Search interesting materials

Friday, April 10, 2020

Indian Supreme Court on virtual currency: Regulatory governance implications

by Pratik Datta and Varun Marwah.

The Indian Supreme Court in IMAI v. RBI (‘Crypto Judgement’) recently struck down a Reserve Bank of India (‘RBI’) circular that prohibited entities regulated by it from dealing or settling in Virtual Currencies (‘VCs’). While many commentators have lauded the outcome, the judgement itself is a milestone in the history of jurisprudence on rule of law and the working of regulators in India.

In this blog, we contextualise this decision in the broader context of regulatory governance in India. We argue that this decision may not be sufficient to nudge regulators to improve their internal governance arrangements. Instead, deeper legislative reforms are needed along the lines of the US Administrative Procedure Act ('APA') and the draft Indian Financial Code ('IFC').

Regulatory governance in India

When India embarked on a market oriented reform in early 1990s, there was a desire to break away from central planning and government control towards creation of competitive private markets in different sectors. This led to proliferation of specialised statutory regulators across sectors. The dominant motive behind setting up new regulators was to signal credibility to private investors and financial institutions. Another important objective was to create technocratic specialisation, which would have been difficult within the administrative constraints of government departments. Given these priorities, there was hardly much focus on regulatory governance, that is, the formal processes to be followed by a regulator while performing its internal functions. Consequently, the parliamentary statutes setting up these regulators did not provide much guidance on regulatory governance.

Lack of regulatory governance often leads to poor regulatory outcomes. For instance, Roy et al (2018) explains that poor legislative processes within a regulator may prevent its board from systematically evaluating the management’s proposals to regulate. It may also restrict the board from receiving appropriate feedback from regulated entities about proposed regulations. Therefore, one would have reasonably expected the Indian regulators to voluntarily adopt such regulatory governance norms through regulations.

However, the regulators did not make any systematic effort to improve their own regulatory governance. Krishnan and Burman (2019) note that the administrative processes within regulators are strikingly similar to those of government departments. This is because, at least in the initial days, most members as well as officials of these regulators came from the government. In absence of any statutory guidance, they transplanted the administrative processes of the government into the regulators. This became a source of deeper problems.

A statutory regulator is materially different from a government department. Unlike a government department, a regulator concentrates legislative (regulation-making), executive (monitoring and supervision) and judicial (issuing orders) powers. Moreover, the frequency and volume of legislative instruments issued by a regulator is significantly higher than most government departments. None of these unique features of a regulator are addressed by transplanting government processes within the regulator.

Given this vacuum in regulatory governance both in external administrative law (the statute) as well as in internal administrative law (regulations, circulars etc.), judicial precedents came to play a visibly important role in shaping regulatory governance in India. An analysis of these judicial precedents by Krishnan and Burman (2019) reveals two interesting features. First, the judiciary has generally been deferential towards the functioning of regulators, except in cases of blatant disregard of process. Second, judicial review of legislative actions of regulators has been rare. Even in such rare occasions, the ultra vires doctrine has been used to strike down regulations issued without appropriate legal powers. To the best of our knowledge, the only instance where the Indian Supreme Court struck down a regulation for inadequate regulatory governance was in COAI vs. TRAI ('Call Drop Judgement') in 2016. And now, the Crypto Judgement adds to this nascent jurisprudence.

The Crypto Judgment

On April 6, 2018, the RBI issued a circular prohibiting RBI regulated entities from dealing or settling in VCs (‘Circular’). The Circular was challenged by the Internet and Mobile Association of India (‘IMAI’) before the Supreme Court. The court struck down the Circular for infringement of Article 19(1)(g) of the Constitution of India. Article 19(1)(g) guarantees the fundamental right to conduct trade and business in India subject to reasonable restrictions that may be imposed by law in public interest. The Apex Court held that the prohibition in the Circular was an unreasonable restriction on this fundamental right to trade (in VCs and to operate VC exchanges) in India, because it was disproportionate.

The Apex Court found the Circular to be disproportionate primarily on two grounds:

First, RBI did not adduce any cogent evidence of the likely harm that its circular sought to address. RBI had not found the activities of VC exchanges to have actually adversely impacted any RBI regulated entity. In case any such harm was actually caused, the court expected at least some empirical data about degree of harm suffered by the regulated entities. In the absence of any such harm or any empirical data establishing the degree of harm to regulated entities, the court found the absolute ban on trading of VCs and functioning of VC exchanges to be disproportionate.

Second, RBI did not consider any less intrusive alternative regulatory response. An Inter-Ministerial Committee had initially suggested that an absolute ban would be an extreme tool. This Committee had observed that the same objectives could be achieved through less intrusive regulatory measures, as reflected in the Crypto-token Regulation Bill, 2018. Referring to this observation as well as several other authoritative international sources such as the European Parliament and the Financial Action Task Force ('FATF'), the court found that RBI did not consider the availability of alternatives before issuing the Circular imposing an absolute ban. Consequently, the Circular was held to be a disproportionate measure.

Both these reasons suggest that the Supreme Court expected the RBI to perform a basic Cost-Benefit Analysis ('CBA') before issuing the circular. A CBA would have enabled the RBI to identify multiple possible solutions to the problem and then choose the most appropriate one. Statutory laws in most advanced jurisdictions usually require regulators to conduct a CBA before issuing a regulation. In contrast, Indian laws do not impose such high regulatory governance standards on regulators. But this may soon need to change.

A nascent trend

As highlighted by Krishnan and Burman (2019), judicial review of legislative action by a regulator is rare in India and in the rarest of the rare cases, such judicial review hinges on regulatory governance standards. The Crypto Judgement is one such rare instance. To the best of our knowledge,the only other instance was in COAI vs. TRAI (‘Call Drop Judgement’) in 2016. In that case, the Supreme Court had similarly struck down a regulation issued by Telecom Regulatory Authority of India ('TRAI') for inadequate regulatory governance.

The Telecom Consumer Protection (Ninth Amendment) Regulation, 2015 required telecom operators to credit Rs. 1 to a calling customer for a maximum of three call drops per day. A number of telecom operators challenged this regulation for violation of Article 14 (arbitrariness) as well as section 11(4) of the TRAI Act, 1997, that imposes a broad legal obligation on TRAI to act transparently. The Supreme Court held TRAI’s action to be arbitrary since it had failed to substantiate how it arrived at a compensation amount of Rs. 1 and that too only to the calling customer. The court concluded that the regulation was based on mere guess work without any intelligent care and deliberation.

Further, the telecom operators had raised these issues in public comments, but TRAI had failed to consider their arguments while framing the regulations. Relying on the transparency requirements under section 11(4), the court held that TRAI should have responded in a reasoned manner to those comments which raised significant issues. Evidently, the Supreme Court struck down the call drop regulation due to inadequate regulatory governance standards in issuing regulations. For this, the court resorted to a broad interpretation of the transparency obligation under the TRAI Act, 1997.

In contrast to the TRAI Act, 1997, the RBI Act, 1934 does not explicitly impose any statutory obligation on RBI to be transparent or proportionate in regulation-making. The Supreme Court in the Crypto Judgement applied the general administrative law principle of proportionality to strike down the Circular. This has now set a precedent for holding regulators accountable while exercising their legislative powers, irrespective of whether their parent statute explicitly imposes any obligation of transparency or proportionality while issuing regulations.

Potential consequences

These two precedents undoubtedly empower citizens against arbitrary regulatory actions. Regulations issued by different regulators are likely to face legal challenges in the future on grounds of inadequate regulatory governance. Only time will tell whether such challenges would succeed. If they succeed, one would reasonably expect the respective regulators to take corrective actions to avoid more legal challenges (and the associated costs). That would indeed be the best outcome. However, research suggests, this may not be so.

Krishnan and Burman (2019) interviewed three past members of boards of Securities and Exchange Board of India, Pension Fund Regulatory and Development Authority and Competition Commission of India to understand whether statutory regulators undertake corrective exercises if their actions are struck down by courts or tribunals. The unanimous opinion was that regulators have no systematic process to analyse the decisions of courts and tribunals in order to correct defects in procedures and processes. Therefore, risk of future litigation by itself may not result in regulators improving their internal governance. Instead, deeper legislative reforms would be necessary.

Case for legislative reforms

Litigation is welcome in a democracy. It is the most potent tool in the hands of the citizenry to keep a check on the excesses by the powers that be, including the regulators. That tool is not to be blunted at any cost. But what is in question is its efficacy, delays apart, in laying down regulatory governance standards in a holistic manner by taking into consideration all aspects of regulation making.

Robust legislative reforms would be significantly better at improving Indian regulatory governance standards compared to case-law jurisprudence. A litigation at most raises few regulatory governance issues relevant to that particular case. The process takes a long time to complete, moving through the appeals process. Moreover, there could be debate on the applicability of a judgement delivered with respect to the regulations made by one regulator under one statute, to the regulations made under another statute by another regulator. This creates uncertainty in the regulatory regime. In contrast, a parliamentary legislation on regulatory governance would provide a relatively wholesome framework. Such a law could help India leapfrog to higher regulatory governance standards, instead of relying on piece-meal case-law jurisprudence to develop over decades. Between litigation and legislation, legislation is certainly a better tool to improve regulatory governance.

Proposed legislative reforms

In the Call Drop Judgment, Justice Nariman had exhorted the Indian Parliament to enact a regulatory governance law along the lines of the APA in the USA. The APA lays down standard procedures for rule making and adjudication in USA. It applies to all executive branches of the federal government and even independent agencies, subject to suitable modifications. The APA also prescribes standards for judicial review of agency actions.

In India, the Financial Sector Legislative Reforms Commission ('FSLRC') had recommended similar processes for financial regulators in 2013. These recommendations were hardcoded into the draft IFC. Based on this, the Ministry of Finance had released a handbook on regulatory governance in 2016 for voluntary adoption by the financial sector regulators. Evidently, the policy thinking on these issues is mature enough for initiating necessary legislative reforms.

Currently, India does not have a comparable statute like APA or the draft IFC. Each Indian regulator has its own unique regulatory governance standards embedded in its governing statute or in some cases, even in regulations. These standards hardly match up to the global best practices. For instance, Burman and Zaveri (2019) measured the performance of four prominent Indian regulators on a responsiveness index based on international best practices on public consultation process. None of the regulators scored more than 5 out of 10. The situation is likely to be worse in government ministries and departments, since their processes are based more on custom and lack any statutory backing. This creates a situation where not only regulators are following different statutory standards, but government ministries and departments are functioning without any statutory standards at all.

India needs an overarching regulatory governance statute along the lines of APA and draft IFC, applicable to all regulators and government departments. This law should have two broad elements. First, it should lay down standard processes for framing rules and regulations, conducting affairs of the regulatory board, annual reporting, approval for regulated activities, investigation and adjudication. For regulation-making, the minimum standards of public consultation, where feasible, and CBA must be embedded in the statute. While developing such CBA standards, policymakers must ensure adequate flexibility to regulators so that a CBA need not necessarily be quantitative and could also be purely forward looking in nature. Second, the law should lay down precise standards for judicial review of actions taken by government departments and regulators under the law. Judicial review should be restricted to ensure that minimum standards of regulatory governance are complied with. Overall, such a law would enhance regulatory governance and improve predictability.


Since the liberalisation of 1990s, the optimism about specialised regulators has been replaced with concerns about regulatory governance in these institutions. Judicial precedents such as the Crypto Judgement and Call Drop Judgement help address these concerns to some extent. However, the risk of future litigation by itself may not nudge regulators to improve their internal governance. Instead, deeper legislative reform along the lines of APA in the USA and the draft IFC in India, is necessary. Policymakers would do well to heed Justice Nariman’s advice. The good news is, the FSLRC suggested IFC has the draft for consideration.


Burman and Zaveri, Measuring regulatory responsiveness in India: A framework for empirical assessment, William & Mary Policy Review (2019).

Krishnan and Burman, Statutory regulatory authorities: Evolution and impact, in Kapur and Khosla, Regulation in India: Design, Capacity and Performance (2019).

Roy, Shah, Srikrishna, Sundaresan, Building state capacity for regulation in India, in Kapur and Khosla, Regulation in India: Design, Capacity and Performance (2019).


Pratik Datta is a Senior Research Fellow and Varun Marwah is a Research Fellow, at Shardul Amarchand Mangaldas & Co. We thank Mr. Shardul S. Shroff, Mr. Sudarshan Sen, Mr. Prashant Saran, Mr. Gopalkrishna S. Hegde and two anonymous referees for useful comments. All views expressed are personal.

No comments:

Post a Comment

Please note: Comments are moderated. Only civilised conversation is permitted on this blog. Criticism is perfectly okay; uncivilised language is not. We delete any comment which is spam, has personal attacks against anyone, or uses foul language. We delete any comment which does not contribute to the intellectual discussion about the blog article in question.

LaTeX mathematics works. This means that if you want to say $10 you have to say \$10.