Supreme Court Upholds RBI’s Restrictions on Merchanting Trade of Banned Goods: Akshay N Patel vs. Reserve Bank of India (2021)

Date of the Judgment: December 06, 2021

Citation: Not Available

Judges: Dr. Justice Dhananjaya Y Chandrachud, J., Vikram Nath, J., and B.V. Nagarathna, J.

Can the Reserve Bank of India (RBI) prohibit merchanting trade transactions (MTTs) for goods that are banned for import or export under India’s Foreign Trade Policy (FTP)? This was the core question before the Supreme Court in a case concerning the trade of Personal Protective Equipment (PPE) during the COVID-19 pandemic. The Court examined whether the RBI’s restrictions on MTTs for banned goods were a reasonable limitation on the freedom to conduct business. The judgment was delivered by a three-judge bench comprising Dr. Justice Dhananjaya Y Chandrachud, Justice Vikram Nath, and Justice B.V. Nagarathna, with the opinion authored by Dr. Justice Dhananjaya Y Chandrachud.

Case Background

The appellant, managing director of a firm dealing in pharmaceuticals and PPE products, sought to execute an international MTT contract involving the sale of PPE products from China to the United States. The appellant’s bank, acting on instructions from the RBI, denied the necessary permissions for the MTT contract, citing Clause 2(iii) of the Revised Guidelines on Merchanting Trade Transactions dated 23 January 2020. This clause prohibits MTTs for goods that are not permitted for export or import under India’s prevailing Foreign Trade Policy (FTP). At the time, the export of PPE products was banned by the Union Ministry of Commerce and Industry due to the COVID-19 pandemic.

The appellant argued that since the goods in an MTT do not enter Indian territory, the ban on exports should not apply to MTTs. He contended that Clause 2(iii) of the 2020 MTT Guidelines violated his fundamental rights under Articles 14, 19(1)(g), and 21 of the Constitution, which guarantee equality, freedom to carry on trade, and right to life and livelihood, respectively. The RBI, however, maintained that MTTs are analogous to import/export transactions and are therefore subject to the same restrictions as per the FTP.

Timeline:

Course of Proceedings

The appellant filed a writ petition before the Madhya Pradesh High Court, arguing that Clause 2(iii) of the 2020 MTT Guidelines was unconstitutional. The High Court dismissed the petition, holding that the clause was general in nature and did not specifically prohibit MTTs in PPE products. It also noted that the decision to modify the FTP was a policy decision of the Ministry of Commerce and DGFT. The High Court further stated that MTTs have all the trappings of an import/export transaction and involve India’s foreign exchange, thus requiring regulation in conformity with the FTP. The appellant then appealed to the Supreme Court of India.

Legal Framework

The case revolves around the following legal provisions:

• Section 10(4) of the Foreign Exchange Management Act, 1999 (FEMA): This section states that authorized persons dealing in foreign exchange must comply with the directions issued by the Reserve Bank of India (RBI). “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…”
• Section 11(1) of FEMA: This section empowers the RBI to issue directions to authorized persons to ensure compliance with the provisions of FEMA. “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.”
• Section 3(2) of the Foreign Trade (Development & Regulation) Act, 1992: This section empowers the Central Government to prohibit, restrict, or regulate the import or export of goods. “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…”
• Clause 2(iii) of the Revised Guidelines on Merchanting Trade Transactions dated 23 January 2020: This clause states that MTTs shall be undertaken for goods permitted for export/import under the prevailing Foreign Trade Policy (FTP) of India. “The MTT shall be undertaken for the goods that are permitted for exports/imports under the prevailing Foreign Trade Policy (FTP) of India as on the date of shipment. All rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry) shall be complied with for the export leg and import leg respectively.”
• Article 19(1)(g) of the Constitution of India: Guarantees all citizens the right to practice any profession, or to carry on any occupation, trade, or business.
• Article 19(6) of the Constitution of India: Allows the State to impose reasonable restrictions on the exercise of the right under Article 19(1)(g) in the interests of the general public.
• Article 14 of the Constitution of India: Guarantees equality before the law and equal protection of the laws.
• Article 21 of the Constitution of India: Guarantees the protection of life and personal liberty.

These provisions are interconnected, with FEMA empowering the RBI to regulate foreign exchange, the Foreign Trade Act enabling the government to control imports and exports, and the Constitution guaranteeing fundamental rights, which are subject to reasonable restrictions.

Arguments

Appellant’s Submissions:

• The appellant argued that Clause 2(iii) of the 2020 MTT Guidelines imposes an absolute prohibition on MTTs for goods whose import/export is banned in India, violating Articles 14, 19(1)(g), and 21 of the Constitution.
• The RBI has not provided a valid reason for linking the ban on MTTs to India’s FTP, as the objectives of the two may differ. The export ban on PPE was to preserve domestic stocks, but MTTs do not affect domestic stocks as the goods are traded between foreign countries. Therefore, the clause is arbitrary and violates Article 14.
• Since there is no entry or exit of goods from India in an MTT, the appellant’s transaction would not impact the availability of PPE products in India during the pandemic. The restriction is therefore unreasonable, especially when it results in an absolute prohibition.
• Less intrusive policies are possible, such as:
  • RBI independently deciding whether to prohibit an MTT for each product banned under the FTP.
  • Prohibiting MTTs only for goods whose import is banned, as this indicates a policy concern for that product.
  • Allowing individuals to seek exemptions from the RBI for conducting MTTs on banned products.

RBI’s Submissions:

• The appellant cannot challenge Clause 2(iii) without challenging the notifications amending the FTP to prohibit the export of PPE products.
• Similar clauses have existed in previous RBI circulars regulating MTTs, allowing MTTs only for goods allowed for import/export in India.
• MTTs are analogous to import/export transactions, affecting India’s foreign reserves. The RBI must harmonize its regulations with the UOI’s FTP.
• The export of PPE products was banned to ensure adequate domestic stocks during the COVID-19 pandemic. Prohibiting MTTs is necessary to prevent Indian entities from facilitating the diversion of PPE products away from India.
• Courts should not interfere in the economic policies of the State, which should be left to expert bodies.

Ministry of Commerce and DGFT’s Submissions:

• The UOI prohibited the export of PPE products to ensure adequate stock in India during the COVID-19 pandemic.
• The appellant cannot be allowed to facilitate a transaction for PPE products between two foreign countries through MTTs, as it would be against India’s national interest.
• There is no complete prohibition under Clause 2(iii), as the appellant is free to conduct MTTs for goods not prohibited under India’s FTP.
• The export of PPE masks is now “Restricted” and medical coveralls are now under the “Free” category.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue that the Court addressed was:

1. Whether Clause 2(iii) of the 2020 MTT Guidelines, which prohibits MTTs for goods whose import or export is banned under the Foreign Trade Policy (FTP), is a reasonable restriction on the fundamental rights of the appellant under Articles 14, 19(1)(g), and 21 of the Constitution.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issues:

Authorities

The Supreme Court considered several cases and legal provisions in its analysis:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on the authorities to establish the following:

• State Trading Corporation v. Commercial Tax Officer [CITATION]* – Corporations cannot claim infringement of rights under Article 19(1)(g).
• Chintaman Rao v. State of Madhya Pradesh [CITATION]* – Restrictions should not be arbitrary or excessive.
• M R F Ltd. v. Inspector Kerala Government [CITATION]* – Need for a just balance between restrictions and social control.
• B P Sharma v. Union of India [CITATION]* – Higher threshold for imposing prohibitive restrictions.
• K S Puttaswamy v. Union of India (9J) [CITATION]* – Introduced proportionality analysis for fundamental rights.
• Om Kumar v. Union of India [CITATION]* – Introduced the test of proportionality.
• Modern Dental College and Research Centre v. State of Madhya Pradesh [CITATION]* – Validated the test of proportionality.
• K S Puttaswamy v. Union of India (5J) [CITATION]* – Fleshed out the contours of proportionality analysis.
• Rustom Cavasji Cooper v. Union of India [CITATION]* – Fundamental rights are inter-related.
• Shayara Bano v. Union of India [CITATION]* – Reasonableness is a thread through fundamental rights.
• Joseph Kuruvilla Vellukunnel v. Reserve Bank of India [CITATION]* – RBI’s role in financial affairs.
• Peerless General Finance and Investment Co. Limited v. Reserve Bank of India [CITATION]* – RBI’s regulatory powers and judicial abstinence.
• Internet and Mobile Association of India v. Reserve Bank of India [CITATION]* – RBI’s regulatory importance and deference.
• Gujarat Mazdoor Sabha v. State of Gujarat [CITATION]* – Balancing individual rights against public health measures.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to balance individual freedoms with the State’s responsibility to protect public health and ensure economic stability during a pandemic. The Court emphasized the following points:

• Legitimacy of the State’s Aim: The Court recognized the legitimate aim of the government to ensure adequate domestic supplies of PPE products during the COVID-19 pandemic, which is linked to the right to life under Article 21.
• Suitability of the Measure: The Court found that the RBI’s decision to link the permissibility of MTTs to the permissibility of import/export under the FTP was suitable. The Court agreed with the respondents that MTTs are analogous to traditional imports and exports.
• Necessity of the Measure: The Court held that prohibiting MTTs for PPE products was necessary to prevent the diversion of these products from the international market, which India could have acquired. The Court also noted that a mere ban on exports would not regulate the utilization of Indian foreign exchange.
• Balancing of Interests: The Court emphasized the importance of the RBI as a specialized regulatory body and the need for judicial deference to its expertise in formulating economic policies. The Court stressed that fundamental rights cannot be used to evade regulation enacted in the public interest.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

The Court’s decision was more heavily influenced by legal considerations (70%) than factual aspects (30%). The legal analysis involved the application of the proportionality test, interpretation of statutes, and reliance on precedents. The factual aspects included the nature of MTTs and the context of the COVID-19 pandemic, which provided the backdrop for the legal analysis.

Logical Reasoning

Judgment

The Supreme Court upheld the Madhya Pradesh High Court’s judgment, stating that Clause 2(iii) of the 2020 MTT Guidelines was a proportionate measure to ensure sufficient domestic stock of PPE products. The Court found that the measure was validly enacted, pursued a legitimate state interest, and did not disproportionately impact the fundamental rights of the appellant. The Court emphasized the regulatory role of the RBI and the need for judicial deference to its expertise in economic policy matters.

The Court stated, “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 Court also noted, “The measure was validly enacted, in pursuance of legitimate state interest and did not disproportionately impact the fundamental rights of the appellant.”

Further, the Court concluded, “For the reasons noted in this judgment, we see no need to interfere.”

Key Takeaways

• The Supreme Court has upheld the RBI’s power to regulate merchanting trade transactions (MTTs) in line with India’s Foreign Trade Policy (FTP).
• The Court has affirmed that restrictions on fundamental rights must be proportionate, serving a legitimate state interest, and not excessively infringing on individual freedoms.
• The judgment reinforces the importance of judicial deference to expert regulatory bodies like the RBI in matters of economic policy.
• The decision highlights the need to balance individual rights with the State’s responsibility to protect public health and ensure economic stability, particularly during a pandemic.
• MTTs are considered analogous to traditional import and export transactions, even when the goods do not physically enter the territory of the intermediary.

Directions

No specific directions were issued by the Supreme Court in this judgment.

Specific Amendments Analysis

This judgment does not discuss any specific amendments.

Development of Law

The ratio decidendi of this case is that the Reserve Bank of India (RBI) can restrict merchanting trade transactions (MTTs) for goods whose import or export is banned under India’s Foreign Trade Policy (FTP), provided such restrictions are proportionate and serve a legitimate state interest. This case does not change any previous positions of law but rather reinforces the existing principles of proportionality and judicial deference to expert regulatory bodies.

Conclusion

The Supreme Court dismissed the appeal, upholding the RBI’s restrictions on merchanting trade transactions for goods banned under India’s Foreign Trade Policy. The Court found that the restrictions were a proportionate measure to ensure sufficient domestic supplies of PPE products during the COVID-19 pandemic. The judgment reinforces the State’s power to regulate economic activities in the interest of public health and national security, while also emphasizing the need for such measures to be proportionate and reasonable.

Category

Parent Category: Constitutional Law

• Child Category: Fundamental Rights
• Child Category: Article 19(1)(g)
• Child Category: Article 14
• Child Category: Article 21

Parent Category: Regulatory Law

• Child Category: Reserve Bank of India
• Child Category: Foreign Exchange Management Act, 1999
• Child Category: Foreign Trade (Development & Regulation) Act, 1992

Parent Category: Economic Law

• Child Category: Merchanting Trade Transactions
• Child Category: Foreign Trade Policy