This article is written by Duvada S H Neha Choudhury of 3rd Semester of Damodaram Sanjivayya National Law University, DSNLU
ABSTRACT
The world operates on money, which is distributed through banks all around the world. When banks become the primary source of currency and transactions, they should be regulated by a body that oversees both central and state banks. In the case of India, all of these central and state banks are regulated by the Reserve Bank of India, abbreviated as the RBI. This bank prints money and oversees credit and monetary policy. It also ensures the country’s pricing stability. It is India’s highest authority for financial institutions.
The RBI was established in 1935 under the Reserve Bank of India Act of 1934. The RBI Act of 1934 was passed by the Imperial legislative council and got assent from the Governor General of India. This act discusses the RBI, its composition, hierarchy, functions, objectives, its powers, and limitations. In this article, we will discuss the RBI Act of 1934 – its background, features, essential provisions, amendments, and relevant case laws.
Keywords: The Reserve Bank of India Act of 1934, Provisions, Monetary policy, Objectives,Banks, Amendments.
INTRODUCTION
The Reserve Bank of India Act of 1934 was enacted by the Imperial Legislative Council and received approval from the Governor General of India. This legislation created the Reserve Bank of India in 1935, overseeing the country’s currency and credit regulation. The RBI Act comprises 61 parts, two schedules, and five chapters. They provide the basis for the RBI’s seamless operation. In 1949, the bank was nationalised. The RBI performs several tasks, which are covered in this legislation. Various adjustments to the statute were enacted in response to societal developments. The regulations include the composition of the board of directors, their functions, and the nomination of the governor and deputy governors. These provisions also allow the RBI to act as the banks’ last resort lender.
HISTORY AND BACKGROUND OF THE ACT
This act was enacted during the British colonial rule in India. In the year 1926, the royal commission highlighted the importance and necessity to establish a central bank in India to ensure that there only one body could control both credit and currency to achieve monetary stability. Before this currency and credit were controlled by two different entities which led to many problems and became a weakness. On the 25th of January 1927, the first-ever bill was introduced in the Legislative Assembly regarding this matter; this bill was titled “A Bill to Establish a gold standard currency for British India and Constitute a Reserve Bank of India” which contained the main recommendations made by the Royal Commission of 1926. But in 1927, the finance minister Sir Basil Blackett informed that the government had chosen not to proceed with the bill’s consideration in that session.[1]
In early 1933, a new constitution that was outlined as the “white paper” recommended the creation of the Reserve Bank of India. A committee on the Indian Reserve Bank commonly known as the London Committee was formed under the leadership of Sir Samuel Hoare who was the Secretary State of India(titular) and consisted of 23 members who had expertise in the subject matter. But the deputy chairman Sir Reginald Mant presided over the committee. They submitted a report and based on the same a bill was introduced in the assembly as well as the Council of State in 1933. The bill was accepted in 1933 by the assembly and in 1934 by the Council of State. The act was made to ensure that the bank would be free of any political influence and it was the shareholders’ bank with Fifty (50) million rupees as the original share capital.[2] The Reserve Bank of India is responsible for the stability of credit and currency and is independent. Its act can affect the credit policy, monetary policy, and the country’s gold reserves along with the general purchasing power. [3]
The Reserve Bank was established in 1935 after the first world war when the world was facing various economic difficulties. After Burma i.eMyanmar in the present day, withdrew itself from the Indian Union, the Reserve Bank of India stopped being the central bank of Burma in the year 1942. Later after the partition of India in the year of 1947, the Reserve Bank of India in the year of 1948 withdrew itself from being the central bank of Pakistan after the Bank of Pakistan’s operations commenced. In the year 1949, the Reserve Bank of India was nationalized and went under the ownership of the Government Of India. [4]
FEATURES OF THE ACT
The RBI Act of 1934 is the foundation for the RBI. The RBI functions mainly based on the act. Some of the features of this act are-
- The RBI Act of 1934 led to the establishment of the RBI as a central bank that is responsible for the credit and monetary policy of the country.
- The act mentions the constitution of the bank, and the appointment of governor and deputy governors, directors, and other employees.
- The act provides the powers and functions of the bank which include credit control, regulating inflation, and supervision of other commercial and noncommercial banks. It also gave the monopoly of notes issued to the RBI.
- The act mentions that the RBI is the banker to the government. It manages the public debts and accounts of the states and central government. It also acts as the financial advisor to the central government.
- The act has provided the central banking authority to RBI and has the sole authority to issue notes and to maintain the price stability of the country.
- The act gives the authority to supervise and regulate the banks and financial institutions to ensure stability. It also provides credit to banks and financial institutions.
- The act makes the central bank accountable to the government and the public. It has to submit annual reports and other reports like monetary policy reports and financial stability reports.
- The act made the RBI responsible for foreign exchange management and regulated the Foreign exchange market in India. It has to formulate policies related to its management and foreign exchange reserves.
IMPORTANT PROVISIONS OF THE ACT
Section 3 of the RBI Act – Establishment and Incorporation of Reserve Bank[5]
(1) A bank to be called the Reserve Bank of India shall be constituted to take over the management of the currency from the 1 [Central Government] and of carrying on the business of banking following the provisions of this Act.
(2) The Bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual succession and a common seal, and shall by the said name sue and be sued.[6]
Section 7 of the RBI Act – Management[7]
The section says that the central government after consultation with the governor of the RBI may provide directions in the case of public interest.
Section 8 of the RBI Act – Composition of Central Board, and term of office of Directors.[8]
This section deals with the composition of the central board of the bank, its responsibilities, and its term of office.
Section 9 of the RBI Act – local boards, their constitution, and functions[9]
The section deals with local boards. There are 4 local boards i.e., eastern, western, northern, and southern. Each board consists of 5 members who are appointed by the central government. They elect a chairman. Their tenure is for 4 years. They generally advise the Central Board.
Section 17 of the RBI Act – Business which the Bank may transact[10]
The department oversees the operation of the RBI. The RBI can accept interest-free deposits from the federal and state governments. It can purchase and restrict commercial bank bills of exchange. It can purchase foreign currency from banks and sell it to them. It can make loans to banks and state-owned corporations. It can make overtures to both the federal and state governments. It has the authority to buy and sell government securities. It can bargain in subordinate, repo, and inversion repo.[11]
Sections 22 to 29 of the RBI Act deal with the right to issue notes, their denominations, their legal tender, re-issue, recovery, and exemption of stamp duty on bank notes.
Sections 45Z to 45ZO of the RBI Act deal with the monetary policy of the RBI like its constitution, report, terms and conditions, eligibility, meetings, the inflation target, etc.
AMENDMENTS
- The Banking Regulation (Amendment) Bill, 2020 was introduced in the Lok Sabha in 2020. This bill amends the BR Act to strengthen the RBI’s supervisory authority for cooperative banks in terms of management, capital, audit, and liquidation. On September 14, 2020, the Bill was introduced in Lok Sabha. The Finance Minister emphasized the necessity for the Bill to protect depositors’ interests while proposing it, citing the Punjab and Maharashtra Co-operative (PMC) Bank crisis. The Bill repeals the Banking Regulation (Amendment) Ordinance, 2020, which went into effect on June 26, 2020. A Bill proposing identical modifications was presented on March 3, 2020, then withdrawn on September 14, 2020.[12]
- 2016 amendment: The Reserve Bank of India Act, 1934 (RBI Act) was changed by the Finance Act, 2016, to establish a legislative and institutionalized framework for a Monetary Policy Committee to ensure price stability while keeping growth in mind. The Monetary Policy Committee would be tasked with determining the benchmark policy rate (repo rate) necessary to keep inflation within the defined goal range. A committee-based approach to monetary policy determination will offer a lot of value and transparency to monetary policy choices. The Monetary Policy Committee shall convene at least four times each year, and its conclusions shall be published following each meeting.[13]
- The RBI Amendment Act of 2006 aims to modernize and reinforce the Reserve Bank of India’s (RBI) governance and operating structure. It made modifications to the Central Board of Directors constitution, the selection procedure for the Governor and Deputy Governors, and the delegation of functions. The amendment emphasized the necessity of the RBI’s decision-making process to be transparent and accountable. It also strengthened the RBI’s regulatory and supervisory authorities to handle developing banking and financial sector concerns. The RBI Amendment Act of 2006 sought to improve the efficacy and efficiency of the RBI’s operations in general.
CASE LAWS
- Internet and Mobile Association of India vs. Reserve Bank of India [14]
In 2018, the Supreme Court of India dealt with the matter of cryptocurrency trading along with the Reserve Bank of India’s (RBI) banking prohibition. The Court decided in favor of the petitioners, overturning the RBI’s circular prohibiting banks from dealing with virtual currencies. The decision acknowledged the significance of technical breakthroughs as well as the necessity for a balanced legal framework for cryptocurrencies. It emphasized the RBI’s lack of proportionality and asked the government and regulatory bodies to explore adequate steps to regulate India’s cryptocurrency business. [15]
- Roshan Alag vs. Reserve Bank of India[16]
Facts: The complainant, Shri Roshan Alag, filed an RTI application with the Central Public Information Officer (CPIO), Reserve Bank of India, Mumbai, seeking information on the ban on Rs. 5 and 10 coins bearing the image of ‘Mata Vaishno Devi’; who ordered the minting of these coins, the method of distribution of these coins in the market, and the immediate withdrawal of these coins from the market to avoid religious controversy among the people, among other things.
Held: The matter was heard by the Commission. Despite getting a hearing notification, the complainant did not appear. The CPIO delivered a point-by-point response to the complaint, according to the responses. In response to the complainant’s supplementary representation, the RBI notified the complainant that, under the provisions of the Coinage Act, 2011, all concerns concerning coin design, etc., are solely within the purview of the Government of India. Under Section 39 of the RBI Act 1934, the RBI’s responsibility is limited to placing coins into circulation as and when they are made available by the India Government Mints.[17]
- Bhavesh D. Parish and Ors. vs. Union of India (UOI) and Ors.[18]
Facts: The appellants are swindlers who provide credit to members of the general public. Over the last many decades, the typical method of arranging shroff business has been through partnership businesses. The nature of the appellants’ services mainly comprised establishing an account where the consumer may either deposit or withdraw money without security. The Shroff businesses were funded by capital contributions made by the partners/proprietors and deposits made by members of the public.
Held: It was held that the challenged Section 45-S in no way prohibits or restricts any unincorporated entity or individual from carrying on any business. It is permissible for unincorporated organizations to conduct financial transactions using their cash or monies borrowed from family or financial institutions. The prohibition imposed by Section 45-S on doing such activity using public deposits. Considering the constitutionality of the freshly amended Section 45-S of the Act utilising the principles laid out by this Court over the course of time, and as summed up in the passage stated in the earlier part of this judgement from the decision rendered by this Court in Papanasam Labour Unions Case , we say that the cited Section is not illegal or unlawful. Without a doubt, Section 45-S forbids the conduct of banking activity by an unincorporated non-banking company such as a shroff, but this limitation was designed to safeguard naive borrowers and depositors (from shroffs) from fiscal suicide.[19]
- Assistant Commissioner of Income Tax vs. AU Financier (India) Ltd.[20]
Facts: During the assessment proceedings, the AO received information that the assessee company had traded on NSEL through certain registered brokers. For various reasons, trading on the NSEL trading platform had ceased, and many traders’ outstanding receivable amounts remained unpaid. The High Court of Bombay established a committee, which initiated recovery actions, and certain amounts were recovered. Like other brokers/traders, the assessee-company assessee-company has claimed the outstanding sum as bad debts. The AO further determined that, under Section 45V of the RBI Act, NBFC entities are prohibited from dealing in derivative contracts unless the counterparty is a bank. Because the counterparty, in this case, was not a bank, the NBFCs operation was unlawful, limited, and opposed to public policy. As a result, the claim is likewise ineligible under section 37(1).
Held: It was held that the assessee company’s transactions are derivative in form, and the loss resulting from them is speculative, and hence cannot be set off against normal business revenue. Second, the speculative transactions are not following section 45V of the RBI Act, and hence cannot be accepted as an admissible deduction in the hands of the assessee-company under Explanation to section 37(1). [21]
- Rockland Leasing Ltd. vs. Reserve Bank of India and Ors.[22]
Facts: The appellant’s office is located in Delhi. Its objectives include, among other things, “undertaking finance, hire-purchase, leasing, and financing lease operations of all kinds.” The RBI contends that the appellant was conducting NBFC business as described as per Section 45-I(f) of Chapter III-B of the Act. As a result, the appellant was subject to the existing RBI guidelines governing such businesses, which included the NBFC (Reserve Bank) guidelines, 1997 as modified. The appellant sought to the RBI for a certificate of registration as an NBFC under Section 45-IA(2) of the Act. The RBI was able to inspect the records to determine whether the appellant met the requirements for such a registration under the provisions of Section 45B of the Reserve Bank of India Act. The appellant contended before the RBI that it had elected to preserve fee-based merchant banking activities while discontinuing financing operations and had ceased all fund-based operations as an NBFC. The RBI said that it would continue to follow RBI standards as long as the public deposits are not returned.
Held: The court held that the Company had been subject to RBI jurisdiction since its establishment and that it freely filed for registration following the change of the RBI Act. Because it had withdrawn the application, it cannot evade the strictures of the law. [23]
CONCLUSION
The reserve bank of India Act of 1934 has been one of the landmark developments that were made by the British. It was created to make sure that there is only one central bank that deals with both credit and currency to ensure stability in the economy. The act has established the RBI to maintain stability in the economy and to regulate credit and inflation. It was provided with many powers by the act to regulate the banks in India and ensure that there is no chaos created. As power gives many responsibilities, the act has also provided many responsibilities and duties that are to be performed by the RBI like issuing notes, regulating credit, submitting reports, monetary functions, etc. The RBI Act also provides all the limitations if the bank exploits its powers. The act has played an important role in shaping and transforming the financial and monetary system in India.
In this article, we learned about the background, features, and important provisions like sections 3, 8, 17, 20, etc., amendments, and various case laws that challenge the provisions of the act and the courts have clarified the laws. All these help us better in understanding the act better.
[1] Findlay Shirras, The Reserve Bank of India, vol. 44. The Economic Journal, 258-274, (1934), Available on: JSTOR https://www.jstor.org/stable/2224766 , last seen on 08/06/2023.
[2] Ibid. See pg 261
[3] Ibid. See pg 264 and 265
[4] What Are The Main Provisions Of Reserve Bank Of India Act, 1934, Law corner, Available at: https://lawcorner.in/what-are-the-main-provisions-of-reserve-bank-of-india-act-1934/, last seen on 10/06/2003.
[5] S. 3, The Reserve Bank of India Act, 1934
[6] Ibid .
[7] S. 7, The Reserve Bank of India Act, 1934
[8] S. 8, The Reserve Bank of India Act, 1934
[9] S. 9, The Reserve Bank of India Act, 1934
[10]S. 17, The Reserve Bank of India Act, 1934
[11] Supra 4.
[12]The Banking Regulation (Amendment) Bill, 2020, PRSIndia, available at: https://prsindia.org/billtrack/the-banking-regulation-amendment-bill-2020-1054#:~:text=The%20Banking%20Regulation%20(Amendment)%20Bill%2C%202020%20amends%20the%20BR,Sabha%20on%20September%2014%2C%202020., last seen on:12/06/2023
[13] Ministry of Finance, Government of India, Monetary Policy Committee constitution under the Reserve Bank of India Act, 1934 notified. Available on: https://pib.gov.in/newsite/printrelease.aspx?relid=151264,
last seen on:12/06/2023.
[14] Internet and Mobile Association of India vs. Reserve Bank of India, MANU/SC/0264/2020 (Supreme Court of India, 2018)
[15] Case Brief of Internet and Mobile Association of India Versus Reserve Bank of India, Bare Law https://www.barelaw.in/case-brief-of-internet-and-mobile-association-of-india-versus-reserve-bank-of-india/, last seen on 12/06/2023.
[16] Roshan Alag vs. Reserve Bank of India MANU/CI/0052/2015, (06.05.2015 – CIC)
[17] Ibid.
[18]Bhavesh D. Parish and Ors. vs. Union of India (UOI) and Ors.MANU/SC/0392/2000 (12.05.2000 – SC)
[19] Ibid.
[20] Assistant Commissioner of Income Tax vs. AU Financiers (India) Ltd. MANU/IJ/0248/2019, (07.01.2019 – ITAT Jaipur)
[21] Ibid.
[22] Rockland Leasing Ltd. vs. Reserve Bank of India and Ors.MANU/DE/2094/2002 (21.09.2002 – DELHC)
[23] Ibid.
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