Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

Civil Appeal No. 6522 of 2021

Akshay N Patel ...Appellant

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Versus

Reserve Bank of India & Anr. ...Respondents

1
 JUDGMENT

Dr Justice Dhananjaya Y Chandrachud, J

This judgment has been divided into sections to facilitate analysis. They are:
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A Factual background

B Submissions

C A Proportionality Analysis

C.1 Legitimacy

C.2 Suitability

C.3 The necessity of the measure

C.4 Balancing fundamental rights with State aims

C.4.1 Regulatory Role of the RBI

D Conclusion

2
 PART A

A Factual background

1 The appeal arises from a judgment and order dated 8 October 2020 of a

Division Bench of the High Court of Madhya Pradesh at its Bench at Indore. The

High Court upheld Clause 2(iii) of the Revised Guidelines on Merchanting Trade

Transactions1 dated 23 January 20202 issued by the first respondent, Reserve Bank
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of India3, in the exercise of its power under Section 10(4) and 11(1) of the Foreign

Exchange Management Act 19994.

2 The appellant is the managing director of a firm that manufactures and trades

in pharmaceuticals; herbal and skincare products; and personnel protection

equipment products such as masks, gloves, sanitisers, PPE overalls, and

ventilators5. The genesis of the case lies in an international MTT contract which the

appellant obtained to serve as an intermediary between the sale of PPE products by

a supplier in China to a buyer in the United States. In accordance with the 2020 MTT

Guidelines, the appellant wrote to his authorised bank on 1 May 2020 requesting

documents (such as a letter of credit) that were required to execute the MTT

contract. The bank informed the appellant on 4 May 2020 that RBI had denied

permission for his MTT contract, on the basis of Clause 2(iii) of the 2020 MTT

Guidelines. Clause 2(iii) is reproduced below:

1
“MTT”
2
“2020 MTT Guidelines” - RBI/2019-20/152: A.P. (DIR Series) Circular No 20
3
“RBI”
4
“FEMA”
5
Collectively, they are being referred to as “PPE products”

3
 PART A

“iii. The MTT shall be undertaken for the goods that are
permitted for exports/imports under the prevailing Foreign
Trade Policy (FTP) of India as on the date of shipment. All
rules, regulations and directions applicable to exports (except
Export Declaration Form) and imports (except Bill of Entry)
shall be complied with for the export leg and import leg
respectively.”

At the relevant time, the export of PPE products had been banned by the second
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respondent, the Union Ministry of Commerce and Industry and the Directorate

General of Foreign Trade6, through successive notifications dated 8 February 2020,

25 February 2020 and 19 March 2020, due to the ongoing COVID-19 pandemic.

Therefore, MTT contracts concerning PPE products were considered impermissible

under Clause 2(iii) of the 2020 MTT Guidelines.

3 Upon receiving the communication from his bank, the appellant wrote an

email to the Ministry of Commerce and DGFT on 12 May 2020, stating that under his

MTT contract, there was no actual export of PPE products from India. The appellant

claimed that he was only serving as an intermediary in a trade between two other

nations. Hence, he requested the Ministry of Commerce and DGFT to issue a

notification/clarification/circular exempting MTT contracts in relation to PPE products

from the requirements of Clause 2(iii). However, the appellant received no response.

The appellant then filed a writ petition7 under Article 226 before the Madhya Pradesh

High Court. The writ petition set up a case that Clause 2(iii) of the 2020 MTT

Guidelines is unconstitutional since it violates the appellant’s right to carry on

6
“Ministry of Commerce and DGFT”
7
Writ Petition No 7902/2020

4
 PART A

business under Article 19(1)(g) and the right to life and livelihood under Article 21 of

the Constitution.

4 In its reply before the Madhya Pradesh High Court, the RBI stated that the

Union of India8 had prohibited the export of PPE products from India by issuing

multiple notifications under Section 3 of the Foreign Trade (Development &

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Regulation) Act 19929, through which it amended the Foreign Trade Policy 2015-

202010. Hence, in accordance with Clause 2(iii) of the 2020 MTT Guidelines, MTT

transactions concerning PPE products were also prohibited since they allowed

Indian individuals to assist others in diverting PPE products away from India in the

global market. Further, it was clarified that Clause 2(iii) was of a general nature, and

the RBI had no jurisdiction to exempt products from its application, since only the

UOI determined the nation’s FTP.

5 By its judgment dated 8 October 2020, the High Court dismissed the writ

petition. In upholding the constitutionality of Clause 2(iii) of the 2020 MTT

Guidelines, the High Court held that: (i) Clause 2(iii) only prohibits MTTs for goods

that cannot be imported/exported into India. The provision is general in its

application and does not specifically prohibit MTT in PPE products; (ii) the decision

to modify the FTP to prohibit import/export of goods is a policy decision of the

Ministry of Commerce and DGFT under the Foreign Trade Act; (iii) the Ministry of

Commerce and DGFT prohibited the export of PPE products due to the COVID-19

8
“UOI”
9
“Foreign Trade Act”
10
“FTP”

5
 PART B

pandemic, and consequently, MTTs are also prohibited under Clause 2(iii); and (iv)

apart from the fact that the goods do not physically enter Indian territory, an MTT

has all the trappings of an import/export transaction. Further, it involves India’s

foreign exchange. Hence, its regulation needs to be in conformity with the FTP set

by the UOI.
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B Submissions

6 Mr Aayush Agarwala, learned Counsel for the appellant submitted that:

(i) Clause 2(iii) of the 2020 MTT Guidelines prohibits MTTs for goods whose

import/export is banned in India, which results in an absolute prohibition.

This violates Articles 14, 19(1)(g) and 21 of the Constitution;

(ii) The RBI has provided no cogent reason why it has linked the ban on

MTTs completely to India’s FTP, instead of independently deciding it under

FEMA, since the objective while prohibiting goods under the FTP may not

be fulfilled by also prohibiting MTTs. This is true in the present case,

where the export of PPE products was banned to preserve stocks in India

during the COVID-19 pandemic; however, MTTs in PPE products do not

affect domestic stocks because the goods traded are from outside of India.

Therefore, Clause 2(iii) is manifestly arbitrary and violates Article 14;

(iii) There is no entry into or exit of goods from the borders of India in an MTT

and the Indian entity only serves as an intermediary in a transaction

between two foreign countries. Hence, the appellant’s MTT in relation to

6
 PART B

PPE products would not affect the quantity of PPE products in India during

the pandemic, and is not a reasonable restriction. Pertinently, courts

should consider the reasonableness of a policy more carefully when it

results in an absolute prohibition;

(iv) Further, lesser intrusive policies are possible, such as the following:

a. The RBI can independently decide whether to prohibit an MTT for each
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product whose import/export has been banned under the FTP. This can

be done by delinking the prohibition on MTT with the prohibition under

the FTP;

b. The RBI can prohibit MTTs only for goods whose import has been

prohibited since the lack of import into India highlights a policy concern

in relation to that product. However, for goods whose export is

prohibited, the MTT can be allowed because it does not reduce the

stock of that product in India. It is submitted that this was also the intent

of RBI’s circular dated 24 August 2000 in relation to MTTs; and

c. Individuals should be allowed to approach the RBI to seek an

exemption for conducting MTTs in relation to products whose

import/export is prohibited under the FTP. The RBI can then consider

each individual product and decide whether its MTT should be

permitted, keeping in mind the reasons for its prohibition under the

FTP.

7
 PART B

7 Opposing the above submissions, Mr Ramesh Babu M R, learned Counsel for

the RBI submitted that:

(i) The appellant cannot challenge Clause 2(iii) of the 2020 MTT Guidelines

without challenging the notifications amending the FTP to prohibit the

export of PPE products. Clause 2(iii) is general in its application and was
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introduced on 23 January 2020, while the first notification prohibiting the

export of PPE products was issued by the UOI on 8 February 2020;

(ii) Clauses similar to Clause 2(iii) of the 2020 MTT Guidelines have existed in

all previous circulars issued by the RBI to regulate MTTs. These clauses

substantially stipulate that MTTs would only be allowed in respect of

products whose import/export is allowed in India;

(iii) MTTs are analogous to import/export transactions, except for the fact that

the goods never physically enter India. There is an outflow of foreign

exchange during the import leg of the MTT and an inflow of foreign

exchange during the export leg. Hence, MTTs affect India’s foreign

reserves, which the RBI has to manage and harmonise with the UOI’s

FTP. Therefore, the RBI cannot permit MTTs in respect of goods whose

import/export has been prohibited by the UOI under the Foreign Trade Act;

(iv) Export of PPE products was prohibited by the UOI in order to ensure that

adequate stocks are present in India during the COVID-19 pandemic.

Hence, a prohibition of MTTs in respect of PPE products is also important

because when an Indian entity facilitates the trade of these products to

8
 PART B

another nation, it takes away from India’s possible stock in the global

market; and

(v) Courts should be wary of interfering in the economic policies of the State,

which should be left to expert bodies. This proposition is supported by the

decisions of this Court in Shri Sitaram Sugar Co. Ltd. v. Union of

India11, Prag Ice & Oil Mills v. Union of India12 and P.T.R. Exports
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(Madras) (P) Ltd. v. Union of India13.

8 Supporting the submissions of the RBI on behalf of the Ministry of Commerce

and DGFT, Mr Vikramjit Banerjee, Additional Solicitor General14 submitted that:

(i) The UOI has prohibited the export of PPE products through a series of

notifications issued between 31 January 2020 to 16 May 2020, so as to

ensure that there is adequate stock in India during the COVID-19

pandemic;

(ii) The appellant cannot be allowed to facilitate a transaction for PPE

products between two foreign countries through MTTs since it would be

against India’s national interest. Given the COVID-19 pandemic, such a

restriction is reasonable;

11
(1990) 3 SCC 223
12
(1978) 3 SCC 459
13
(1996) 5 SCC 268
14
“ASG”

9
 PART C

(iii) There is no complete prohibition under Clause 2(iii) of the 2020 MTT

Guidelines since the appellant is free to conduct MTTs in respect of goods

whose import/export is not prohibited under India’s FTP; and

(iv) By a notification dated 25 August 2020, the export of PPE Masks and N-

95/FFP 2 Masks or equivalent has been categorized as “Restricted”

(instead of “Prohibited”) while medical coveralls of all classes/categories

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(including PPE overalls) are now under the “Free” category.

9 The rival submissions will now be analysed.

C A Proportionality Analysis

10 The appellant is a citizen of India. He is also the Managing Director of Anzalp

Herbal Products Private Limited, a corporate body which inter alia, engages in

MTTs. In State Trading Corporation v. Commercial Tax Officer15, a nine-judge

Bench of this Court has settled the question that corporations are not considered as

“citizens” under the Constitution. A corporation cannot claim an infringement of

rights under Article 19(1)(g), as this fundamental right is only available to citizens

and not to juristic persons. Over the years, shareholders and business persons have

filed petitions in their individual capacity, to allege infringement of their fundamental

right to carry on business or a profession of their choice16. The appellant argues that

the RBI and UOI’s prohibition of MTTs in respect of PPE products infringes his

15
AIR 1963 SC 1811
16
M P Jain, Citizenship, in INDIAN CONSTITUTIONAL LAW (7th edn, Lexis Nexis, 2014)

10
 PART C

fundamental rights and freedoms under Articles 14, 19(1)(g) and 21 of the

Constitution.

11 The appellant has contended that this Court has been circumspect of

legislative provisions or executive policies that impose a total prohibition on a

citizen’s right to conduct business. Since the appellant is engaged in MTTs which
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facilitate import and export between two different countries, he urges that a complete

prohibition on MTTs in relation to PPE products, without a rational distinction of

prohibiting their exports alone, is a constitutionally suspect infringement of his

freedom to conduct his business. In order to test this claim, we will begin by

analysing the precedents of this Court on the ambit of the freedom envisaged under

Article 19(1)(g). The relevant freedoms and restrictions with respect to trade under

the Indian Constitution are as follows:

“19. Protection of certain rights regarding freedom of speech,

etc.-(1) All citizens shall have the right –

[…]

(g) to practise any profession, or to carry on any occupation,

trade or business.

[…]

(6) Nothing in sub-clause (g) of the said clause shall affect the
operation of any existing law in so far as it imposes, or
prevent the State from making any law imposing, in the
interests of the general public, reasonable restrictions on the
exercise of the right conferred by the said sub-clause, and, in
particular, nothing in the said sub-clause shall affect the
operation of any existing law in so far as it relates to, or
prevent the State from making any law relating to,—

11
 PART C

(i) the professional or technical qualifications necessary for

practising any profession or carrying on any occupation, trade
or business, or

(ii) the carrying on by the State, or by a corporation owned or

controlled by the State, of any trade, business, industry or
service, whether to the exclusion, complete or partial, of
citizens or otherwise.”

12 The text of the Constitution clarifies that the right to carry on trade or business
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is subject to reasonable restrictions which are imposed in the interests of the general

public. This Court has propounded several tests for determining “reasonableness”

for the purpose of Article 19(1)(g). These have ranged from testing restrictions for

arbitrariness17, excessiveness18 and discerning their objective of compliance with the

Directive Principles of State Policy19. In Chintaman Rao v. State of Madhya

Pradesh,20 a Constitution Bench noted the importance of striking the right balance

between social control and individual freedom. Justice K C Das Gupta articulated

the limitation under Article 19(6) in the following terms:

“6. The phrase “reasonable restriction” connotes that the

limitation imposed on a person in enjoyment of the right
should not be arbitrary or of an excessive nature, beyond
what is required in the interests of the public. The word
“reasonable” implies intelligent care and deliberation, that is,
the choice of a course which reason dictates. Legislation
which arbitrarily or excessively invades the right cannot be
said to contain the quality of reasonableness and unless it
strikes a proper balance between the freedom guaranteed in

17
Dwarka Pd. v. State of Uttar Pradesh, AIR 1954 SC 224; Shree Meenakshi Mills v. Union of India, AIR 1974
SC 366
18
Chintaman Rao v. State of Madhya Pradesh, AIR 1951 SC 118
19
Saghir Ahmad v. State of U.P., (1955) 1 SCR 707; Jalan Trading Co. v. D M Aney, AIR 1973 SC 233; M R F
Ltd. v. Inspector Kerala Government, (1998) 8 SCC 227; Indian Handicrafts Emporium v. Union of India, (2003)
7 SCC 589
20
AIR 1951 SC 118

12
 PART C

Article 19(1)(g) and the social control permitted by clause (6)

of Article 19, it must be held to be wanting in that quality.”

13 In M R F Ltd. v. Inspector Kerala Government,21 a two judge Bench of this

Court consolidated the body of precedent of this Court on Article 19(1)(g). Justice S

Saghir Ahmed noted the following principles that govern the restrictions under Article

19(6):
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“13. […]

(1) While considering the reasonableness of the restrictions,

the court has to keep in mind the Directive Principles of State
Policy.

(2) Restrictions must not be arbitrary or of an excessive

nature so as to go beyond the requirement of the interest of
the general public.

(3) In order to judge the reasonableness of the restrictions, no

abstract or general pattern or a fixed principle can be laid
down so as to be of universal application and the same will
vary from case to case as also with regard to changing
conditions, values of human life, social philosophy of the
Constitution, prevailing conditions and the surrounding
circumstances.

(4) A just balance has to be struck between the restrictions

imposed and the social control envisaged by clause (6) of
Article 19.

(5) Prevailing social values as also social needs which are

intended to be satisfied by restrictions have to be borne in
mind. (See: State of U.P. v. Kaushailiya [AIR 1964 SC 416 :
(1964) 4 SCR 1002] .)

(6) There must be a direct and proximate nexus or a

reasonable connection between the restrictions imposed and
the object sought to be achieved. If there is a direct nexus
between the restrictions and the object of the Act, then a
strong presumption in favour of the constitutionality of the Act

21
(1998) 8 SCC 227

13
 PART C

will naturally arise. (See: Kavalappara Kottarathil Kochuni v.

States of Madras and Kerala [AIR 1960 SC 1080 : (1960) 3
SCR 887] ; O.K. Ghosh v. E.X. Joseph [AIR 1963 SC 812 :
1963 Supp (1) SCR 789 : (1962) 2 LLJ 615] .)”

14 This Court has also consistently held that restrictions on the freedom to carry

on trade and business can take the form of a complete prohibition22. However, in B

P Sharma v. Union of India,23 a two judge Bench of this Court has espoused a
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higher threshold for imposition of a prohibitive restriction. A legitimate object and

prejudice to the general public by non-imposition of such prohibition has to be

demonstrated by the State, to discharge its burden of demonstrating

reasonableness under Article 19(6). Justice Brijesh Kumar held:

“15. The freedom under Article 19(1)(g) can also be

completely curtailed in certain circumstances e.g. where the
profession chosen is so inherently pernicious that nobody can
be considered to have a fundamental right to carry on such
business, trade, calling or profession like gambling, betting or
dealing in intoxicants or an activity injurious to public health
and morals. It may be useful to refer to a few decisions of this
Court on the point at this stage viz. in Saghir Ahmad v. State
of U.P. [AIR 1954 SC 728 : (1955) 1 SCR 707] and J.K.
Industries Ltd. v. Chief Inspector of Factories and Boilers
[(1996) 6 SCC 665] . The main purpose of restricting the
exercise of the right is to strike a balance between individual
freedom and social control. The freedom, however, as
guaranteed under Article 19(1)(g) is valuable and cannot be
violated on grounds which are not established to be in public
interest or just on the basis that it is permissible to do so. For
placing a complete prohibition on any professional
activity, there must exist some strong reason for the
same with a view to attain some legitimate object and in
case of non-imposition of such prohibition, it may result
in jeopardizing or seriously affecting the interest of the

22
Narendra Kumar v. Union of India, AIR 1960 SC 430
23
(2003) 7 SCC 309

14
 PART C

people in general. If it is not so, it would not be a

reasonable restriction if placed on exercise of the right
guaranteed under Article 19(1)(g). The phrase “in the
interest of the general public” has come to be considered in
several decisions and it has been held that it would comprise
within its ambit interests like public health and morals….”

(emphasis supplied)

15 Various principles have been espoused by this Court to bring about a

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balance between the perceived interest of the state of social control over the

economy, with the rights and freedoms of individuals. The appellant has cited

various decisions to argue for heightened scrutiny of legislative or administrative

action which places an absolute prohibition on an individual’s right to conduct trade

or business24. The judicial evolution of a four-pronged analysis of proportionality

displaces the varying standards that were prescribed to determine “reasonableness”

under Article 19(6). The qualitative nature of a right and the corresponding scrutiny

of its violation cannot be a sole function of the degree of restriction. Every violation

of rights, irrespective of the degree of the infraction, must be evaluated through a

uniform principle that promotes a culture of justification. The decision of a nine-judge

Bench of this Court in K S Puttaswamy v. Union of India25 (“K S Puttaswamy

(9J)”) prescribed a proportionality analysis for determining violations of fundamental

rights under Part III. A proportionality analysis can adequately consider the

constitutionality of prohibitive measures on commercial activities. Therefore, we will

24
Mohd. Faruk v. State of Madhya Pradesh, 1969 (1) SCC 853; Cellular Operators Association of India v.
Telecom Regulatory Authority of India, (2016) 7 SCC 703; Internet and Mobile Association of India v. Reserve
Bank of India, 2020 SCC OnLine SC 275
25
(2017) 10 SCC 1, para 325

15
 PART C

structure the judgment on an analysis of the proportionality of RBI’s decision to

prohibit MTTs in PPE products, in order to determine its constitutionality.

16 An analysis of legitimate social control for the purpose of Article 19(6) has

been streamlined by this Court through the lens of proportionality. A two-judge

Bench of this Court in Om Kumar v. Union of India26 introduced the test of

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proportionality for determining the reasonableness of restrictions on freedoms

guaranteed under Article 19(1). Justice M Jagannadha Rao traced the historical

application of the principle in this Court’s precedent and in a comparative context.

The judgment defined the concept in the following terms:

“28. By “proportionality”, we mean the question whether, while

regulating exercise of fundamental rights, the appropriate or
least-restrictive choice of measures has been made by the
legislature or the administrator so as to achieve the object of
the legislation or the purpose of the administrative order, as
the case may be. Under the principle, the court will see that
the legislature and the administrative authority “maintain a
proper balance between the adverse effects which the
legislation or the administrative order may have on the rights,
liberties or interests of persons keeping in mind the purpose
which they were intended to serve”. The legislature and the
administrative authority are, however, given an area of
discretion or a range of choices but as to whether the choice
made infringes the rights excessively or not is for the court.
That is what is meant by proportionality.”

26
(2001) 2 SCC 386

16
 PART C

The test was made applicable to testing the validity of legislation as well as

administrative action:

“53. Now under Articles 19(2) to (6), restrictions on

fundamental freedoms can be imposed only by legislation. In
cases where such legislation is made and the restrictions are
reasonable yet, if the statute concerned permitted the
administrative authorities to exercise power or discretion
while imposing restrictions in individual situations, question
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frequently arises whether a wrong choice is made by the

administrator for imposing restriction or whether the
administrator has not properly balanced the fundamental right
and the need for the restriction or whether he has imposed
the least of the restrictions or the reasonable quantum of
restriction etc. In such cases, the administrative action in our
country, in our view, has to be tested on the principle of
“proportionality”, just as it is done in the case of the main
legislation. This, in fact, is being done by our courts.”

17 A Constitution Bench, in Modern Dental College and Research Centre v.

State of Madhya Pradesh27 (“Modern Dental College”), validated the test of

proportionality for determining the reasonableness of a restriction under Article

19(6). Justice A K Sikri accepted the Canadian Supreme Court’s analysis of the

doctrine of proportionality and held it to be applicable to constitutional rights in India.

The Court noted:

“63. In this direction, the next question that arises is as to

what criteria is to be adopted for a proper balance between
the two facets viz. the rights and limitations imposed upon it
by a statute. Here comes the concept of “proportionality”,
which is a proper criterion. To put it pithily, when a law
limits a constitutional right, such a limitation is
constitutional if it is proportional. The law imposing
restrictions will be treated as proportional if it is meant to

27
(2016) 7 SCC 353

17
 PART C

achieve a proper purpose, and if the measures taken to

achieve such a purpose are rationally connected to the
purpose, and such measures are necessary. This essence
of doctrine of proportionality is beautifully captured by
Dickson, C.J. of Canada in R. v. Oakes [R.v. Oakes, (1986) 1
SCR 103 (Can SC)] , in the following words (at p. 138):

“To establish that a limit is reasonable and demonstrably

justified in a free and democratic society, two central criteria
must be satisfied. First, the objective, which the measures,
responsible for a limit on a Charter right or freedom are
designed to serve, must be “of” sufficient importance to
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warrant overriding a constitutional protected right or freedom

… Second … the party invoking Section 1 must show that the
means chosen are reasonable and demonstrably justified.
This involves “a form of proportionality test…” Although the
nature of the proportionality test will vary depending on the
circumstances, in each case courts will be required to
balance the interests of society with those of individuals and
groups. There are, in my view, three important components of
a proportionality test. First, the measures adopted must be …
rationally connected to the objective. Second, the means …
should impair “as little as possible” the right or freedom in
question … Third, there must be a proportionality between the
effects of the measures which are responsible for limiting the
Charter right or freedom, and the objective which has been
identified as of “sufficient importance”. The more severe the
deleterious effects of a measure, the more important the
objective must be if the measure is to be reasonable and
demonstrably justified in a free and democratic society.”

64. The exercise which, therefore, is to be taken is to find

out as to whether the limitation of constitutional rights is
for a purpose that is reasonable and necessary in a
democratic society and such an exercise involves the
weighing up of competitive values, and ultimately an
assessment based on proportionality i.e. balancing of
different interests.”

(emphasis supplied)

18
 PART C

18 The decision in K S Puttaswamy (9J)28 (supra) introduced the proportionality

standard in determining violations of fundamental rights, particularly the right to

privacy. This doctrine was affirmed in the judgments of five out of the nine judges on

the Bench. Subsequently, a Constitution Bench in K S Puttaswamy v. Union of

India29 (“Aadhar (5J)”) fleshed out the contours of a proportionality analysis and

applied it to determine the constitutionality of the Aadhar Scheme and the Aadhar
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Act 2016. Justice A K Sikri conducted a comparative analysis of the types of

proportionality analysis globally and elucidated a four-pronged approach that could

be suitable for the Indian Constitution. This test was laid down in the following terms:

“319. …This discussion brings out that following four sub-

components of proportionality need to be satisfied:

319.1. A measure restricting a right must have a legitimate

goal (legitimate goal stage).

319.2. It must be a suitable means of furthering this goal

(suitability or rational connection stage).

319.3. There must not be any less restrictive but equally

effective alternative (necessity stage).

319.4. The measure must not have a disproportionate impact

on the right holder (balancing stage).”

19 This Court has thus propounded a four-pronged test of proportionality. This

can now be utilised to determine the constitutionality of Clause 2(iii) of the 2020 MTT

Guidelines.

28
Para 325
29
(2019) 1 SCC 1

19
 PART C

20 Before our analysis proceeds along the above direction, it is important to note

that the appellant has challenged the constitutionality of Clause 2(iii) of the 2020

MTT Guidelines by alleging a violation of his rights under Articles 14, 19(1)(g) and

21. Hence, this Court has to determine if the RBI’s restriction to prohibit MTTs in

PPE products is restrictive of the appellant’s right to equality under Article 14 on the

ground that it is arbitrary, whether it is a reasonable restriction on the appellant’s

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freedom to conduct trade under Articles 19(1)(g) read with Article 19(6), and if it

violates the appellant’s liberty and right to livelihood under Article 21.

21 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. This analysis

has been considered similar to a proportionality inquiry, with the “necessity” prong

being considered missing30.

22 Some academic commentators have suggested that the Courts can adopt the

proportionality analysis, even when considering rights with different limitations. They

state this for three reasons: (i) litigation of rights can often be open-ended, which

30
Aparna Chandra, “Proportionality in India: A Bridge to Nowhere” (2020) 3(2) University of Oxford Human Rights
Hub Journal 55

20
 PART C

risks the analysis becoming inconsistent across different cases. Hence, a formal

balancing procedure, such as the proportionality analysis, is useful in providing a

structure to the arguments; (ii) in multiple jurisdictions, the provision of the right itself

contains a limitation clause (such as Article 19 in the Indian Constitution) and even

then, the courts have opted to use the proportionality analysis. In such

circumstances, the courts use the proportionality analysis to test the application of
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the limitation clause; and (iii) the proportionality analysis is particularly helpful when

the dispute between a right and its limitation is recast as one between a right and a

measure which limits that right but only to promote a different right31.

23 On the other hand, in an illuminating article in the Yale Law Journal, Professor

Vicki Jackson has pointed out that there are structural differences between various

rights, due to which a proportionality analysis may not be suitable for some of them.

While Professor Jackson agrees with the principle of balancing that underlies

proportionality as a principle, she issues a note of caution that the protection of

certain rights may be better suited to categorical rules. Even so, Professor Jackson

supports the use of proportionality analysis wherever possible and notes its benefits

in the following passage32:

“Using proportionality to define violations, of course, does not

dictate remedies or exclude definitions of rights based on
separate deontological or historical questions. However,
greater use of proportionality, as a principle and as a
structured form of review, has several potential benefits. It

31
Alec Stone Sweet and Jud Mathews, “Proportionality Balancing and Global Constitutionalism” (2008-2009) 47
Columbia Journal of Transnational Law 72
32
Vicki C Jackson, “Constitutional Law in an Age of Proportionality” (2015) 124(8) Yale Law Journal 3094

21
 PART C

could enhance judicial reasoning by clarifying justifications for

limitations on freedoms. Proportionality might also improve
the outcomes of adjudication by bringing…constitutional law
closer to…conceptions of justice, in ways consistent with the
demands of effective government. Finally, proportionality may
be democracy-enhancing, both in providing a shared
discourse of justification for action clamed to limit rights and in
providing more sensitivity to serious process-deficiencies
reflecting entrenched biases against particular groups.”
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24 Adopting the proportionality analysis not only provides a formal structure

through which abstract rights litigations can be analysed, but it also (when applied

properly) has the potential to improve the quality of judicial reasoning while

protecting individual rights. As noted in Aadhar (5J) (supra), the use of

proportionality analysis reflects the shift from a culture of authority to a culture of

justification33 where State action is best held accountable for its violation of

fundamental rights. Justice Albie Sachs, a judge of the Constitutional Court of South

Africa, in his memoir The Strange Alchemy of Life and Law34, also described this

shift from a culture of authority to a culture of justification in South Africa with the

introduction of their Constitution:

“The negotiated revolution which saw South Africa move from

being an authoritarian, racist state to becoming a
constitutional democracy led Professor Etienne Mureinik to
make a memorable statement as far as the character of legal
adjudication was concerned. He pointed out that we were
crossing a bridge from a culture of authority to a culture
of justification…The implications for the judicial function
turned out to be enormous. And it was our Court that was
made responsible for guiding the legal community to embrace
and internalize the necessary changes. Much more was

33
Para 1276
34
Albie Sachs, The Strange Alchemy of Life and Law (Oxford University Press, 2009)

22
 PART C

involved than simply making a technical shift from what the

lawyers call a literalist to a purposive approach to
interpretation. The Constitution brought about a seachange in
the very nature of the judicial function…[It] necessitated
moving beyond an approach based on the application of
purportedly inexorable rules towards accepting the duty
in most matters for the judges to exercise
constitutionally-controlled discretion. The transformation
involved a journey from preoccupation with classification
and strict adherence to formal rules to focussing on
principled modes of weighing up the competing interests
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as triggered by the facts of the case and assessed in the

light of the values of an open and democratic society…”

(emphasis supplied)

Therefore, this Court must unhesitatingly use the proportionality analysis while

assessing the violation of the appellant’s rights under Articles 14, 19(1)(g) and 21.

25 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. An eleven-judge Bench of this Court in Rustom Cavasji

Cooper v. Union of India35, speaking through Justice J C Shah, had observed:

“52…it is necessary to bear in mind the enunciation of the

guarantee of fundamental rights which has taken different
forms. In some cases it is an express declaration of a
guaranteed right: Articles 29(1), 30(1), 26, 25 and 32; in
others to ensure protection of individual rights they take
specific forms of restrictions on State action — legislative or
executive — Articles 14, 15, 16, 20, 21, 22(1), 27 and 28; in
some others, it takes the form of a positive declaration and

35
(1970) 1 SCC 248

23
 PART C

simultaneously enunciates the restriction thereon: Articles

19(1) and 19(2) to (6); in some cases, it arises as an
implication from the delimitation of the authority of the State,
e.g. Articles 31(1) and 31(2); in still others, it takes the form of
a general prohibition against the State as well as others:
Articles 17, 23 and 24. The enunciation of rights either
express or by implication does not follow a uniform
pattern. But one thread runs through them: they seek to
protect the rights of the individual or groups of
individuals against infringement of those rights within
specific limits. Part III of the Constitution weaves a
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pattern of guarantees on the texture of basic human

rights. The guarantees delimit the protection of those
rights in their allotted fields: they do not attempt to
enunciate distinct rights.”

(emphasis supplied)

26 Conceptualising constitutional rights is incomplete without analysing their

corresponding limitations. This Court has also noticed that an underlying thread of

reasonableness defines fundamental rights in Part III of the Constitution. A

Constitution Bench in Shayara Bano v. Union of India36 disavowed the view that

challenges under every Article must strictly be considered in a disjoint, water-tight

fashion. Justice Kurian Joseph had observed:

84. The second reason given is that a challenge under

Article 14 has to be viewed separately from a challenge
under Article 19, which is a reiteration of the point of
view of A.K. Gopalan v. State of Madras [A.K.
Gopalan v. State of Madras, 1950 SCR 88 : AIR 1950 SC
27 : (1950) 51 Cri LJ 1383] that fundamental rights must
be seen in watertight compartments. We have seen how
this view was upset by an eleven-Judge Bench of this
Court in Rustom Cavasjee Cooper v. Union of
India[Rustom Cavasjee Cooper v. Union of India, (1970) 1
SCC 248] and followed in Maneka Gandhi [Maneka

36
(2017) 9 SCC 1

24
 PART C

Gandhi v. Union of India, (1978) 1 SCC 248] . Arbitrariness in

legislation is very much a facet of unreasonableness in
Articles 19(2) to (6), as has been laid down in several
judgments of this Court, some of which are referred to in Om
Kumar [Om Kumar v. Union of India, (2001) 2 SCC 386 :
2001 SCC (L&S) 1039] and, therefore, there is no reason why
arbitrariness cannot be used in the aforesaid sense to strike
down legislation under Article 14 as well.

[…]

87. The thread of reasonableness runs through the entire

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fundamental rights chapter. What is manifestly arbitrary

is obviously unreasonable and being contrary to the rule
of law, would violate Article 14. Further, there is an
apparent contradiction in the three-Judge Bench
decision in McDowell [State of A.P. v. McDowell and Co.,
(1996) 3 SCC 709] when it is said that a constitutional
challenge can succeed on the ground that a law is
“disproportionate, excessive or unreasonable”, yet such
challenge would fail on the very ground of the law being
“unreasonable, unnecessary or unwarranted”. The
arbitrariness doctrine when applied to legislation
obviously would not involve the latter challenge but
would only involve a law being disproportionate,
excessive or otherwise being manifestly unreasonable.
All the aforesaid grounds, therefore, do not seek to
differentiate between State action in its various forms, all
of which are interdicted if they fall foul of the
fundamental rights guaranteed to persons and citizens in
Part III of the Constitution.”

(emphasis supplied)

27 The Constitution Bench in Aadhar (5J) (supra) also undertook an integrated

proportionality analysis to determine the proportionality of the State’s interference in

the rights to privacy, dignity, choice and access to basic entitlements37. Hence, the

Court can adopt an integrated proportionality analysis where the limitation on each

of the rights is common and affects them in a similar way. In the present case, the
37
Para 1277

25
 PART C

limitation (i.e., Clause 2(iii) of the 2020 MTT Guidelines) is what affects the

appellant’s rights under Articles 14, 19(1)(g) and 21. Further, the appellant has

submitted that the limitation is arbitrary, not a reasonable restriction and violative of

his liberty because the RBI has, without application of mind, linked the prohibition on

import/export of a product to the prohibition of MTTs in relation to that product. It is

thus clear that the appellant’s submissions for challenging the constitutionality of
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Clause 2(iii) rest on similar grounds, and hence an integrated proportionality

analysis can be adopted. However, this Court must issue a note of caution – while

an integrated proportionality analysis has been adopted for assessing the limitation

on rights (under Articles 14, 19(1)(g) and 21) in this case, it may not be true for all

cases where such limitations occur because the alleged violation of rights may be

characteristically different or the alleged limitation may affect the rights in different

ways.

28 The appellant has submitted that the precedents of this Court indicate that

once the citizen can demonstrate that the restriction directly or proximately interferes

with the exercise of their freedom of trade or to carry on a business, it is the State’s

burden to demonstrate the reasonableness of the restriction and that it is in the

interest of the general public38. The authority of the RBI in issuing the impugned

notification is not in challenge. Additionally, the legitimacy of the aim – of ensuring

adequate domestic supplies of PPE products – is also not in challenge. The

appellant assails the suitability of the measure restricting MTTs in ensuring domestic
38
Sukhnandan Saran Dinesh Kumar v. Union of India, AIR 1982 SC 902; Laxmi Khandsari v. State of Uttar
Pradesh, AIR 1981 SC 860

26
 PART C

supplies and for being overbroad in its ambit, since an Indian entity acting as an

intermediary in an MTT between two different countries does not impact the

availability of PPE products in India. Thus, this Court will be relying on the

justification furnished by the RBI in determining the proportionality of the impugned

measure (Clause 2(iii) of the 2020 MTT Guidelines). This analysis will be structured

along with the following questions:

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(i) Is the measure in furtherance of a legitimate aim?;

(ii) Is the measure suitable for achieving such an aim?;

(iii) Is the measure necessary for achieving the aim?; and

(iv) Is the measure adequately balanced with the right of the individual?

C.1 Legitimacy

29 This prong of the test entails an evaluation of the legitimacy of an aim that

purportedly violates a fundamental right. The measure must be designated for a

proper purpose, i.e., a legitimate goal. Five of the judges in the nine-judge Bench

decision in K S Puttaswamy (9J) (supra) adopted the threshold of a “legitimate state

interest” as the first prong for assessing proportionality. This state interest must also

be of sufficient importance to override a constitutional right or freedom39. 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.

39
Aadhar (5J) (supra), paras 321-322

27
 PART C

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. The RBI, at the time of filing its affidavit on 30 January 2021, had
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elaborated on the state of the pandemic in the country and the necessity of ensuring

adequate stock of PPE products. The executive’s aim to ensure sufficient availability

of PPE products, considering the ongoing pandemic, is legitimate. Accordingly, we

hold that the impugned measure is enacted in furtherance of a legitimate aim that is

of sufficient importance to override a constitutional right of freedom to conduct

business.

C.2 Suitability

30 In examining the aim of ensuring adequate supplies in India, we will now

evaluate the suitability of the prohibition of MTTs in relation to PPE products. This

would entail an analysis of whether the proposed measure can further the stated

objective. To understand whether the prohibition of MTTs in relation to PPE products

was suitable, we must first analyse the framework under which the RBI regulates

MTTs in India.

31 MTTs are regulated by the RBI under FEMA, which came into force on 1 June

2000. Under FEMA, it is the duty of the RBI to manage, regulate and supervise the

28
 PART C

foreign exchange in India. Section 340 of FEMA provides, inter alia, that no person

can deal in foreign exchange without the permission of the RBI. In accordance with

Section 10(1)41, the RBI can grant permission to an entity to become an “authorized

person” who can deal in foreign exchange. Further, Section 10(4) provides that such

authorized persons shall comply with all directions issued by the RBI while dealing in

foreign exchange. Section 10(4) reads as follows:

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“10. Authorised person.—… (4) An authorised person shall,

in all his dealings in foreign exchange or foreign security,
comply with such general or special directions or orders as
the Reserve Bank may, from time to time, think fit to give,
and, except with the previous permission of the Reserve
Bank, an authorised person shall not engage in any
transaction involving any foreign exchange or foreign security
which is not in conformity with the terms of his authorisation
under this section.”

The RBI is granted the power to issue directions to authorized persons under

Section 11(1). Section 11(1) provides:

“11. Reserve Bank's powers to issue directions to

authorised person.—(1) The Reserve Bank may, for the
40
3. Dealing in foreign exchange, etc.—Save as otherwise provided in this Act, rules or regulations made thereunder,
or with the general or special permission of the Reserve Bank, no person shall—
(a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person;
(b) make any payment to or for the credit of any person resident outside India in any manner;
(c) receive otherwise through an authorised person, any payment by order or on behalf of any person resident
outside India in any manner;
Explanation.—For the purpose of this clause, where any person in, or resident in, India receives any payment by
order or on behalf of any person resident outside India through any other person (including an authorised person)
without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have
received such payment otherwise than through an authorised person;
(d) enter into any financial transaction in India as consideration for or in association with acquisition or creation or
transfer of a right to acquire, any asset outside India by any person.
Explanation.—For the purpose of this clause, “financial transaction” means making any payment to, or for the credit
of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating
any bill of exchange or promissory note, or transferring any security or acknowledging any debt.
41
10. Authorised person.—(1) The Reserve Bank may, on an application made to it in this behalf, authorise any
person to be known as authorised person to deal in foreign exchange or in foreign securities, as an authorised dealer,
money changer or off-shore banking unit or in any other manner as it deems fit.

29
 PART C

purpose of securing compliance with the provisions of this Act

and of any rules, regulations, notifications or directions made
thereunder, give to the authorised persons any direction in
regard to making of payment or the doing or desist from doing
any act relating to foreign exchange or foreign security.”

32 It is in the exercise of its powers under Section 10(4) read with Section 11(1),

that the RBI issued a circular42 dated 24 August 2000, which provided guidance to
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authorized dealers in relation to FEMA. The relevant part of the circular in relation to

MTTs is extracted below:

“Part B - Merchanting Trade

Authorised dealers may take necessary precautions in

handling merchant trade transactions or intermediary
trade transactions to ensure that (a) goods involved in
the transaction are permitted to be imported into India,
(b) such transactions do not involve foreign exchange outlay
for a period exceeding three months, and (c) all Rules,
Regulations and Directions applicable to export out of
India are complied with by the export leg and all Rules,
Regulations and Directions applicable to import are
complied with by the import leg of merchanting trade
transactions. Authorised dealers are also required to ensure
timely receipt of payment for the export leg of such
transactions.”

(emphasis supplied)

From the above, it is clear that an MTT could only be in respect of goods whose

import was permitted into India. A similar direction was retained in the circular 43

dated 19 June 2003.

42
A.P. (DIR Series) Circular No 9
43
A.P. (DIR Series) Circular No 106

30
 PART C

33 Thereafter, the RBI issued a circular44 dated 17 January 2014 titled

“Merchanting Trade Transactions”, which revised the MTT guidelines in light of the

recommendations of the Technical Committee on Services/Facilities to Exporters.

Clause 2(i) of the circular noted:

“i) Goods involved in the merchanting or intermediary trade

transactions would be the ones that are permitted for
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exports/imports under the prevailing Foreign Trade Policy

(FTP) of India, at the time of entering into the contract and all
the rules, regulations and directions applicable to exports
(except Export Declaration Form) and imports (except Bill of
Entry) are complied with for the export leg and import leg
respectively;”

Hence, the circular modified the earlier requirement and now clarified that MTTs

could not be conducted in respect of goods whose import and export are prohibited

under the FTP. It is important to note that this was based on a suggestion made by

the Technical Committee on Services/Facilities to Exporters, which stated as

follows:

“Issues Associated with Merchanting Trade

[…]

4.9 Goods covered under Merchanting trade should be

allowed to be exported/imported into the country as per the
prevailing Foreign Trade Policy (FTP) at the time of entering
into the contract with the overseas suppliers, in order to avoid
entering into trading contracts that are not permitted to be
imported/exported under the FTP. To safeguard the interest
of the exporter, the export leg of the transaction can be
recommended to be covered by Letter of Credit (or) through
insurance from ECGC.”

44
A.P. (DIR Series) Circular No. 95

31
 PART C

34 These guidelines were soon revised through a circular45 dated 28 March

2014. However, there was no material change to the requirement that MTTs cannot

be conducted in respect of goods whose import/export is prohibited under the FTP.

The relevant clause of the circular is extracted as follows:

“ii) Goods involved in the merchanting trade transactions

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would be the ones that are permitted for exports/imports

under the prevailing Foreign Trade Policy (FTP) of India, as
on the date of shipment and all the rules, regulations and
directions applicable to exports (except Export Declaration
Form) and imports (except Bill of Entry), are complied with for
the export leg and import leg respectively;”

35 Subsequently, this circular was modified by the 2020 MTT Guidelines which

introduced the impugned Clause 2(iii). On an analysis of the above circulars, it is

clear that the RBI has never attempted to permit/prohibit MTTs into specific goods.

Rather, from the very first circular, it has relied upon the goods’ position under

India’s FTP to regulate MTTs. Till 2013, MTTs were prohibited in relation to goods

whose import was not allowed under the FTP. Since 2013, they have also been

prohibited in relation to goods whose export is not allowed under the FTP.

36 The RBI is responsible for issuing guidelines to authorized persons under

FEMA. 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

45
A.P. (DIR Series) Circular No.115

32
 PART C

market in India”. Hence, 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. 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
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products for which MTTs are impermissible but has opted to rely on the decision

made by the UOI under the FTP.

37 Such a decision, regarding the products in which import or export is prohibited

in India, is made by the UOI under Section 3(2) of the Foreign Trade Act. Section

3(2) provides as follows:

“3. Powers to make provisions relating to imports and

exports.—… (2) The Central Government may also, by Order
published in the Official Gazette, make provision for
prohibiting, restricting or otherwise regulating, in all cases or
in specified classes of cases and subject to such exceptions,
if any, as may be made by or under the Order, the import or
export of goods or services or technology:

Provided that the provisions of this sub-section shall be

applicable, in case of import or export of services or
technology, only when the service or technology provider is
availing benefits under the foreign trade policy or is dealing
with specified services or specified technologies.”

38 While exercising its powers under Section 3(2), the UOI issued multiple

notifications commencing from 8 February 2020, which prohibited the export of all

PPE products due to the need to maintain their domestic stock during the COVID-19

pandemic. Mr Vikramjeet Banerjee, learned ASG appearing on behalf of the Ministry

33
 PART C

of Commerce and DGFT, has pointed out that the notification46 dated 25 August

2020 now categorizes the export of PPE Masks and N-95/FFP 2 Masks as

“Restricted” (instead of “Prohibited”) and limits their export to 50 lakh units per

month, while medical coveralls of all classes/categories (including PPE overalls) are

categorized under the “Free” category, i.e., they are freely exportable.
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39 The appellant has challenged the suitability of the RBI’s decision to link the

MTT of goods with their prohibition under India’s FTP by arguing that the objectives

behind the two are entirely different. To support their argument, the appellant has

relied on the nature of an MTT, where the goods do not enter or leave Indian

territory and the Indian entity acts as an intermediary in an exchange between two

foreign countries.

40 In its affidavit, the RBI has explained the genesis of MTTs in the following

terms:

“7. It is submitted that under the Merchanting Trade

Transactions (hereinafter referred to as "MTT”) an Indian
Citizen facilitates the export of good or material from a
Company or individual of an exporting country (other than
India) and then import/supply the said good or material to a
Company or individual in another country, which is also other
than India. In short, by MTT the Indian citizen while acting as
intermediary, facilitates an international trade between two
different countries. It is submitted that the MTTs are very
closely analogous to, and have all the elements of, export as
well as import except the fact that the goods are physically
not located in India. The first leg of the transaction, known as
import leg, requires outlay of foreign exchange by the entity
located in India carrying on the transaction, for the purpose of
making payment for the goods being purchased overseas.
46
Notification No 29/2015-2020

34
 PART C

The payment is made by the Indian Entity by drawing foreign

exchange or obtaining a letter of credit in India from its
banker, authorised dealer of foreign exchange (i.e. authorised
dealer bank) also located in India. Thus, there is a clear
nexus of the first leg of the transaction to India and the
involvement of its foreign exchange reserves. It is further
submitted that in a successful trade, the Indian entity so
purchasing the goods overseas recovers its money in the
second leg of transaction, known as export leg, by selling the
goods to its buyer, also located overseas, but the money is
under the law to be repatriated to India to the credit of Indian
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entity, which is located in India, within a strict time frame.”

From the above extract, the following salient features of MTTs emerge: (i) the

original supplier and ultimate buyer of the goods are foreign entities, with the Indian

entity acting as an intermediary between them; (ii) the goods do not enter the

territory of India while shifting hands between the supplier and the buyer; (iii) Indian

foreign reserves are implicated when payment is remitted outside India when the

Indian entity initially pays the supplier for the goods; and (iv) foreign exchange is

remitted to India when the Indian entity receives the payment from the buyer of the

goods.

41 The respondents have argued that the above features make MTTs analogous

to imports/exports, while the appellant has attempted to differentiate them by noting

that the goods never enter India’s territory during an MTT. To resolve this, we must

understand how MTTs are considered internationally.

35
 PART C

42 The International Monetary Fund47 in its sixth edition of the Balance of

Payments and International Investment Position Manual48 defines MTT in the

following terms:

“10.41 Merchanting is defined as the purchase of goods by a

resident (of the compiling economy) from a nonresident
combined with the subsequent resale of the same goods to
another nonresident without the goods being present in the
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compiling economy. Merchanting occurs for transactions

involving goods where physical possession of the goods by
the owner is unnecessary for the process to occur.”

Thereafter, it considers how MTTs should be recorded by noting:

“10.44 The treatment of merchanting is as follows:

(a) The acquisition of goods by merchants is shown under

goods as a negative export of the economy of the merchant;

(b) The sale of goods is shown under goods sold under

merchanting as a positive export of the economy of the
merchant;

(c) The difference between sales over purchases of goods for

merchanting is shown as the item “net exports of goods under
merchanting.” This item includes merchants’ margins, holding
gains and losses, and changes in inventories of goods under
merchanting. As a result of losses or increases in inventories,
net exports of goods under merchanting may be negative in
some cases; and

(d) Merchanting entries are valued at transaction prices as

agreed by the parties, not FOB.”

47
“IMF”
48
Pages 157-159, available at <https://www.imf.org/external/pubs/ft/bop/2007/pdf/BPM6.pdf> accessed on 25
November 2021

36
 PART C

This makes it clear that while the goods involved in an MTT never enter the territory

of the intermediary, they are still recorded as negative and positive exports from the

territory of intermediary during the import and export leg of the MTT, which is similar

to how ordinary imports and exports would be recorded.

43 This conclusion is also supported by the IMF’s accompanying Balance of

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Payments Compilation Guide49, which notes:

“Merchanting

11.29 Merchanting transactions—that is, the purchase of

goods by a resident (of the compiling economy) from a
nonresident combined with the subsequent resale of the
same goods to another nonresident without the goods
being present in the compiling economy—should be
recorded in the balance of payments as transactions in
goods. This a change from the BPM5, where merchanting
was to be recorded as a service. The change in treatment
is in line with the change of ownership rule that
underpins the balance of payments conceptual
framework. If there is a change in the physical form of the
goods during the period they are owned by the merchant, as
a result of manufacturing services, then the transaction
should be classified as general merchandise, and not as
merchanting.

11.30 For the economy of the merchant, goods acquired

under merchanting should be recorded as a negative credit in
the balance of payments in the period the merchant acquires
the goods, and when they are sold they should be recorded in
that period as goods sold under merchanting as a positive
credit…”

(emphasis supplied)

49
Page 184, available at <https://www.imf.org/external/pubs/ft/bop/2014/pdf/BPM6_11F.pdf> accessed on 25
November 2021

37
 PART C

It is evident that the role of an intermediary in MTTs was earlier only considered as

providing a service. However, this has now evolved, where the intermediary is

considered to be the owner of the goods during their transit from the supplier to the

buyer. Hence, goods under MTTs are recorded as negative and positive exports

from the intermediary’s resident country, even when they never physically enter their

territory.
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44 Therefore, the international opinion favours the position taken by the

respondents that MTTs are analogous to traditional imports and exports. Therefore,

it was suitable for the RBI to link the permissibility of MTT in goods to the

permissibility of their import/export under the FTP. As noted earlier, the appellant

has not challenged notifications prohibiting the export of PPE products under the

FTP. Hence, the prohibition of their MTT under Clause 2(iii) of the 2020 MTT

Guidelines is also considered suitable.

C.3 The necessity of the measure

45 The prong evaluating necessity is often conflated with the prong evaluating

the suitability of a measure. The analysis of necessity is an extension of evaluating

the suitability of a restriction, coupled with an analysis of whether the proposed

measure is the least restrictive manner of arriving at the intended legitimate State

38
 PART C

interest. This prong has traces of the “narrowly tailored” state interest50 that has

often been used by this Court in evaluating claims of infringement of fundamental

rights under Part III.

46 The appellant has contended that a prohibition of exports in PPE products

was sufficient to achieve the objective of ensuring adequate supplies, and it was not
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necessary to also prohibit MTTs. Further, it is argued that the appellant facilitating

an MTT of PPE products between two countries does not impact their stock in India.

In any event, the appellant has argued that a less-intrusive alternative would be to

ban MTTs only for goods whose imports have been prohibited under the FTP or

allow individuals to seek exemptions from the RBI in relation to goods whose

import/export has been prohibited by the FTP where the RBI can assess, on a case-

by-case basis, whether their MTT should also be prohibited. While these measures

have been suggested on a general basis, the appellant has limited his challenge in

the present case only to the prohibition of PPE products. Hence, we shall be limiting

our analysis in relation to that.

47 Having considered the nature of MTTs in Section C.2, we reject the

appellant’s arguments for two reasons. First, while MTTs in PPE products may not

directly reduce the stock of these products in India, it still does contribute to their

trade between two foreign nations. In doing so, it directly reduces the available

quantity of PPE products in the international market, which may have been bought

by India, if so required. As such, MTTs contribute to reducing the available stock of

50
Aadhar (5J) (supra), paras 420 and 424

39
 PART C

PPE products in the international market that India could have acquired. Second, the

UOI’s policy to ban the export of PPE products reflects their stance on the product’s

non-tradability during the COVID-19 pandemic. It highlights a clear policy choice

under which Indian entities shall not be allowed to export these products outside of

India, in all probability to the highest buyers across the globe who may end up

hoarding the global supply. Hence, banning MTTs in PPE products was critical in
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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 utilisation of Indian foreign exchange. Hence, 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 realisation of

legitimate State interest.

C.4 Balancing fundamental rights with State aims

48 The fourth and final prong of the proportionality analysis involves the crucial

task of conducting a balancing exercise. The Court is called upon to legitimise the

“social importance of the limitation on a constitutional right”51. A measure that fails to

justify its existence on this prong is considered to have a disproportionate impact on

the right-holder52.

51
Aadhar (5J) (supra), paras 335 and 369
52
Ibid

40
 PART C

49 Before we commence our analysis on the balancing of this right, we think it is

critical for the Court to elaborate on the purpose and duties of the RBI, in order to

better appreciate the objective behind its seemingly onerous restrictions and

regulations.
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C.4.1 Regulatory Role of the RBI

50 The RBI was established by the Reserve Bank of India Act 193453. By way of

an amendment in 201654, the preamble of the statute was amended to reflect the

importance of a modern monetary policy framework in an increasingly complex

economy. The RBI has been entrusted with the exclusive authority to operate the

monetary policy framework of India55.

51 A Constitution Bench in Joseph Kuruvilla Vellukunnel v. Reserve Bank of

India56 considered a challenge to certain statutory provisions introduced in the

Banking Companies Act 1949 which vested the RBI with the powers to file an

application for winding-up of any company. Before conducting an analysis of the

constitutional challenge under Articles 14 and 19, the Constitution Bench prefaced

its analysis with the raison d’etre and importance of the RBI as a regulatory body.

Justice M Hidayatullah (as the learned Chief Justice then was) observed the

following:

53
“RBI Act”
54
Act 28 of 2016
55
Sections 45Z to 45Zo of the RBI Act
56
AIR 1962 SC 1371

41
 PART C

“16. Before we consider the arguments of the two sides in

detail, we wish to say a few words about the position of the
Reserve Bank in the financial affairs of India and also about
its place in the scheme of the law. The Reserve Bank of India
was established on April 1, 1935 by the Reserve Bank of
India Act, 1934. Even before the establishment of the
Reserve Bank, suggestions were made that there should be a
central bank in India, and the Royal Commission on Indian
Currency and Finance had recommended in 1926 that the
currency and credit of the country could only be put on a firm
foundation, if a central bank was established. The first Bill
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introduced in 1927 by Sir Basil Blackett was dropped. The

Indian Central Banking Inquiry Committee, however, reported
in 1931 that there was a need for a central banking institution
in India “for securing the development of the Indian banking
and credit system on a sound and proper basis”. The
Committee pointed out that some of the Provincial
Committees had also suggested the establishment of the
Reserve Bank. The Committee ended by saying:

“We accordingly consider it to be a matter of

supreme importance from the point of view of the
development of banking facilities in India, and of her
economic advancement generally, that a Central or
Reserve Bank should be created at the earliest
possible date. The establishment of such a bank
would by mobilization of the banking and
currency reserves of India in one hand tend to
increase the Vol. of credit available for trade,
industry and agriculture and to mitigate the evils
of fluctuating and high charges for the use of
such credit caused by seasonal stringency.” (Vol.
I, Part I. Chap. XXII, para 605)

The White Paper on Indian Constitutional Reforms also

recommended the establishment of a Reserve Bank “free
from political influence”. As a result of these findings, when
a fresh Bill was introduced by Sir George Schuster on
September 8, 1933 it was accepted and received the assent
of the Governor-General on March 6, 1934.

17. The functions of the Reserve Bank were generally

indicated in the preamble as the regulation of the issue of
the Bank notes and the keeping of the reserves with a
view to securing monetary stability in India and generally
to operate the currency and credit system of the country
to its advantage. But to enable the Reserve Bank to

42
 PART C

function in this manner, it had to be given other powers,

so that it may function effectively as a central bank. To
this end, the Reserve Bank was given the right to hold the
cash balances of important commercial banks, a right to
transact Government business in India which was also its
obligation, and to enter into agreements with State
Governments to transact their business.

[……]

18. But the most important function of the Reserve Bank

is to regulate the banking system generally. The Reserve
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Bank has been described as a Bankers' Bank. Under the

Reserve Bank of India Act, the scheduled banks maintain
certain balances and the Reserve Bank can lend
assistance to those banks “as a lender of the last resort”.
The Reserve Bank has also been given certain advisory
and regulatory functions. By its position as a central bank, it
acts as an agency for collecting financial information and
statistics. It advises Government and other banks on financial
and banking matters, and for this purpose, it keeps itself
informed of the activities and monetary position of scheduled
and other banks, and inspects the books and accounts of
scheduled banks and advises Government after inspection
whether a particular bank should be included in the Second
Schedule or not. […..]”

(emphasis supplied)

52 A two-judge Bench of this Court in Peerless General Finance and

Investment Co. Limited v. Reserve Bank of India57 considered an alleged

constitutional infringement of Article 19(1)(g) in the context of RBI’s regulation of

savings schemes run by Residuary Non-Banking Companies. The thrust of the

impugned regulation was to regulate deposit investment schemes issued by

Residuary Non-Banking Companies, in order to ensure the security of deposits

made by consumers. Justice N M Kasliwal elaborated on the role of the Courts with

57
(1992) 2 SCC 343

43
 PART C

specific reference to the regulatory powers of the RBI. The decision highlighted the

importance of judicial abstinence from matters of economic policy requiring

expertise:

“30. Before examining the scope and effect of the impugned

paragraphs (6) and (12) of the directions of 1987, it is also
important to note that Reserve Bank of India which is bankers'
bank is a creature of statute. It has large contingent of expert
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advice relating to matters affecting the economy of the entire

country and nobody can doubt the bona fides of the Reserve
Bank in issuing the impugned directions of 1987. The
Reserve Bank plays an important role in the economy
and financial affairs of India and one of its important
functions is to regulate the banking system in the
country. It is the duty of the Reserve Bank to safeguard
the economy and financial stability of the country [….]

31. The function of the Court is to see that lawful authority is

not abused but not to appropriate to itself the task entrusted
to that authority. It is well settled that a public body invested
with statutory powers must take care not to exceed or abuse
its power. It must keep within the limits of the authority
committed to it. It must act in good faith and it must act
reasonably. Courts are not to interfere with economic
policy which is the function of experts. It is not the
function of the courts to sit in judgment over matters of
economic policy and it must necessarily be left to the
expert bodies. In such matters even experts can
seriously and doubtlessly differ. Courts cannot be
expected to decide them without even the aid of experts.”

(emphasis supplied)

In his concurring opinion, Justice V Ramaswamy noted the statutory importance of

the RBI and held that directions validly issued by the RBI are in the nature of

statutory regulations:

“51. This Court in Joseph Kuruvilla Vellukunnel v. Reserve

Bank of India [1962 Supp 3 SCR 632 : AIR 1962 SC 1371 :
(1962) 32 Comp Cas 514] held that the RBI is “a bankers'

44
 PART C

bank and lender of the last resort”. Its objective is to ensure

monetary stability in India and to operate and regulate the
credit system of the country. It has, therefore, to perform a
delicate balance between the need to preserve and maintain
the credit structure of the country by strengthening the rule as
well as apparent creditworthiness of the banks operating in
the country and the interest of the depositors. In
underdeveloped country like ours, where majority population
are illiterate and poor and are not conversant with banking
operations and in underdeveloped money and capital market
with mixed economy, the Constitution charges the State to
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prevent exploitation and so the RBI would play both

promotional and regulatory roles. Thus the RBI occupies
place of “pre-eminence” to ensure monetary discipline
and to regulate the economy or the credit system of the
country as an expert body. It also advices the
government in public finance and monetary regulations.
The banks or non-banking institutions shall have to
regulate their operations in accordance with, not only as
per the provisions of the Act but also the rules and
directions or instructions issued by the RBI in exercise of
the power thereunder. Chapter 3-B expressly deals with
regulations of deposit and finance received by the
RNBCs. The directions, therefore, are statutory
regulations.

[…]

65. No one can have fundamental right to do any

unregulated business with the subscribers/depositors'
money. [….]Thus there is a reasonable nexus between the
regulation and the public purpose, namely, security to the
depositors' money and the right to repayment without any
impediment, which undoubtedly is in the public interest.

(emphasis supplied)

Justice V Ramaswamy further articulated the role of judicial review in matters of

economic legislation and the democratic necessity of judicial abstinence:

68. It is well settled that the court is not a tribunal from

the crudities and inequities of complicated experimental
economic legislation. The discretion in evolving
economic measures, rests with the policy makers and

45
 PART C

not with the judiciary. Indian social order is beset with

social and economic inequalities and of status, and in
our socialist secular democratic Republic, inequality is
an anathema to social and economic justice. The
Constitution of India charges the State to reduce
inequalities and ensure decent standard of life and
economic equality. The Act assigns the power to the RBI
to regulate monetary system and the experimentation of
the economic legislation, can best be left to the executive
unless it is found to be unrealistic or manifestly arbitrary.
Even if a law is found wanting on trial, it is better that its
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defects should be demonstrated and removed than that

the law should be aborted by judicial fiat. Such an
assertion of judicial power deflects responsibilities from
those on whom a democratic society ultimately rests. The
Court has to see whether the scheme, measure or regulation
adopted is relevant or appropriate to the power exercised by
the authority. Prejudice to the interest of depositors is a
relevant factor. Mismanagement or inability to pay the
accrued liabilities are evils sought to be remedied. The
directions are designed to preserve the right of the depositors
and the ability of RNBC to pay back the contracted liability. It
is also intended to prevent mismanagement of the deposits
collected from vulnerable social segments who have no
knowledge of banking operations or credit system and repose
unfounded blind faith on the company with fond hope of its
ability to pay back the contracted amount. Thus the directions
maintain the thrift for saving and streamline and strengthen
the monetary operations of RNBCs.”

(emphasis supplied)

53 A three-judge Bench of this Court in Internet and Mobile Association of

India v. Reserve Bank of India58 (“Internet & Mobile Association”) recently

considered a challenge to the RBI’s ban of trading in cryptocurrencies. In examining

this challenge, the Court detailed the regulatory importance of the RBI through a

historical and textual analysis of the RBI Act. Justice V Ramasubramanian, speaking

58
(2020) 10 SCC 274

46
 PART C

on behalf of the Court, observed that the RBI assumes a special role, compared to

other statutory bodies. Its decisions are reflective of its expertise and guide the

monetary policy of the country. Hence, a policy decision of the RBI warrants

deference from this Court. The Court held:

“84. A careful scan of the RBI Act, 1934 in its entirety would
show that the operation/regulation of the credit/financial
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system of the country to its advantage, is a thread that

connects all the provisions which confer powers upon RBI,
both to determine policy and to issue directions.

[…]

189. It is contended by Shri Ashim Sood, learned Counsel

for the petitioners that the impugned Circular does not
have either the status of a legislation or the status of an
executive action, but is only the exercise of a power
conferred by statute upon a statutory body corporate.
Therefore, it is his contention that the judicial rule of
deference as articulated in R.K. Garg v. Union of India
[R.K. Garg v. Union of India, (1981) 4 SCC 675 : 1982 SCC
(Tax) 30] , Balco Employees' Union v. Union of India
[Balco Employees' Union v. Union of India, (2002) 2 SCC
333] and Swiss Ribbons (P) Ltd. v. Union of India [Swiss
Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17] will
not apply to the decision taken by a statutory body like
RBI. If, a legislation relating to economic matters is placed at
the highest pedestal, an executive decision with regard to
similar matters will be placed only at a lower pedestal and the
decision taken by a statutory body may not even be entitled to
any such deference or reverence.

190. But given the scheme of the RBI Act, 1934 and the
Banking Regulation Act, 1949, the above argument
appears only to belittle the role of RBI. RBI is not just like
any other statutory body created by an Act of legislature.
It is a creature, created with a mandate to get liberated
even from its creator. This is why it is given a mandate — (i)
under the Preamble of the RBI Act, 1934, to operate the
currency and credit system of the country to its advantage
and to operate the monetary policy framework in the country;
(ii) under Section 3(1), to take over the management of the
currency from the Central Government; (iii) under Section 20,

47
 PART C

to undertake to accept monies for account of the Central

Government, to make payments up to the amount standing to
the credit of its account and to carry out its exchange,
remittance and other banking operations, including the
management of the public debt of the Union; (iv) under
Section 21(1), to have all the money, remittance, exchange
and banking transactions in India of the Central Government
entrusted with it; (v) under Section 22(1), to have the sole
right to issue bank notes in India and (vi) under Section 38, to
get rupees into circulation only through it, to the exclusion of
the Central Government. Therefore, RBI cannot be equated
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to any other statutory body that merely serves its master.

It is specifically empowered to do certain things to the
exclusion of even the Central Government. Therefore, to
place its decisions at a pedestal lower than that of even
an executive decision, would do violence to the scheme
of the Act.

[….]

192. But as we have pointed out above, RBI is not just any
other statutory authority. It is not like a stream which cannot
be greater than the source. The RBI Act, 1934 is a pre-
constitutional legislation, which survived the Constitution by
virtue of Article 372(1) of the Constitution. The difference
between other statutory creatures and RBI is that what the
statutory creatures can do, could as well be done by the
executive. The power conferred upon the delegate in other
statutes can be tinkered with, amended or even withdrawn.
But the power conferred upon RBI under Section 3(1) of the
RBI Act, 1934 to take over the management of the currency
from the Central Government, cannot be taken away. The
sole right to issue bank notes in India, conferred by Section
22(1) cannot also be taken away and conferred upon any
other bank or authority. RBI by virtue of its authority, is a
member of the Bank of International Settlements, which
position cannot be taken over by the Central Government and
conferred upon any other authority. Therefore, to say that it
is just like any other statutory authority whose decisions
cannot invite due deference, is to do violence to the
scheme of the Act. In fact, all countries have Central
banks/authorities, which, technically have independence from
the Government of the country. To ensure such
independence, a fixed tenure is granted to the Board of
Governors, so that they are not bogged down by political
expediencies. […..]Therefore, we do not accept the

48
 PART C

argument that a policy decision taken by RBI does not

warrant any deference.

(emphasis supplied)

In further analysing the wide-ranging powers entrusted with the RBI, the Court noted

that its regulatory powers would be tested against the cornerstone of proportionality:
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“224. It is no doubt true that RBI has very wide powers

not only in view of the statutory scheme of the three
enactments indicated earlier, but also in view of the
special place and role that it has in the economy of the
country. These powers can be exercised both in the form
of preventive as well as curative measures. But the
availability of power is different from the manner and
extent to which it can be exercised. While we have
recognised elsewhere in this order, the power of RBI to
take a pre-emptive action, we are testing in this part of
the order the proportionality of such measure, for the
determination of which RBI needs to show at least some
semblance of any damage suffered by its regulated entities.
But there is none. When the consistent stand of RBI is that
they have not banned VCs and when the Government of India
is unable to take a call despite several committees coming up
with several proposals including two draft Bills, both of which
advocated exactly opposite positions, it is not possible for us
to hold that the impugned measure is proportionate.”

(emphasis supplied)

54 Thus, it is settled that the RBI is a special, expert regulatory body that is

insulated from the political arena. Its decisions are reflective of its expertise in

guiding the economic policy and financial stability of the nation. Adverting to the

facts of this case, the RBI is empowered by FEMA to manage, regulate, and

supervise the foreign exchange of India. It is trite law that courts do not interfere with

49
 PART C

the economic59 or regulatory60 policy adopted by the government. This lack of

interference is in deference to the democratically elected government’s wisdom,

reflecting the will of the people. As held by a three-judge Bench of this Court in

Internet & Mobile Association (supra), the regulations introduced by RBI are in the

nature of statutory regulation and demand a similar level of deference that is

accorded to executive and Parliamentary policy.

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55 This Court must be circumspect that the rights and freedoms guaranteed

under the Constitution do not become a weapon in the arsenal of private businesses

to disable regulation enacted in the public interest. The Constituent Assembly

Debates had carefully curated restrictions on rights and freedoms, in order to retain

democratic control over the economy. Regulation must of course be within the

bounds of the statute and in conformity with executive policy. A regulated economy

is a critical facet of ensuring a balance between private business interests and the

State’s role in ensuring a just polity for its citizens. The Constitution Bench in

Modern Dental College (supra) had remarked on the role of regulatory

mechanisms in liberalized economies. Speaking for the Bench, Justice A K Sikri had

observed:

“87. Regulatory mechanism, or what is called regulatory

economics, is the order of the day. In the last 60-70 years,
economic policy of this country has travelled from laissez faire
to mixed economy to the present era of liberal economy with
regulatory regime. With the advent of mixed economy, there

59
R K Garg v. Union of India, (1981) 4 SCC 675; Balco Employees Union v. Union of India, (2002) 2 SCC 333
60
Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17; Ebix Singapore v. Committee of Creditors of
Educomp Solutions (P) Ltd., 2021 SCC OnLine SC 313

50
 PART C

was mushrooming of the public sector and some of the key

industries like aviation, insurance, railways, electricity/power,
telecommunication, etc. were monopolised by the State.
Licence/permit raj prevailed during this period with strict
control of the Government even in respect of those industries
where private sectors were allowed to operate. However,
Indian economy experienced major policy changes in early
90s on LPG Model i.e. liberalisation, privatisation and
globalisation. With the onset of reforms to liberalise the Indian
economy, in July 1991, a new chapter has dawned for India.
This period of economic transition has had a tremendous
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impact on the overall economic development of almost all

major sectors of the economy.

88. When we have a liberal economy which is regulated by

the market forces (that is why it is also termed as market
economy), prices of goods and services in such an economy
are determined in a free price system set up by supply and
demand. This is often contrasted with a planned economy in
which a Central Government determines the price of goods
and services using a fixed price system. Market economies
are also contrasted with mixed economy where the price
system is not entirely free, but under some government
control or heavily regulated, which is sometimes combined
with State led economic planning that is not extensive enough
to constitute a planned economy.

89. With the advent of globalisation and liberalisation, though

the market economy is restored, at the same time, it is also
felt that market economies should not exist in pure form.
Some regulation of the various industries is required rather
than allowing self-regulation by market forces. This
intervention through regulatory bodies, particularly in pricing,
is considered necessary for the welfare of the society and the
economists point out that such regulatory economy does not
rob the character of a market economy which still remains a
market economy. Justification for regulatory bodies even in
such industries managed by private sector lies in the welfare
of people. Regulatory measures are felt necessary to promote
basic well being for individuals in need. It is because of this
reason that we find regulatory bodies in all vital industries like,
insurance, electricity and power, telecommunications, etc.”

51
 PART C

56 Regulating the economy is reflective of the compromise between the interests

of private commercial actors and the democratic State that represents and protects

the interests of the collective. Scholars across the world have warned against the

judiciary constitutionalising an unregulated marketplace61. This Court must be bound

by a similar obligation, in order to preserve its fidelity to the Constitution. With the

transformation in the economy, the Courts must also be alive to the socio-economic
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milieu. The right to equality and the freedom to carry on one’s trade cannot inhere a

right to evade or avoid regulation. In liberalized economies, regulatory mechanisms

represent democratic interests of setting the terms of operation for private economic

actors. This Court does not espouse shunning of judicial review when actions of

regulatory bodies are questioned. Rather, it implores intelligent care in probing the

bona fides of such action and nuanced deference to their expertise in formulating

regulations. A casual invalidation of regulatory action in the garb of upholding

fundamental rights and freedoms, without a careful evaluation of its objective of

social and economic control, would harm the general interests of the public.

57 In the instant case, the RBI has demonstrated a rational nexus in the

prohibition of MTTs in respect of PPE products and the public health of Indian

citizens. The critical links between FTP and MTTs have been established by the

respondents. Facilitating MTTs in PPE products between two distinct nations may

prima facie appear as having no bearing on the availability of domestic stocks.

However, the RBI has carefully established the connection between the use of
61
Robert Post & Amanda Shanor, Adam Smith’s First Amendment, 128 HARVARD LAW REVIEW FORUM 165, 167
(2015), available at <https://harvardlawreview.org/2015/03/adam-smiths-first-amendment/>

52
 PART C

Indian foreign exchange reserves, MTTs and the availability of domestic stocks (as

noted in Sections C.2 and C.3). As a developing country with a sizeable population,

RBI’s policy to align MTT permissibility with the FTP restrictions on import and

export of PPE products cannot be questioned. Thus, this Court is constrained to

defer to the regulations imposed by RBI and the UOI, in the interests of preserving

public health in a pandemic. This deference is by no means uncritical. In fact, one of

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us (Justice D Y Chandrachud), in a three-judge Bench of this Court in Gujarat

Mazdoor Sabha v. State of Gujarat62 had decried the State’s tenuous claim of a

public health emergency to dilute welfare conditions in labour laws. This Court had

stressed that balancing individual rights against measures adopted to combat the

public health crisis must continue to satisfy the test of proportionality. Justice D Y

Chandrachud noted:

“30. Even if we were to accept the respondent's argument at

its highest, that the pandemic has resulted in an internal
disturbance, we find that the economic slowdown created by
the Covid-19 Pandemic does not qualify as an internal
disturbance threatening the security of the State. The
pandemic has put a severe burden on existing, particularly
public health, infrastructure and has led to a sharp decline in
economic activities. The Union Government has taken
recourse to the provisions of the Disaster Management Act,
2005. [ Ministry of Home Affairs, Order No. 40-3/2020-DM-
I(A) dated 24-3-2020.] However, it has not affected the
security of India, or of a part of its territory in a manner that
disturbs the peace and integrity of the country. The economic
hardships caused by Covid-19 certainly pose unprecedented
challenges to governance. However, such challenges are to
be resolved by the State Governments within the domain of
their functioning under the law, in coordination with the
Central Government. Unless the threshold of an economic

62
(2020) 10 SCC 459

53
 PART C

hardship is so extreme that it leads to disruption of public

order and threatens the security of India or of a part of its
territory, recourse cannot be taken to such emergency
powers which are to be used sparingly under the law.
Recourse can be taken to them only when the conditions
requisite for a valid exercise of statutory power exist under
Section 5. That is absent in the present case.

[…]

40. The need for protecting labour welfare on one hand and
combating a public health crisis occasioned by the pandemic
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on the other may require careful balances. But these

balances must accord with the rule of law. A statutory
provision which conditions the grant of an exemption on
stipulated conditions must be scrupulously observed. It
cannot be interpreted to provide a free reign for the State to
eliminate provisions promoting dignity and equity in the
workplace in the face of novel challenges to the State
administration, unless they bear an immediate nexus to
ensuring the security of the State against the gravest of
threats.”

Thus, it is not this Court’s stance that judicial review is stowed in cold storage until a

public health crisis tides over. This Court retains its role as the constitutional

watchdog to protect against State excesses. It continues to exercise its role in

determining the proportionality of a State measure, with adequate consideration of

the nature and purpose of the extraordinary measures that are implemented to

manage the pandemic. Democratic interests that secure the well-being of the

masses cannot be judicially aborted to preserve the unfettered freedom to conduct

business, of the few.

54
 PART D

D Conclusion

58 Therefore, we find that the judgment dated 8 October 2020 of the Madhya

Pradesh High Court was correct in holding that Clause 2(iii) of the 2020 MTT

Guidelines was a proportionate measure in ensuring the availability of sufficient

domestic stock of PPE products. The measure was validly enacted, in pursuance of
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legitimate state interest and did not disproportionately impact the fundamental rights

of the appellant. Hence, Clause 2(iii) passes muster under Articles 14, 19(1)(g) and

21. For the reasons noted in this judgment, we see no need to interfere.

59 For the above reasons, we find no merit in the appeal. The appeal accordingly

stands dismissed.

60 Pending application(s), if any, shall stand disposed of.

……….….....................................................J.
[Dr Dhananjaya Y Chandrachud]

.…..….….....................................................J.
[Vikram Nath]

.…..….….....................................................J.
[B V Nagarathna]

New Delhi;
December 06, 2021

55