Clause 2(iii) of Revised Guidelines on Merchanting Trade Transactions issued by RBI, passes muster under Articles 14, 19(1)(g) & 21 of Constitution: SC

Read Judgment: Akshay N. Patel vs. RBI & Another 

Pankaj Bajpai 

New Delhi, December 7,2021: The Supreme Court has opined that banning Merchanting Trade Transactions (MTTs) in PPE products was critical in ensuring that Indian foreign exchange reserves are not utilized to facilitate the hoarding of PPE products with wealthier nations. 

A mere ban on exports would not regulate the utilization of Indian foreign exchange, added the Court. 

A Larger Bench of Justice Dr. D.Y. Chandrachud, Justice B.V. Nagarathna and Justice Vikram Nath observed that in order to keep India’s policy position consistent across the board, the prohibition of MTTs in respect of PPE products was necessary and the only alternative of ensuring the realization of legitimate State interest. 

The observation came pursuant to an appeal challenging a judgment and order passed by the Madhya Pradesh High Court (Indore Bench), whereby it upheld Clause 2(iii) of the Revised Guidelines on MMT dated January 23, 2020 issued by the RBI (First Respondent) in exercise of its power u/s 10(4) & 11(1) of the Foreign Exchange Management Act,1999 (FEMA). 

Going by the background of the case, Akshay Patel (Appellant), being the managing director of a firm engaged in manufacturing & trading of pharmaceuticals and healthcare products like PPE kits, had obtained a contract to serve as an intermediary between the sales of PPE products by a supplier in China to a buyer in the United States. When he asked his bank seeking letter of credit to execute the MTT contract for the transaction, he was denied the same and was informed that the RBI had denied permission for the MTT contract in view of the export ban imposed by the Union Government on PPE Kits. 

After considering the arguments, the Top Court found that judicial evolution of a four-pronged analysis of proportionality displaces the varying standards that were prescribed to determine “reasonableness” under Article 19(6) of the Constitution. 

The qualitative nature of a right and the corresponding scrutiny of its violation cannot be a sole function of the degree of restriction, and every violation of rights, irrespective of the degree of the infraction, must be evaluated through a uniform principle that promotes a culture of justification, added the Court. 

“Allegations involving a violation of each of these rights are often considered independently and within the framework of their own prescribed limitation by the precedents of this Court. However, the substance of the enquiry behind each of the limitations under these Articles is similar to a proportionality analysis. In essence, the rights’ limitation is considered justified if it pursues a legitimate aim, has a rational nexus to the objective and there is a balance between the limitation of the right and the public interest which the rights-limitation aims to achieve”, observed the Larger Bench. 

The Larger Bench noted that the present case poses another issue, which is whether an integrated proportionality analysis can be undertaken for assessing the violation of all three rights. 

It is a settled principle that fundamental rights in Part III are not understood in silos, but as an inter-related enunciation of rights and freedoms that uphold the basic rubric of human rights, added the Bench. 

“In this case, the ban on exports, imports and MTTs of PPE products is to ensure the availability of adequate domestic supplies during a global health pandemic. Adequate stocks of PPE products are critical for the healthcare system to combat the COVID-19 pandemic. The State’s aim of ensuring supplies is in furtherance of the right to life under Article 21 and the Directive Principles of State Policy mandating the State’s improvement of public health as a primary duty under Article 47. The appellant has not challenged the legitimacy of this aim of ensuring adequate PPE in India”, observed the Bench.

Thus, speaking for the Bench, Justice Chandrachud held that the measure is enacted in furtherance of a legitimate aim that is of sufficient importance to override a constitutional right of freedom to conduct business. 

The RBI is responsible for issuing guidelines to authorized persons under FEMA and FEMA was introduced as an “Act to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India”, added Justice Chandrachud. 

Hence, the Larger Bench found that the role of the RBI under FEMA is directed towards ensuring that India’s foreign exchange market is regulated, with a view to preserving India’s foreign exchange reserves, and on a review of the guidelines which have been issued by the RBI in respect of MTTs since 2000, it is clear that most of them are technical in nature and seek to regulate the manner in which India’s foreign reserves are traded. 

Consequently, the RBI has not made the policy decision to classify products for which MTTs are impermissible but has opted to rely on the decision made by the UOI under the Foreign Trade Policy (FTP), added the Bench. 

Hence, the Apex Court concluded that the judgment 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.

Accordingly, Clause 2(iii) passes muster under Articles 14, 19(1)(g) and 21 of the Constitution, held the Bench.