Section 7 of The RBI Act and Related Issues

Background

  • The issue of invoking Section 7 (1) of RBI Act came up during the hearing of Allahabad high court in a case filed by the Independent Power Producers Association of India challenging RBI’s 12 February circular. The high court, in August, said the government could issue directions to RBI under Section 7 of RBI Act.
  • Against this backdrop, the government issued a letter to the RBI governor seeking his views on exemption for power companies in relation to the 12 February circular. Another instance was when the government on 10 October sought the governor’s views on using RBI’s capital reserves for providing liquidity.

Section 7 of the RBI Act

  • According to Section 7 of the RBI Act the central government is empowered to issue directions it considers necessary for public interest to the central bank from time to time after consultation with the RBI governor.
  • “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest,” Section 7(1) of the RBI Act reads.
  • The sub-section under Section 7 further reads, “Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”
  • Section 7(3) reads, “Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.”
  • However, complete implication of the section cannot be determined because it has never been invoked in the history of independent India.

Section 7 seen as an extreme measure

  • This section has never been used in till now. It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 global financial crisis.
  • It is not clear how this Section operates since it has never been used.
  • The aggressive move could scandalise a section of academia and experts, while raising questions about the government’s intentions and the impact on RBI’s autonomy.

The difference between government and RBI

  • The disinclination of RBI to dilute the prompt corrective action(PCA) directive imposed upon the 11 public sector banks.
  • The refusal of RBI to relax actions on some major power sector companies.
  • The difference in perceptions about the reserves with RBI and right of the government to demand transfer from them to the government as demanded.
Location: Thiruvananthapuram, Kerala, India

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