Tuesday, 19 July 2011

Bombay High Court SpeakAsia Petition 1365-2011 - 14 July 2011

Speak Asia Online Pte Limited and others ..Petitioners.
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.
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 chair persons 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 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.”

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 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.

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 meeting which may be convened for that purpose.

The Petition is accordingly disposed of.
(Dr. D.Y. Chandrachud, J.)


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