Congress leader P Chidambaram, a former finance minister, has been widely credited with implementing a series of reforms, along with Prime Minister Manmohan Singh, in the Indian economy. As an opposition leader, Chidambaram, who holds degrees from Madras University in Chennai and a Masters of Business Administration from Harvard University, has been a trenchant critic of the Narendra Modi government’s economic policies. In an interview with CNBC-TV18, Chidambaram, 73, weighed in on Monday’s RBI board meeting that comes in the backdrop of the ongoing tussle between the central government and the regulator. He spoke at length about the controversial Section 7, the role of the government-appointed board members, and the options before the central bank. Here is the full transcript of the interview.
A: That is a preposterous suggestion. Nowhere in the world is a central bank run by a board. Central bank equals governor or central bank equals the chairman of the Fed or the governor of the European Central Bank (ECB) or the governor of the Bank of England. I have never heard of a central bank being treated like a board-managed private or public company.
Shereen: Let me start by asking you about what do you make of the proposed thinking and I don’t know whether this is going to land up in the form of a proposal to be taken up by the board tomorrow but the thinking within government that the Reserve Bank of India (RBI) board should be more empowered, that the RBI should in fact become a board managed institution? Besides, who is on the board of RBI? These are private businessmen, private professionals pursuing their own professions or private businesses heading conglomerates, corporates, how are they competent to lay down central bank policy? They are there to keep a watchful eye on how the RBI is reacting to situations and responding to situations and they can give their feedback to the government. But to say that the central bank will be run like a board-managed company with these private businessmen and private professionals voting and the governor reduced to a Chief Operating Officer, I think it is a preposterous suggestion, a suggestion that has to be dismissed out of hand. I cannot recall any such central bank anywhere in the world, which is sought to be run as a board-managed company. Shereen: Let me pick up on that point. One you have raised the issue of competence or conflict of interest for the benefit of our viewers; let us take the example of the current board of the RBI. One of the issues that is likely to be taken up is the liquidity issue, the non-banking financial companies (NBFCs) issue and you have Bharat Doshi as well as the N Chandrasekaran both run conglomerates and they have NBFCs in the fold of those conglomerates sitting on the board of the RBI, so a lot of people are raising the conflict question. However, we heard from former RBI governors, whether it was Raghuram Rajan or C Rangarajan, all of them echoing the point of view that the board acts as a sounding board, it is advisory in nature, that has been the tradition but within the thinking of the government, their view is that that might have been tradition but the law does not prohibit the government from providing rules to the board to empower the board members further. What is the point of law?
A: A section can be interpreted, a section can be misinterpreted. When a board is given to the RBI that has to be read in the context of what a board is supposed to do vis-a-vis a central bank. You cannot simply read the letter of the law and interpret it literally or in a pedestrian manner. You have to understand the purpose behind a law, what is the law for, what is the institution for which the law is being made and having regard to the role of the central bank. You cannot treat a central bank like any other commercial bank. Therefore you take the letter of the law but understand the spirit behind which eminent people are placed on the board, that is to bring to the notice of the governor, notice of the professionals running the central bank, the various issues that concern the economy and leave it to the professionals, the central bankers, the governor, the deputy governor to respond to a situation.
N Chandrasekaran and others are very competent professionals but they cannot decide what the policy of the RBI should be towards NBFC or towards MSMEs. They cannot decide that policy. That is to be decided by the central bank having regard to other economic indicators and the overall economic situation.
Latha: Considering your expertise in law, I wanted to guess what the options before the RBI are. Section 7(2) says subject to any such direction, the general superintendence, the direction of the affairs and business of the bank shall be entrusted to the central board of directors which may exercise all powers and do all acts, which maybe exercised or done by the bank. Section 7(3) just has one more phrase, save as otherwise provided and regulations made by the board, the governor and in his absence the deputy governor shall also have powers of general superintendence and direction of the affairs and business of the bank and may exercise all powers and do all acts and things, which may be exercised and done by the bank. Identical phrases, except for this one phrase, save as otherwise provided and regulations made by the central board. If the central board were to make regulations, giving itself powers or empowering committees, what are the options before the governor?
A: That is not the way to read the Sections. Central bank is a very specialised, special institution in an open economy. A central bank cannot be treated like a commercial bank, a central bank has to maintain monetary stability, a central bank in India - the RBI, has many other functions, it manages the debt of the government, it keeps the reserves of various states, so the RBI is more powerful than other central banks around the world. Central bank is to set interest rates, central bank has to do open market operations (OMOs), having regard to the inflow and outflow of foreign money. It has too many functions. All these functions must be balanced and policy decisions taken by competent, professional central bankers.When you say that the second proviso says that the governor – will have the powers - that means what is meant all over the world - central bank equals governor and in the absence of the governor, the deputy governor. So central bank equals governor. What does the first proviso says, yes, you can make regulations for overall superintendence, you can make regulations for things like meetings of the central bank, frequency of meetings, how the agenda should be prepared, how the research should be done, what information should be brought to the board before the board can advise but that doesn't mean under the first proviso, the board of directors will take over the powers of the governor and they become a collective governor.
I have never heard of a collective called governor. The governor is the head of the central bank and in him, alone, vests the responsibility to maintain monetary stability. So first proviso cannot be misinterpreted, distorted the way this government is trying to do. I think it is quite mischievous. Latha: There are voting members and non-voting members so clearly voting is envisaged by the act. Therefore my fear is that all these provisions can be used to mean that the board can vote and direct the governor to do something. Let us assume hypothetically, in the Monday meeting, the board votes to direct the governor to do something for SMEs or for NBFCs or for overall liquidity or for the banks under prompt correction action (PCA) then what are the options for the governor?
A: The board can pass a resolution or a decision or a sense of the board to say, we request the governor to look into these aspects, these are the facts that we are placing before the board and the governor will take note of all these facts and devise suitable measures to enhance liquidity to NBFCs or to enhance credit flow to MSMEs. That the board can do and that the board can do if there are dissenting voices on the board. If there are more than one view, the board can then say - the sense of the board is naturally by majority is that liquidity must be enhanced or credit should be enhanced. But if the board directs the governor to do this or do that, I think it is a gross interference with the independence of the central bank and the governor must reject such a resolution as beyond the competence of the board and if the board insists on passing such a resolution and insists on obedience to that resolution, the governor must resign.
A: No. If you ask me for a legal opinion, I will give a legal opinion to the contrary. Keep aside legal opinions, please understand central bank by definition is an independent organisation. Look at the charter of the European Central Bank (ECB), ECB charter says, the ECB nor any of its constituent national central banks shall seek or receive any instructions from any government or any other body or any other authority, that is the core of central bank’ s independence.
Shereen: You are saying that the governor must reject or must resign if he doesn’t agree with the board resolution. What about the fact that at least on some of these issues the consultation process between the government as well as the Reserve Bank of India has happened under Section 7? Under Section 7, the government believes and it has sought legal opinion and in the legal opinion the government claim says that it can direct the central bank to take action as per the writ of the government. If the government mischievously and the board ignorantly passes resolutions or so called decisions directing the governor to do this or do that the governor would be well within his rights to reject it and if the board still insists that the resolution must be passed and the resolution must be obeyed and a report should be given to the next board meeting about how the resolution was implemented, the governor must resign and make a statement in the public. Shereen: I want to come back to the larger issue of giving the board the powers or empowering the directors of the board of the RBI. We had put this question to Y H Malegam on how regulations under Section 58 of the act can in fact be processed. I want to get your legal opinion on that as well. Malegam had said that the board can make regulations with the prior approval of government by notification in the official gazette and then after this notification is done, within 30 days or so that notification has to be placed before parliament and both houses of parliament have to approve it or modify that. So, this requires parliamentary sanction as per what Malegam told us. Again the government says that this would not require parliamentary approval?
A: That is not correct. Regulations have to be placed before parliament. All regulations, all sub-ordinate legislation or most sub-ordinate legislation have to be placed before parliament. Parliament usually allows it to lie there for 30 days, nobody looks at it or tries to amend it, but please understand, the regulation would be incompetent, would be without jurisdiction if it encroaches upon central bank independence, that is the unstated premise of a central bank law. It is the foundation of a central bank law,
A central bank is independent of the government and of any other authority. Therefore any regulation that encroaches upon central bank’s independence is ultra vires. Let me give you an example, the constitution says, the ministers shall aid and advice the governor. The governors, some governors and in fact the Lieutenant governor of Delhi took the view, you are only to aid and advise me, all power rests with me. However then the Supreme Court said no, the fundamental premise of parliamentary democracy is that the governor is only a titular head aid and advice is a real three words which describes the powers in the parliamentary democracy. It is the ministers who aid and advice who have the real power. Therefore just because the regulations says or the Section says you can make a regulation, you can pass resolutions, please understand if any of that encroaches or interferes with the central bank’s independence , it would be ultra vires. It will be stuck down by courts.
A: That is premised on central bank independence that is not negotiable. Therefore if the act is premised on central bank’s independence, you cannot make a regulation contrary to that. There are any number of judgments which have interpreted the nature of rulemaking power. It has to be for the purposes of the act and not inconsistent with the provisions of the act. There is a judgment of Chief Justice Dipak Misra in the Gujarat Petroleum & Gas Board case, there is a judgment of Justice Nariman speaking for the bench, you cannot make a regulation or a rule which undermines or literally destroys the basis on which and the purpose for which the law is made. If the central bank law is to ensure central bank’s independence, then no resolution, no decision, no regulation can encroach upon that and that will be struck down.
Latha: I am reading the powers of central board to make regulations, that is, Section 58 of the Act. It says, the central board may with the previous sanction of the government by notification of the gazette, make regulations consistent with this act. Are those words enough to say that the central board can’t make.....