Impact of India's Proposed Central Bank Digital Currency (CBDC)

Numerous signals have been emanating from the government and the RBI in the past several months to indicate the imminent launch of India’s Central Bank Digital Currency (CBDC). This includes the announcement last month that the Cryptocurrency and Official Digital Currency Bill, 2021 will be tabled for discussion in the ongoing session of the Indian parliament.

What is a CBDC?

In simple terms, it is the digital version of legal tender issued by a sovereign central bank. In terms of value, it is the same as the country’s fiat currency and is exchangeable with physical currency on demand. Thus, India’s CBDC will be denominated in Rupees. Like physical currency notes/coins, CBDC can be used by individuals and businesses as a store of value and to make payments for purchasing goods/services.


Why does India need a CBDC?

There are many reasons why countries will need their own CBDC systems. In India, interbank transactions and settlements already take place through the reserves individual banks maintain with the RBI, so there may not be much impact in this arena. However, in the retail segment, a bulk of the transactions still rely on physical cash and increasingly, on digital payment solutions. It is important to recognize that payment solutions such as those from Google, Amazon, Apple, or Paytm and Phonepe are all privately-owned and controlled; as such, their growing popularity does pose a risk to the country’s financial system.

For example, it is estimated that 94% of mobile payment transactions in China are processed on transactions owned by Alibaba or Tencent. As the companies behind these apps start to build “ecosystems”, more and more goods and services can be paid for through these apps. Such integration and breadth of usage can easily create a virtual stranglehold that has the potential to place at risk the entire financial system of a country; there could even be regional or global ripples. The launch of a CBDC is thus not just a digital payment system, but also a mechanism towards mitigation of major risks that are associated with an increasingly digital world.

Currently, all payment solutions in India, whether developed and deployed by fintech players, Big Tech or banks, run on the Unified Payments Interface (UPI) infrastructure built and managed by the National Payments Corporation of India (NPCI), which is jointly promoted by the RBI and the Indian Banks’ Association (IBA). That India’s payments backbone has never been in private hands reduces the level of risk to our financial system. Also, it must also be acknowledged that the NPCI has done a fabulous job so far. The month of October 2021 alone saw more than 4.2 billion transactions being processed through NPCI infrastructure. But it is important to keep in mind that the payment apps owned and managed by fintech and Big Tech companies are not under the direct regulatory supervision of the RBI because they are not licensed banks. A CBDC-based ecosystem will make the regulation of such apps and platforms easier and more effective- thus enabling a higher degree of consumer protection. 

There are other reasons too why an Indian CBDC will become a necessity sooner rather than later. Countries like China are already at an advanced stage of launching their versions of CBDC. Given global cross-border trade and investment flows and repatriation of funds by Indian diaspora overseas and tourist travel, it is only a matter of time before Chinese or other CBDC enter the Indian financial system. And as more countries launch their own CBDC, it is imperative that we have our own, so that we can negotiate from a position of experience (and strength) when it comes to agreeing on multilateral CBDC protocols.

A well-designed CBDC system reduces the threat of counterfeit currency- something that our adversaries have used over many decades to weaken our economy. Arguably, CBDC can also play an important role in the nation’s fight against corruption and black money- although much will depend on how it evolves and the operational rules and regulatory framework governing it.


CBDC: The Road Ahead

At this time, it is unclear when and how the government will choose to launch India’s CBDC. But it is fair to say that an entirely new digital currency ecosystem will be needed. It is likely that the RBI itself will cause to design, develop and run the CBDC infrastructure. There are also speculations that they would be regulated as financial assets by the Securities & Exchange Board of India (SEBI). Big Tech, fintech and banks will need to link their apps to this new infrastructure as well- assuming that over time, individuals will retain the option to pay via physical currency-backed UPI platforms or their CBDC cousins.

Since no regulator can compete with those it is tasked with regulating, the RBI may have to let financial intermediaries continue to take responsibility for the distribution of digital currency via e-wallets or other pre-paid digital instruments and similar solutions. This also means that fintech players, BigTech and retail banks will need to evolve their platforms and come up with innovative offerings to ride this new wave of opportunity. The road ahead will have its own challenges at both the policy and operational levels. The success of CBDC will also depend on how quickly internet access expands across the country and how resistant to hacking and breaches the underlying systems are.

Fasten your seatbelts and prepare for an interesting ride at the end of which, digital currency could be the crowned king. 


Image Credits:  Photo by Alesia Kozik from Pexels

At this time, it is unclear when and how the RBI will choose to launch India’s CBDC. But it is fair to say that an entirely new digital currency ecosystem will be needed. It is likely that the RBI itself will cause to design, develop and run the CBDC infrastructure


Bad Bank in India: A Concept Note

The Indian banking system has been grappling with the ballooning Non-Performing Assets (NPAs) crisis on its balance sheets for decades now. The pandemic marked a further downward spiral for the Indian economy; proving specifically detrimental to individual borrowers and large corporates across sectors, who were adversely affected by the cash flow in businesses which led to defaults in outstanding obligations. The consequential increase in the NPAs revived the discussions for institutionalizing an independent entity that would exclusively deal with the bad loans and help in cleaning up the NPAs off the balance sheets. As of March 2021, the total NPAs in the banking system amounted to Rs 8.35 lakh crore (approx). According to the Reserve Bank of India’s (RBI) financial stability report, the gross NPAs ratio for the banking sector could rise to 9.8% by March 2022.

Following India’s first-ever Bad Bank announcement in the 2021-22 Union Budget by the Finance Minister; India, Debt Resolution Company Ltd (“IDRCL”), an Asset Management Company (“AMC”) has been set up that shall work in tandem with the National Asset Reconstruction Company Ltd (“NARCL”) to streamline and square away bad loans as per the documents and data available with the Registrar of Companies (“RoC”).

Proposed Mechanism of Bad Bank in India

  • The Government of India (“GOI”) has primarily set up two entities to acquire stressed assets from banks and then sell them in the market.
  • The NARCL has been incorporated under the Companies Act, 2013. NARCL will buy stressed assets worth INR 2 lakh crore from banks in phases and sell them to buyers of distressed debt. NARCL shall also be responsible for the valuation of bad loans to determine the price at which they will be sold. Public Sector Banks (PSBs) will jointly own 51% in NARCL.
  • The IDRCL will be an operational entity wherein 51% ownership will be of private-sector lenders / commercial banks, while the PSBs shall own a maximum of 49%.

NARCL will purchase bad loans from banks and shall pay 15% of the agreed price in cash, and the remaining 85% in the form of Security Receipts. If the bad loans remain unsold, the government guarantee shall be invoked; a provision worth INR 30,600 crore has been structured for the same.

Benefits of Bad Bank in India

Since non-performing assets have majorly impacted Public Sector Banks, the institutionalization of a Bad Bank shall equip PSBs in selling / transferring the NPAs, while simultaneously improving and promoting credit quality, strategically minimizing efforts in loan recovery and enhancing the macroeconomy.

Additionally, the profits of the banks were mostly utilized to cut losses. With the NPAs off their balance sheets, the banks will have more capital to lend to retail borrowers and large corporates.

The issues faced by Asset Reconstruction Companies (ARCs) relating to the governance, acceptance of deep discount on loans, and valuation may not concern the Bad Bank, owing to the government’s initiative and support that engages appropriate expertise.


Challenges of Bad Bank

As per the operational structure, bad banks shall buy bad loans, that have been recorded in the books of the PSB’s or private lenders. If the institution fails to secure buyers and record appropriate prices for the assets, the entire exercise shall prove to be futile.

In India, 75% of the bad loans are defaulted corporate loans, including a consortium of banks that had loaned corporations to finance major infrastructure and industrial projects. Countries such as Mexico, Greece, South Korea, Argentina, and Italy have portrayed that bad banks rarely yield positive outcomes in settings dominated by industrial, corporate, and conglomerate-level bad loans. Hence, structural and governance issues at various levels with state governments, judiciary, and political interests shall have to be streamlined and implemented efficiently to steer away from making them a repository of bad loans and for cleaning up the books of the PSBs.

Bad Bank: A One-Time Exercise?

The Government of India will have to undertake appropriate reforms/lending norms to reduce the number of NPAs. Setting up Bad Bank is most likely to tackle only the existing NPAs problem and should be a one-time exercise.

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in the near future in the country.

Banks will get a huge financial boost with the transfer of the NPAs off their books and help in credit growth in the country. The success of Bad Bank is also crucial in restoring the faith of the taxpayer in the banking system. With the existence of the Insolvency and Bankruptcy Code, 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, it remains to be seen how a Bad Bank will be a complement in the resolution of the bad loans.


Image Credits: Photo by Visual Stories || Micheile on Unsplash

The concept of Bad Bank has been a success in certain European countries and the United States of America, however, it is pertinent to understand that they were structured to tackle home loans and toxic mortgages, unlike in India. Hence, in-depth analysis of the experiences of these countries should be utilized and intricately be revamped in alignment with key differences to ascertain the role of Bad Bank in near future in the country.


Protection of Family Assets in the Trying Times of COVID

When death hits closer to home, it is accompanied by an ancillary ramification apart from emotional and psychological distress – finances. Many families have had to confront this reality as the pandemic left a trail of deaths across the country. Apart from grappling with insurmountable pain, one is often saddled with time-bound financial formalities, asset management and planning.Family businesses have been gravely impacted due to the COVID situation and it has acted for a wake-up call for planning the protection of valuable assets. 

Financial planning is a step-by-step process that is designed to meet fiscal requirements at every milestone of one’s life. For instance, creating a fund for children’s education, investing in retirement planning etc. The aim is to build a corpus of sufficient funds over a period of 15-30 years of continued investment and planning, which enables one to sustain financial responsibilities in these events. Another aspect of asset planning is setting up a contingency fund, which is most relevant and crucial in the present scenario of sudden deaths and unanticipated health emergencies. 

Lack of a structured plan can lead the family into chaos which may further result in litigation, a scenario not alien to many unsuspecting families today. This article aims to assist you through this dilemma by constituting an exhaustive list of tasks and legal measures one can undertake to ease the workload and formalities in such circumstances.

Documents and Immediate Actions for Families

The first step should be the collection of all documents, essential for dealing with various government and financial institutions. If the deceased had conducted a majority of transactions online, it is essential to secure access to their online accounts, with account numbers and login passwords.

The second step is securing the death certificate. In India, all deaths have to be mandatorily registered within 21 days of demise. If the same is done within 21-30 days, a penalty of INR 25 is charged. The certificate has to be certified by the medical officer. After 30 days and up to a year, the joint director of statistics is authorized to issue the certificate. The application has to be filed with a fine of INR 50 and an affidavit. After a year, the certificate is only issued by an order of a first-class magistrate, an application form which has to be accompanied by a “cause of death” certificate, cremation certificate, and an affidavit. The death certificate is vital for every financial task that has to be conducted in pursuance of the asset and financial management of the deceased.

Once all the above-mentioned documents and details are organized and collected, one can move forwards with the following tasks;

  1. Try to find out if the deceased person made a Will while they were living. A Will exponentially eases the process of transfer of assets, since most of the confusion is put to rest.
  1. Next, the efforts must be directed towards assessing the deceased’s liabilities and loans (secured/unsecured). This includes home, vehicles, personal loans or credit card dues. In such cases, the first step should be informing the creditor about the demise. In case the borrower had a co-signor/joint debtor the latter shall repay the loans. In the case of a single borrower; if a Will is in place, the executor shall be responsible for settling the debts, in the absence of a Will, an administrator (typically the   is appointed by the court to repay the liabilities.
  1. The heirs or children of the deceased (if adults) can undertake a mature discussion about the distribution of assets. The family must try to unite to avoid litigation. If possible, appoint a trustworthy person to carry out the necessary legal obligations.
  1. Take stock of all the assets in the name of the deceased and make a list with the valuation. Even if the deceased made a Will but left out a property that they later acquired, the property will be distributed according to intestate laws. i.e., the personal law of the individual.
  1. When it comes to insurance, deposits in banks, and shares of the deceased, in most cases, nominees are appointed. Notify the financial institutions of the death of the person and make inquires for the procedure to be followed by the nominee.
  1. In the event of the demise of both parents, where are minor children involved, it is essential that a guardian be appointed for them. If not appointed by a Will, in the case of Hindus, a guardian may be appointed by the court.
  1. Hire a local attorney to advise you. Keep in mind that laws in India relating to succession are not uniform. Moreover, legal procedures to get the appropriate documentation differ from state to state. Hence, it is recommended to hire someone who is well-versed with the local laws of the state in which the deceased resided or where they owned property.

Future Planning for Protection of Assets of a Family Business

People usually start thinking about protecting their assets only once they reach their late 40’s and 50’s. The ongoing pandemic has been a much-needed reality check which has triggered the families and individuals to structure their assets and finances for unforeseeable circumstances, even young adults.

What can you do to protect your estate in your life so that your assets are distributed according to your wishes?


  1. Will: Having a Will in place would make your life as well as the life of your loved ones quite simple. There is no fixed format for a Will under the law. The only requirements for a valid Will according to the Indian Succession Act, 1925 are; it should be made by a sound adult, signed by them, and attested by two witnesses. It is recommended that an Executor be appointed in the Will to reduce hassles. It is not compulsory to register a Will. Probate is also required only if the Will is made in Bengal, Bihar, Orissa, and Assam and within the local limits of the ordinary original civil jurisdiction of the High Courts of Madras and Bombay or where the property of the deceased is situated in these areas.
  1. Trusts: A trust may be created during the lifetime of a person who is called the author/s It may be created with a written legal document through which the assets of the settlor are placed into a trust and trustees are appointed therein who manage these assets for the benefit of the settlor and the beneficiaries named in the Trust Deed. The settlor can also be one of the trustees or the managing trustee of the trust during their lifetime. This gives them control over their assets while they are still living. The biggest advantage of Trust is that it operates both during and after a person’s life.
  • A provision can also be made in the Trust Deed for the appointment of a guardian for minor children in case both the parents die. The Trust Deed may provide instructions regarding the administration of the property to take care of one’s children.
  • A written Trust Deed is signed by the Settlor, requires a minimum of two trustees and two witnesses. The trust may or not be registered; registration is required only if an immovable property is transferred to the trust.
  • When a settlor dies, the trustee pays the debts, files the tax returns, and distributes the assets of a deceased. Trusts are an effective estate planning tool if one wants to avoid the costs and hassles involved in obtaining probate. It is a quick and quiet procedure, preserving one’s privacy and done without any court interference.
  1. Guardianship: Where minor children are involved, it is very important to make provisions either in a Will or by Trust, for appointing a guardian for minor children in the event of a death. If one parent dies, then the other living parent becomes the guardian. If both parents die, then it is needed to mention who will be accorded guardianship. Failure to do so will involve the intervention of courts and various applicable laws given India’s pluralistic society. The need for an appropriate guardian is to provide for personal needs but to also ensure that any future assets to be inherited are protected during the period of minority.

How does Ownership of Assets Transfer after the Death of a Person?


There are two scenarios that are to be considered while determining the ownership of the assets after the death of a person:

  1. In case a person dies leaving a Will; or
  2. In case a person dies without leaving a Will

Where there is a Will

Leaving behind a validly executed Will is the most uncomplicated mode through which a property can pass to the next owner. If an Executor is appointed in the Will, they should apply for the probate of the Will where Probate is mandatory. Once a Probate is obtained, the Executor is responsible for paying off all the debts of the deceased, managing the expenses for all the properties, and distributing the assets to all the beneficiaries according to the Will of the Testator.

Where there is No Will

The ownership of the property will be determined by intestate succession i.e succession according to the personal law applicable to the deceased individual. The heirs will be determined in accordance with the religion of the intestate for example Hindus, Buddhists, Sikhs and Jains will be governed by the Hindu Succession Act, 1956, Muslims will be governed by the Mohammedan Law and all others will be determined by the Indian Succession Act, 1925.

What are the legal options available to the heirs of the deceased?

  • Letters of AdministrationSection 273 of the Indian Succession Act, 1925 provides for Letters of Administration which are granted by the court to the individual who volunteers to be the administrator with the consent of the legal heirs for the lawful distribution of assets of the deceased. The purpose of grant of Letters of Administration is only to enable the administrator so appointed by the court to collect/assimilate the properties of the deceased and to deal with the various authorities with whom the properties of the deceased may be vested or recorded and thereafter the same be transferred in the names of the successors in accordance with the law of succession applicable to the deceased. The administrator during the proceedings is required from time to time to file the accounts in the court with respect to the administration of the estate of the deceased.[1]
  • Succession Certificate: Succession certificate entitles the holder to inherit the moveable assets of the deceased and to make payment of a debt or transfer securities to the holder of certificate without having to ascertain the legal heir entitled to it. A Succession Certificate is not granted where Probate or Letters of Administration are mandatory to be obtained. The purpose of a succession certificate is limited in respect of debts and securities such as provident fund, insurance, deposits in banks, shares, or any other security of the central government or the state government to which the deceased was entitled.
  • Family Arrangement: Family arrangement resolves present or possible future disputes among family members ensuring equitable distribution of property among the family members.[2] In a Family arrangement, a member gives up all claims in respect of all the properties in dispute other than the ones falling to their share. The rights of all the others are recognised. Therefore, under a Family arrangement, members of a family may decide amongst themselves about the distribution of the property of the deceased. A Family arrangement would have to be appropriately stamped and registered. However, even oral arrangements are valid in the eyes of law.
  • Administration Suit: Order 20, Rule 13 of the Civil Procedure Code, 1908 deals with an administration suit that is filed by a person seeking administration of the estate of the deceased. It is resorted to when there is no amicable settlement of disputes amongst the family members of the deceased. Under the decree, distribution of the assets of the deceased amongst the heirs can be sought along with the administration. In an administration suit, the court takes upon itself the function of an executor or administrator and administers the estate of the deceased. The suit in its essence is one for an account and for application of the estate of the deceased for the satisfaction of the debts of all the creditors and for the benefit of all others who are entitled.
  • Partition: In the case of Hindus under the Hindu Succession Act, the co-parceners may claim for a partition of the property. Under the Mitakshara law, the partition of a joint estate consists of defining the shares of the coparceners in the joint property. Once the shares are defined there is a severance of the joint status. Therefore, all that is required for a partition to take place is a definite and unequivocal intention by a member of a joint family to separate himself from the family. An actual division of the property by metes and bounds is not necessary. It may be declared orally or by an agreement in writing or by instituting a suit for partition of the property in the court. The difference between family arrangement and partition is that any member of the family can enter a family arrangement, but partition can only take place between co-parceners.


Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession. Additionally, the time-consuming and tedious process for completing the transfer of assets when the courts get involved has also facilitated this shift in individual priorities.


[1] Ramesh Chand Sharma V/s State & Ors  (High Court of Delhi, Test. Cas. 66/2011, Date of Decision: 20.01.2015, Coram: Indermeet Kaur, J.)

[2] Kale & Others vs Deputy Director of Consolidation 1976 AIR 807

Image Credits: Photo by Matthias Zomer from Pexels

Not only have the consequences of the pandemic made protection of assets a top priority for most individuals but it has also encouraged people to ensure the protection of their assets through a Will or a Trust. The primary reason for this change in approach can be owed to India’s pluralistic society which sets limitations on estate and succession rights and adopts the regime of forced heirship in some cases of intestate succession.


Supreme Court lifts the RBI notification prohibiting banking services to Virtual Currency Business: Analysis

After providing the reference of more than 50 cases about legality of virtual currency from across the world in its 180-page-long judgement, the Supreme Court, on March 4th, 2020 lifted the RBI notification prohibiting banking services to Virtual Currency (VC) business.

‘Cryptocurrency’ means “a math-based, decentralised convertible Virtual Currency Protected by cryptography by relying on public and private keys to transfer value from one person to another and signed cryptographically each time it is transferred.”[1]

“‘Virtual currency (VC)’ as the name suggests is a digital representation of value that can be traded digitally and functioning as (1) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value, but not having a legal tender status.” [2]

On a global level, regulatory responses to cryptocurrency have ranged from a complete clamp down in some jurisdictions to a comparatively ‘light-touch regulatory approach.

Though cryptocurrency may not currently pose systemic risks, its increasing popularity leading to price bubbles raises serious concerns for consumer and investor protection and market integrity. The cryptocurrency eco-system may affect the existing payment and settlement system which could, in turn, influence the transmission of monetary policy.[3]

Brief facts:

It was in 2013, for the first time, RBI had noted and discussed the risks of the development of technology and VCs in its Financial Stability Report[4]. In the report, RBI had mentioned VCs as unregulated money and that regulators were studying the impact of the same.  A press release was thereafter issued by RBI on the potential impact and risks associated with VCs. Later that year newspapers reported about the first-ever raid in India by enforcement authorities on two Bitcoin firms.

On 01-02-2017, RBI again issued a Press Release[5] cautioning users, vendors and holders of VCs. Closely on the heels of the Press Release, the Ministry of Finance constituted an Interdisciplinary committee and the committee gave its report on 25-07-2017. The committee recommended issuing warnings to the general public that the Government does not support cryptocurrencies and those offering to buy or sell these currencies must stop such activities. However, it was clarified that there was no restriction on the use of blockchain technology.

RBI issued a “Statement on Developmental and Regulatory Policies[6]” followed by a circular[7] dated April 6, 2018,  directing the entities regulated by it (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them. It appears that at around the same time (April 2018), the Inter-Ministerial Committee submitted its initial report, (or a precursor to the report) along with a draft bill known as ‘Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019’.[8]

Challenging the said Statement and Circular and seeking a direction to the RBI not to restrict or restrain banks and financial institutions regulated by RBI from providing access to banking services to those engaged in transactions in crypto assets, these writ petitions were filed. The petitioner in the first writ petition is a specialized industry body known as the ‘Internet and Mobile Association of India’ which represents the interests of the online and digital services industry. The petitioners in the second writ petition comprise a few companies which run online crypto assets exchange platforms, the shareholders/founders of these companies, and a few individual crypto-assets traders.

After detailed analysis, the Hon’ble Supreme Court bench comprising of Hon’ble Justices R.F. Nariman, Aniruddha Bose, and V. Ramasubramanian set aside the impugned circular issued by RBI on “directing  the entities regulated by RBI (i) not to deal in virtual currencies nor to provide services for facilitating any person or entity in dealing with or settling virtual currencies and (ii) to exit the relationship with such persons or entities, if they were already providing such services to them.” [9]

There were two main issues raised before the Hon’ble Supreme Court.


  1. Whether RBI had the power to prohibit the activities of trading in VCs?


No power at all:

One of the major contention raised by the  Petitioners is that RBI has no power to prohibit VC as it is neither a  legal tender nor comes within the credit system of the country so as to enable RBI to act upon the power conferred in it. Also, that, it does not have any characteristics of money for RBI to have the power to regulate the same.  

RBI in its counter-argument agreed to the fact that VC does not satisfy with being acknowledged as currency, however, stated that VCs do not have any formal or structured mechanism for handling consumer disputes/ grievances. Further, due to its anonymity/pseudo-anonymity characteristic, it is capable of being used for illegal activities. Increased use of VCs would eventually erode the monetary stability of the Indian currency and the credit system. Therefore, RBI has every power to regulate and control the activities of trading in VCs.

With regard to the above contentions and arguments, the Supreme Court after analyzing opinions and definitions of various legislations observed that though VCs are not recognized as legal tender, they are capable of performing some or most of the functions of real currency. The statutory obligation that RBI has, as a central bank, is  (i) to operate the currency and credit system, (ii) to regulate the financial system, and (iii) to ensure the payment system of the country to be on track, would compel them naturally to address all issues that are perceived as potential risks to the monetary, currency, payment, credit and financial systems of the country. Therefore, anything that may pose a threat to or have an impact on the financial system of the country can be regulated or prohibited by RBI, despite the said activity not forming part of the credit system or payment system. and concluded that the users and traders of virtual currencies carry on an activity that falls squarely within the purview of the RBI.

If at all power, only to regulate:

Another contention made by the Petitioners was that, if at all RBI is conferred with any power it is only to regulate, but not to prohibit.  It was contended by petitioners that the power to prohibit something as res extra commercium was always a legislative policy and that therefore the same could not be done through executive fiat.  In support of its contention, the petitioners referred to the definition of the expression “payment system” under the Payment and Settlement Act and contented that VC Exchanges do not operate any payment system and that since the power to issue directions under Section 18 of the Payment and settlement systems Act was only to regulate payment systems, the invocation of the said power to something that did not fall within the purview of payment system was arbitrary.

RBI in its counter-argument stated that the impugned decision of RBI was legislative in character and was in the realm of an economic policy decision taken by an expert body warranting a hands-off approach from the Court.  

In this regard, the Supreme Court observed that the power of RBI was not merely curative but also preventive. Further, in any case, the projection of the impugned decisions of RBI as a total prohibition of activity altogether, might not be correct. The impugned Circular did not impose a prohibition on the use of or the trading in VCs. It merely directed the entities regulated by RBI not to provide banking services to those engaged in the trading or facilitating the trading in VCs. The fact that the functioning of VC Exchanges automatically got paralyzed or crippled because of the impugned Circular, was no ground to hold that it tantamounted to total prohibition.

Supreme court in this issue held that in the overall scheme of the Payment and Settlement Systems Act, 2007, it was impossible to say that RBI did not have the power to frame policies and issue directions to banks who are system participants, with respect to transactions that would fall under the category of payment obligation or payment instruction, if not a payment system. Hence, the argument revolving around Section 18 failed.

  1. If RBI has the power to deal with carrying out activities related to VCs, whether this impugned circular was a proper exercise of that power?

The second issue raised was regarding the mode of exercise of power and the court-tested its appropriateness and validity based on certain well-established parameters.

No application of mind

One of the major contentions by the petitioner was that RBI had not adequately applied its mind. However, SC was of the view that RBI had been brooding over the issue for almost five years without taking any extreme step. RBI had even issued a press release titled “RBI cautions users of Virtual Currencies against Risks”. Therefore, RBI could hardly be held guilty of non-application of mind.

Malice in law

Another contention made by petitioners was that the impugned Circular was a colorable exercise of power and tainted by malice in law, in as much as it sought to achieve an object completely different from the one for which the power was entrusted.

However, SC observed that in order to constitute colorable exercise of power, the act must have been done in bad faith and the power must have been exercised not with the object of protecting the regulated entities or the public in general, but with the object of hitting those who form the target. To constitute malice in law, the act must have been done wrongfully and wilfully without reasonable or probable cause which is not the case here. Hence, SC rejected the argument.

Violative of Article 19 and proportionality

The next ground of issue raised before the Supreme Court was on the basis of Article 19(1)(g) of the Constitution. It was contended by the Petitioners that since access to banking was the equivalent of the supply of oxygen in any modern economy, the denial of such access to those who carry on a trade which was not prohibited by law, was not a reasonable restriction, rather it was extremely disproportionate. It was further contended that the right to access the banking system was actually integral to the right to carry on any trade or profession and therefore legislation, subordinate or otherwise whose effect or impact severely impairs the right to carry on a trade or business, not prohibited by law, would be violative of Article 19(1)(g).

RBI raised two fundamental objections in this regard. The first was that corporate bodies/entities that had come up with the challenge were not ‘citizens’ and hence, not entitled to maintain a challenge under Article 19(1)(g). Secondly, there was no fundamental right to purchase, sell, transact and/or invest in VCs and that therefore, the petitioners could not invoke Article 19(1)(g).

The SC, however, objected to the contentions of RBI for two reasons namely, (i) that at least some of the petitioners are not claiming any right to purchase, sell or transact in VCs, but claiming a right to provide a platform for facilitating an activity of trading in VCs between individuals/entities who want to buy and sell VCs) which is not yet prohibited by law and (ii) that in any case, the impugned Circular does not per se prohibit the purchase or sale of VCs.

SC observed that, despite the fact that the users and traders of VCs are also prevented by the impugned Circular from accessing the banking services, the circular has not paralyzed many of the other ways in which crypto-currencies can still find their way to or from the market. It was further noted by the apex court that if a central authority like RBI, on a conspectus of various factors perceive the trend as the growth of a parallel economy and severs the umbilical cord that virtual currency has with fiat currency, the same cannot be very lightly nullified as offending Article 19(1)(g).

On the question of proportionality, the petitioners relied upon the four-pronged test summed up in the opinion of the majority in Modern Dental College and Research Centre v. State of Madhya Pradesh. These four tests were (i) that the measure was designated for a proper purpose (ii) that the measures were rationally connected to the fulfillment of the purpose (iii) that there were no alternative less invasive measures and (iv) that there was a proper relation between the importance of achieving the aim and the importance of limiting the right.

SC observed that the impugned circular was issued with the aim of prohibiting the trade in VCs. The object of hitting at trading in VCs was to ensure (i) consumer protection (ii) prevention of violation of money laundering laws (iii) curbing the menace of financing of terrorism and (iv) safeguarding of the existing monetary/payment/credit system from being polluted. However, in the process, it has hit VC Exchanges and not the actual trading of VCs, consequently, the volume of transactions in VCs (perhaps through VCEs alone) is stated to have come down.

SC further observed that at the time when the impugned Circular was issued, RBI had not obviously addressed many of the issues flagged by the writ petitioners. SC held that RBI failed to pass the test of proportionality due to the following reasons:

  • Even though RBI states that it can adversely impact its regulated entities, consumers, and the economy, RBI has not so far found, in the past 5 years or more, the activities of VC exchanges to have actually impacted adversely, the way the entities regulated by RBI function. Before taking any pre-emptive action against VCs, the RBI is required to show some semblance of any damage suffered to it or regulated entities. Since they don’t have any substantial evidence to show damage, RBI failed in the test of proportionality.
  • Secondly, despite coming out with various circulars, statements against cryptocurrency, RBI has consistently taken the stand that it has not prohibited VCs in the country. Therefore, RBI’s position is still murky.
  • Thirdly, the Government of India is unable to take a call despite several committees coming up with several proposals including two bills. It is also worthwhile to mention that the draft bills also take opposite stands where one bill tries to ban cryptocurrency while the other bill tries to regulate them.


In light of answering the final issue, SC held that petitioners are entitled to succeed, and the impugned Circular dated 06-04-2018 is liable to be set aside on the ground of proportionality.


It is only in the last leg that the apex court held against the respondent RBI and ordered to set aside the circular. The ruling was based on the reasons that- (i) RBI has failed to provide any empirical evidence to show that VCs have negatively impacted the banking sector or other entities regulated by the RBI; (ii) the inconsistencies in proposals made by Govt and; (iii) RBIs consistent position that they have not banned VC.

However, notably, this judgement lost the opportunity to answer crucial questions or take a definitive stand on cryptocurrency. The Court could take measures to legalize cryptocurrencies or direct the RBI to come up with more documentation and legal backing to ban the same.   

Even though this judgement held in favour of the cryptocurrency communities, we cannot conclude that that the apex court is for VC it in fact empowered RBI to regulate virtual currency clearly confirming the powers of RBI in this regard.

Till this judgement, RBI wasn’t very sure about whether it has the power to hit VC directly. With that dilemma, RBI issued this impugned (now banned) Circular by ring-fencing them.   This judgement now paves a way for RBI to take a decision on whether to completely ban VC or should it come up with alternate solution capable of dealing with virtual currencies for the stability of the financial system. Though the judgement set aside the RBI circular, it in fact empowered RBI to regulate and even ban VC’s in the future. You can now expect some fresh regulatory steps from RBI or from the government.   

This judgment lost the opportunity to answer crucial questions or take a definitive stand on cryptocurrency. The Court could take measures to legalize cryptocurrencies or direct the RBI to come up with more documentation and legal backing to ban the same.   


Budget Proposal to Boost Non-Banking Financial Companies

The looming crisis concerning Non-Banking Financial Companies (NBFC) necessitated some quick action on the part of the government to stabilize the shaking consumer confidence on the shadow banking sector. Although scholars are still confident of the sector’s performance as a whole but delayed disbursement caused by a liquidity crunch was seen as a cause of concern that required quick redressal to attain balance.

The liquidity crunch is not a recent development, it started affecting NBFCs, especially micro-finance institutions, in the aftermath of demonetization as these institutions basically catered to the financial needs of the lower section of the society which had to bear the major brunt of the currency deficit. The situation further worsened with increasing bank NPAs and the recent payment defaults by leading infrastructure finance companies. Non-Banking Finance Company-Microfinance Institutions (NBFC-MFIs) hold the largest share of the portfolio in micro-credit with the total loan outstanding of ₹68,868 crore, which is 36.8 percent of the total micro-credit universe.[i]

In a bid to lower the NBFC liquidity crisis, the Central Government in its Budget 2019-20 announced that, “NBFCs are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment. NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse. For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees one lakh crore during the current financial year, Government will provide one time six months’ partial credit guarantee to Public Sector Banks for first loss of up to 10%.[ii] Thereby the Union Budget has enhanced the liquidity to financially sound NBFCs.

The NBFC situation had worsened because of increased dependence on easy money by the banks which declined after the Infrastructure Leasing and Financial Services Ltd debacle and the fact that these entities are loosely regulated. The Central Government, therefore, proposed to increase RBI’s oversight on these entities through the following changes to the ‘NBFCs’s regulations in its Finance (No.2) Bill, 2019(“Bill 2019”)[iii].


Net Owned Fund:

At present no NBFC can commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration and having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the RBI may, by notification in the Official Gazette, specify.

The Bill 2019 proposed to increase the upper limit to a hundred crore rupees. Further, the RBI may notify different amounts of net-owned funds for certain categories of NBFCs. This change will enable RBI to notify a higher minimum net-owned fund requirement for an NBFC.

Debenture Redemption Reserve:

Ms. Nirmala Sitharaman, the Finance Minister, in her budget speech mentioned that NBFCs that do the public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and in addition, a special reserve is also required to be maintained as per the RBI. The Budget 2019-20 relaxed the mandate of having DRR by NBFCs for raising the funds in public issues. However, the reference of the same is not provided in Bill 2019.

Change in Board of Directors:

Further, the Bill, 2019 has granted the power to RBI to remove the directors of NBFCs where it is satisfied that the affairs of the NBFCs are in a manner detrimental to the public interest. However, the RBI is required to grant an opportunity to the director to represent himself before an order is passed against him. Further, the RBI has the power to appoint a new director in the place of the director removed.

 Supersede the Board:

RBI is authorized to supersede the Board of Directors of an NBFC, not exceeding five years, to prevent the affairs of an NBFC from being conducted in a manner detrimental to the public interest or the interest of the depositors or creditors or interest of the NBFC (other than Government Company) or for securing the proper management of such NBFC or for financial stability, if it is necessary so to do.

 Removal of Auditor:

RBI is empowered to remove or debar an auditor from exercising the duties as auditor of any of the RBI regulated entities for a maximum period of three years, at a time,  in case the auditor fails to comply with any direction given or order made by the RBI.

Currently, ICAI Council has the power to debar its members from audits with or without directions from any authority. However, with this change, RBI is also vested with the power to debar auditors.

Scheme for Amalgamation and/or Reconstruction:

 RBI may frame a scheme for amalgamation and/or reconstruction of NBFCs with any other NBFCs and/or splitting of the NBFCs into different units or institutions and vesting viable and non-viable businesses in separate units or institutions to establish Bridge Institutions.

“Bridge Institutions” mean temporary institutional arrangement made under the scheme, to preserve the continuity of the activities of NBFCs that are critical to the functioning of the financial system.

Once RBI frames the scheme it is understood that the Companies will have to adopt the NCLT Process to obtain necessary orders.


Information of Group Companies:

RBI is empowered to seek statements and information relating to the business or affairs of any group company of NBFCs where it considers necessary or expedient to obtain. Further, the bank may cause an inspection or audit of any Group Company.

“Group Company” shall mean an arrangement involving two or more entities related to each other through any of the following relationships, namely: –

(i) subsidiary- parent (as may be notified by the RBI in accordance with Accounting Standards);

(ii) joint venture (as may be notified by the RBI in accordance with Accounting Standards);

(iii) associate (as may be notified by the RBI in accordance with Accounting Standards);

(iv) promoter-promotee (under the Securities and Exchange Board of India Act, 1992 or the rules or regulations made thereunder for listed companies);

(v) related party;

(vi) common brand name (that is usage of a registered brand name of an entity by another entity for business purposes); and

(vii) investment in equity shares of twenty percent. and above in the entity.


The penalties/fine for non-compliance under various provisions has also been increased as follows:

Sl. No.

Description of the Penalties

Existing Amount of Penalty/Fine

Proposed revision of the Penalty/Fine amount


If any person fails to produce any documents or any books.

Fine of Rs. 2000/- for each offence and Rs. 100/- per day where failure is continuous.

Fine of Rs. 100000/- for each offence and Rs. 5000/- per day where failure is continuous.


Non-Compliance of Section 45IA (1) of the RBI Act, 1934.

Maximum fine of Rs. 500000/- along with imprisonment.

Maximum fine of Rs. 2500000/- along with imprisonment.


Failure by the Auditor to comply with any direction given or order made by the RBI.

Maximum Fine of Rs. 5000/-

Maximum Fine of Rs. 1000000/-


Person who fails to comply with any direction given or order made by the RBI.

Fine of Rs. 50/- per day during which non-compliance continues.

Fine of Rs. 5000/- per day during which non-compliance continues.


Any person guilty of non-compliance with the provisions of NBFCs.

Fine upto Rs. 2000/- and Rs. 100/- per day during which non-compliance continues.

Fine upto Rs. 100000/- and Rs. 10000/- per day during which non-compliance continues.


With high-risk entities such as small and medium enterprises (SMEs), real estate developers, and auto manufacturers majorly relying on NBFCs for their funding requirements, it is crucial that they are effectively managed to reduce the chances of them slipping into a major crisis. The proposed changes to the NBFC’s regulations are endeavoured to provide liquidity as well as increasing their commitment as reliable lenders. Sound implementation of these measures is vital to bring back the NBFC sector to a solid ground

With high risk entities such as small and medium enterprises (SMEs), real estate developers and auto manufacturers majorly relying on NBFCs for their funding requirements, it is crucial that they are effectively managed to reduce the chances of them slipping into a major crisis. The proposed changes to the NBFC’s regulations are endeavoured to provide liquidity as well as increasing their commitment as reliable lenders.