The High Court of Bombay dismissed a PIL challenging the Market Stabilization Scheme. The court held that funds under the scheme are part of the Consolidated Fund of India, no specific audit is mandated by statute, and the MOU falls outside Section 21 of the RBI Act. The Court deferred on economic policy matters under Article 226.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
CIVIL APPELLATE JURISDICTION
PUBLIC INTEREST LITIGATION NO.40 OF 2008
Raghunath Shankar Kelkar Aged 52 years, occupation agriculture, residing at 250, Sadashiv Peth, Pune 411 030.
..Petitioner.
Vs.
Mumbai 400 001.
..Respondents.
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Mr. S.H. Aney, Senior Advocate i/b Mr. R.S. Patil for the Petitioner. Mr. R.B. Raghuvanshi, Additional Solicitor General with Mr. A.C. Singh and Mr. Afroz Shah i/b H.P. Chaturvedi for Respondent No.1. Mr. Virendra Tulzapurkar, Senior Advocate with Mr. Nikhil Sakhardande i/b M/s. Udwadia & Udeshi for Respondent No.2.
CORAM: SWATANTER KUMAR, C.J. & DR. D.Y. CHANDRACHUD, J.
24th March, 2009.
JUDGMENT (PER.DR.D.Y. CHANDRACHUD, J.) :
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and exchange rate management. In a fully floating exchange rate regime, the exchange rate would adjust itself in accordance with demand and supply conditions in the forex market, obviating the need for intervention by the central bank. However, when huge forex inflows are expected, such as in an emerging economy like India, it may well happen that the exchange rate may appreciate significantly, though an appreciation may not automatically restore equilibrium in the balance of payments. While as a matter of practice, central banks in all countries intervene in the forex market, in emerging economies, a more intensive approach is warranted in the context of large inflows. Such an intervention is founded on shared experience because in emerging markets like in India, capital inflows are relatively more volatile; driven by sentiment and not necessarily related to fundamentals of markets. Volatile inflows are liable to pose a substantial risk to the economy. Whenever the Central Bank intervenes in the forex market, domestic liquidity is created. The market based approach which is aimed at neutralizing a part or the whole of the liquidity impact of forex market intervention is called 'sterilization'. The Central Bank has to determine the extent of forex
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market intervention; a consequent build up of reserves; whether to sterilize and, if so, to what extent. A policy response has to be viewed as a package encompassing exchange rate policy, level of reserves, interest rate policy and considerations relating to domestic liquidity, financial market conditions and the degree of openness of the economy. The report of the Working Group concluded with a recommendation that the Government of India may issue Market Stabilization Bills / Bonds (MSBs) for mopping up liquidity from the system. The amounts so raised should, the Group recommended, be credited to a fund created in the Public Account and the fund should be maintained and operated by the Reserve Bank in consultation with Government.
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entered into between the Government of India in the Ministry of Finance and the Reserve Bank for the introduction of the Market Stabilization Scheme (MSS). The Scheme essentially constitutes an instrument of sterilization and follows a market based approach. Clause 1 of the Scheme provides as follows :
“1. The Government may issue Treasury Bills and /or dated securities in addition to their normal market borrowing programme for absorbing liquidity from the system.”
Clause 2 envisages that the Government, in consultation with the Reserve Bank, is to fix an annual aggregate ceiling for Treasury Bills and/or for dated securities that may remain outstanding at any point of time. For the financial year 2004-05, the ceiling was to be Rs.60,000 Crores, while for subsequent years, limitations were to be mutually
agreed upon between the Government and the Bank. Clause 5 provides that within the ceiling the Bank has to decide the amount, tenure, modalities and timing of the issue of Treasury Bills and/or dated securities. Clause 8 provides that the amounts raised shall
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form a part of the Consolidated Fund of India and shall be credited to and held in a separate identifiable cash account, titled the 'Market Stabilization Scheme Account'. The account is to be maintained and operated by the Bank at its Central Accounts Section at Nagpur. Clause 9 of the Scheme expressly stipulates that amounts credited to the account shall be appropriated for redemption and for buy back of Treasury Bills and/or dated securities issued under the Scheme. Clause 9 is to the following effect :
“9. The amounts so credited into the MSS Account shall be appropriated only for the purpose of redemption and/or buy back of the Treasury Bills and /or dated securities issued under the MSS. The Government is aware that the purpose of issuing these Treasury Bills and/or dated securities namely, market stabilization, would be defeated if the amounts in the said MSS Account are appropriated for any other purpose or expenditure and as such, undertakes not to appropriate or initiate any step to appropriate the amounts in the MSS Account except for the purpose of redemption and/or buy back of the Treasury Bills and/or dated securities issued under the MSS.”
Clause 10 of the Scheme provides that payment on account of interest and discount shall not be made from the MSS Account.
Similarly, receipts due to premium or accrued interest shall not be credited to the Account. Such receipts and payments have to be
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shown in the budget and its related documents as distinct components under separate sub-heads. Upon maturity of the Treasury Bills and/or dated securities, the Bank is to initiate redemption and Government is to take such steps as are required under law to appropriate amounts from the MSS Account for the purpose of redemption.
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law and for the purpose and in the manner provided in the Constitution. Article 112 provides for expenditure to be charged on the Consolidated Fund. Sub clause (g) of Clause 3 of Article 112 permits Parliament by law to charge any other expenditure. The submission is that the Memorandum of Understanding to the extent that it creates a charge on the basis of the Market Stabilization Scheme bonds on the Consolidated Fund, not being a Law of Parliament under Article 112(3) is unlawful.
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(Budget) in the Department of Economic Affairs of the Union Ministry of Finance in which it has been specifically stated that though the proceeds of the Scheme are kept immobilized in a separate account with the Reserve Bank, they are not outside the Consolidated Fund of India. Borrowing and repayment under the MSS is accounted for in Statement I – Consolidated Fund of India – Capital Account – Receipts and Disbursement in the Annual Financial Statement of the Central Government presented to Parliament. The affidavit further clarifies that :
“(j) The estimated outstanding liabilities in respect of market loans and treasury bills under MSS are reflected in Annex 3: Statement of Liabilities of the Central Government in the Central Government (Receipts Budget). Servicing of MSS borrowings is also reflected in the estimates under Appropriation Nos.34 (Interest Payments) and 37 (Repayment of Debt) in Expenditure Budget Volume II.”
Similarly, the affidavit that has been filed on behalf of the Comptroller and Auditor General clarifies the position thus :
“The amount raised/disbursed under MSS is held as receipt/disbursement in the Consolidated Fund of India below the Minor Head “Market Stabilization Scheme” under the Major Head “6001 – Internal Debt of Union Government” by Debit / Credit to Major Head '8675 –
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Reserve Bank Deposits' and the interest thereon is booked under major Head 2049/0049.”
the Court the Receipts Budget and the Expenditure Budget for 2008-
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though they are kept immobilized in a separate non-interest bearing account, do not lie outside the Consolidated Fund. The borrowings under the Market Stabilization Scheme are stated to be fiscal deficit neutral as the amounts raised are not used for the normal expenditure of the Government, but are kept immobilized in a separate noninterest bearing account with the Reserve Bank, but as part of the Consolidated Fund of India. The interest paid on such borrowings do add to the fiscal, deficit as the expenditure of the Government of India. At this stage, it would also be material to extract from the relevant part of the affidavit filed by the Reserve Bank of India which reads as follows :
“The MSS account forms part of the Consolidated Fund of India, hence even assuming for the sake of argument that the funds collected from the sterilization of liquidity by MSS, are deemed to be borrowings as contemplated in Article 266 of the Constitution of India (COI), these borrowings / loans are made / raised on the security of the CFI, in accordance with the requirements of the Article 292 of the COI. In any event the funds raised from the sterilization of liquidity by MSS are only to be used for the purpose of redemption and /or buy back of the treasury bills and /or dated securities issued under MSS. These funds are not invested and are kept immobilized in RBI's Central Accounts Section in Nagpur, otherwise the very purpose of the scheme to sterilize excess liquidity would be defeated. In other words, since the funds raised through MSS are immobilized, these funds per se do not impact upon the
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fiscal deficit of the Central Government. The whole purpose is to manage the liquidity and therefore the funds cannot be invested, as this would defeat the very purpose of the policy. “
There is, for the aforesaid reasons no merit in the submission.
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Market Stabilization Scheme form part of the Consolidated Fund of India and are hence, deemed to be audited by the Comptroller and Auditor General.
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our view detract from what has been stated in the affidavit filed on behalf of the Comptroller and Auditor General. The affidavit discloses that under Section 23 of the Act the scope and extent of audit is determined by the Comptroller and Auditor General and that the accounts of the Ministry of Finance as well as the appropriation account of the Government of India are audited at regular frequency by the Comptroller and Auditor General. The timing, scope and extent of audit are all matters which fall within the jurisdiction of the Comptroller and Auditor General and this is certainly not a matter on which the Court ought to tread. There is neither a constitutional nor statutory dereliction of duties by the Comptroller and Auditor General and it is undoubtedly for the Comptroller and Auditor General to consider whether and if so to what extent a specific audit should be undertaken.
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Reserve Bank of India Act, 1934 and that under sub section (4) such an agreement was required to be laid before Parliament. It has been urged that there has been a breach of the statutory obligation to do so. Sub section 1 of Section 21 provides that the Central Government shall entrust the bank, on such conditions as may be agreed upon, with all its money, remittance, exchange and banking transactions in India, and in particular, shall deposit free of interest all its cash balances with the bank. Similarly, under sub section (2) the Central Government shall entrust the bank on such conditions as may be agreed upon, with the management of the public debt and with the issue of any new loans. Sub section (4) provides that any agreement made “under this Section” shall be laid before Parliament. The Memorandum of Understanding that has been entered into between the bank and the Central Government is not referable either to the provisions of sub section (1) or sub section (2) of Section 21.
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the country in the light of the depletion in the Currency and Gold Revaluation Account of the Reserve Bank and the interest paid on the Scheme over the years and to file a detailed report before this Court or to the President of India for laying before the House of Parliament. We do not consider it appropriate that any such direction should be issued by this Court in the exercise of its jurisdiction under Article 226 of the Constitution, particularly in the context of a public interest petition. Apart from this, it would be necessary to advert to the affidavit filed by the Reserve Bank of India in which it has been averred that although the net depletion as on 30th June, 2007 transferred to the Currency and Gold Revaluation Account was Rs.65,065.66 Crores, the Petitioner had omitted to state that the net accretion transferred to the Currency and Gold Revaluation Account as on 30th June, 2006 is Rs.59,882.97 Crores. Pertinently, according to the Bank, liquidity sterilization operations under the Market Stabilization Scheme were in existence during both the above mentioned dates. Hence, according to the Reserve Bank, equating the depletion in the Currency and Gold Revaluation Account to the Market Stabilization Scheme would be inappropriate. The Reserve
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Bank has also pointed out that in the report of its auditors, the depletion in the Currency and Gold Revaluation Account has been attributed to the depreciation of the US $ against the Indian rupee calculated on an increased level of foreign currency assets during 2006-07.
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such a petition it would be inappropriate for the Court either to supplant the role and functioning of a constitutional authority or to substitute its judgment for the policy making authority or the discretion of a constitutional functionary. Litigation instituted in the public interest is directed towards ensuring governance in accordance with constitutional and statutory mandate. Public interest litigation cannot provide an avenue for substituted governance nor can the Court, in a democratic set up governed by separation of powers assume to itself the task of governance which the Constitution leaves to elected representatives or to expert bodies who are accountable to the collective wisdom of the legislature. The role of the Court is directed towards ensuring that the process of governance accords with the parameters which are laid down by the Constitution and by governing statutory requirements. Once the Court is satisfied that this has been so, there must be an element of deference particularly in matters involving technical expertise or policy making functions, upon which there is a conferment of power to constitutional or statutory authorities. That leads to the second facet of the matter. The consistent thread which underlies our constitutional jurisprudence is
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that in matters involving economic policy the Court must recognize that there is a wide area of discretion which rests in the executive. Both in the enunciation and in the implementation of economic policy the issues which arise – complex as they may be – are generally not amenable to the application of judicial standards. The law recognizes that there is a large field open for experimentation and for modification of policy in the light of experiences gained and perhaps from the failures reported. Dealing with economic problems cannot be a matter of scientific exactitude. There are successes achieved and, perhaps, failures despite good faith decisions. These in a democratic society are subject to accountability – accountability of the expert functionaries to Government and accountability of Government to Parliament and the people. Judicial learning over the last six decades which defers to the decisions that the Government may take in matters of economic policy is therefore based on a strong foundation. In approaching this case we have borne in mind both of these facets. It has become necessary for the Court to advert to them if only because there is a growing belief that every ill that plagues society can be brought before the Court in the form of a public interest
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petition. Moreover, rapidly changing economic circumstances and the complex problems of the day are liable to give rise to the belief that the Courts should intervene. The jurisdiction of the Court is exercised where there is a breach of a constitutional or statutory prescription. Absent such a breach the exercise of administration should be left to where it is intended to belong in a democratic set up based on the separation of powers.
CHIEF JUSTICE
DR. D.Y. CHANDRACHUD, J.
3 issues framed by the court
Whether the Court can direct the Reserve Bank to transfer funds held in the Market Stabilization Scheme Account to the Consolidated Fund of India.
Whether the Comptroller and Auditor General is under a statutory obligation to conduct a specific audit of the Market Stabilization Scheme and the Currency and Gold Revaluation Account.
Whether the Memorandum of Understanding regarding the Market Stabilization Scheme violates the provisions of the Reserve Bank of India Act, 1934.
Raghunath Shankar Kelkar
Union of India
Reserve Bank of India
Dr. Y. Venugopal Reddy
Comptroller & Auditor General of India
Swatanter Kumar
Dr. D.Y. Chandrachud
As recorded by the court registry
Litigation brought on behalf of the public interest rather than a personal grievance, relaxing the usual rule of locus standi.
Judgements on the same questions, provisions and authorities, from every court
