Last week, the Supreme Court’s order constituting a committee to settle the ongoing farmer agitation was critiqued across the entire spectrum of left-to-right wing commentary. At about the same time, in a case involving PayPal, a popular online payment gateway service in India, the Delhi High Court passed an order directing the Finance Ministry to set up a committee to address the following question: whether providers of online payment gateway services should be classified as payment system operators. This order did not get as much attention. Perhaps this is because it affected a smaller section of the population and was not as politically symbolic. The order of the Delhi High Court is problematic for precisely the same reason as the Supreme Court’s order in the farmers’ agitation matter. It violates the fundamental principle of separation of powers between the judiciary and the executive.
The Delhi High Court order
The story so far is as follows. In December 2020, the Financial Intelligence Unit-Ind (FIU), a Central Government-constituted executive body, imposed a penalty of INR 9.6 million on PayPal Payments Pvt. Ltd. under the provisions of the Prevention of Money Laundering Act, 2002 (PMLA). The PMLA sets up an elaborate reporting framework to be complied with by financial service providers, including ‘payment system operators’. The PMLA obliges such entities to verify the identities of their clients and maintain detailed records of the transactions executed by them. It requires them to periodically report high-value transactions and suspicious transactions to the FIU. The FIU’s order declared PayPal to be a ‘payment system operator’ covered under the PMLA, and penalized it for not having complied with the reporting obligations imposed on it. PayPal filed a writ petition before the Delhi High Court challenging the order.
The Reserve Bank of India (RBI) is the regulator of payment systems in India. In the proceeding before the Delhi High Court, the RBI, in its position as a regulator, adopted the position that PayPal is not a payment system operator and is not licensed as such under the Payment and Settlement Systems Act, 2007 (PSS Act) which governs the regulation of payment systems in India.
The Court stayed the FIU’s order partially. It directed the Finance Ministry to constitute a committee with a nominee of the RBI. The mandate of this committee is to decide whether online payment gateway service providers ought to be considered as payment system operators under Indian law. Incidentally, this is the precise substantial question of law that was raised before the Court in the matter. By constituting a committee, the Court effectively abdicated its responsibility of interpreting the law by delegating it to a committee comprising appointees of the government and the RBI.
Separation of powers
The objective of separating the power of writing the law from the power of interpreting the law and dispensing justice hardly needs reemphasis. The separation of powers does not only serve the purpose of specialized expertise, but it is more fundamental to governance. It is necessary to ensure that power is not concentrated in a single arm of the state. The separation of powers doctrine ensures that, to the extent possible, conflicting roles are played by independent bodies, and that each body acts as a check on the exercise of powers by the other.
Over the years, the courts have developed jurisprudence on the tools of interpretation of the law. The text of the statute, the long and short titles of the law, the headings of sections, its preamble, the intent of the legislature writing the statute, are evolved tools of interpretation. Deferring to the executive’s views or seeking consensus between two executive agencies on the interpretation of a statute is not one of them.
The Court’s approach of seeking consensus on the fundamental question of law before it, raises several questions. First, if the committee does arrive at a consensus on whether online payment gateway service providers are payment system operators under Indian law, will the court independently discharge its responsibility of interpreting the statute to answer the same question? On the other hand, if the court does independently interpret the law to decide this question, the committee’s deliberations would be an exercise in futility.
Should we worry about executive bodies taking conflicting positions?
It is not rare for the Government and the RBI to take opposing positions on a given matter. For instance, the Government and the RBI have been at odds before the court in cases involving questions of loan forgiveness during the pandemic, the classification of loans as non-performing assets as well as on questions involving the constitutionality of amendments to the Banking Regulation Act. All of these are domains where the Government and the RBI have had conflicting objectives, and each is attempting to optimize its objective.
Disagreement between the agencies of the state on questions of their respective roles and interpretation of their governing statutes is indeed healthy in many instances. For example, in the instant case, while the objective of the PMLA is to set up a robust reporting framework for financial transactions, the objective of the PSS Act is to regulate payment system providers and participants in India, without compromising the development of the sector. These objectives often conflict with each other. The role of the court in such a case is not to seek consensus, but to answer the question at hand having regard to the language and objective of the statute it is operating under.
To conclude, with the payments industry developing at breakneck speed in India, the question raised before the court in the PayPal case is critical and will likely have serious implications for the entire range of consumer-facing intermediaries in the Indian payments eco-system.
Further, as rightly pointed out by the Court, the case raises a ‘substantial legal issue’. Indeed, the Court is well-equipped to adjudicate this question itself. It must do so by interpreting the PMLA and applying the law to the business model of online payment gateway service providers. The Court should harness the conventional tools of interpretation of statutes to decide this question. The consensus of the Ministry of Finance and the RBI on a question of interpretation is unnecessary and even counter-productive to the rule of law. Consumers and businesses are best served by the court applying and interpreting the law as it is written on the book, as opposed to what the executive agencies believe it should be.