and it would appear from the averments contained in
paragraph 7(xi) of the Petition that a debit freeze was placed by the
respective banks on account of the investigations which were
conducted by the service tax and income tax department.
6. Be that as it may, we are of the view that the interference of
this Court is not warranted. However, in the interests of fairness an
opportunity should be granted to the Petitioners to submit a
representation to the Reserve Bank. Sub section (2) of Section 35A of
the Banking Regulation Act, 1949 does in fact contemplate the making
of such a representation. From the record before the Court it would
appear that the Petitioners had sought an appointment by a letter
dated 17 May 2011 and pursuant to the request made to the bank a
communication was addressed to the Petitioners on 16 June 2011
seeking a disclosure of information. The Petitioners responded on 20
June 2011, but the matter appears to have rested there. We
accordingly dispose of this Petition by permitting the Petitioners to
place a representation on the record of the Chief General Manager of
the Reserve Bank of India who had issued the circular dated 23 May
2011. In the event that such a representation is made, we would
expect the Reserve Bank of India to take a decision in accordance
with law. The Reserve Bank of India may furnish an opportunity to
the Petitioners to explain the contents of the representation in a
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meeting which may be convened for that purpose.
The Petition is accordingly disposed of.
(Dr. D.Y. Chandrachud, J.)
(Anoop V. Mohta J.)