The history and importance of Section 7 (1) of RBI Act (1934)

Lot of talk in media about Section 7(1) of RBI Act 1934. As per media reports, Government has invoked this section to give certain orders to the central bank. See this by Ira Dugal.

Section 7 of RBI Act states:

1) 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.

(2) 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.

(3) 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.]

I  had blogged about the history of Section 7(1) in an earlier post. Reblogging it:

RBI started as a shareholder bank with Board nomination coming from both Government and shareholders. However, while working towards RBI’s nationalisation the shareholder angle did not matter anymore. A Bill was prepared to amend RBI Act.

In the  bill, on one of the points RBI Governor suggested that in case of differences between the two, the government should take responsibility for their action. However, Finance Ministry refused this and added what is now seen as Section 7 (1). From RBI’s First History Volume:

The clause relating to the giving of directions by the Central Government to the Bank was drafted by the Bank by combining the provisions of Section 4(1) of the Bank of England Act, 1946 and Section g of the Commonwealth Bank of Australia Act, 1945. The Governor considered it desirable to make it clear in the Act itself that when Government decided to act against the advice of the Governor, they took the responsibility for the action they wished to force on the Bank, although it was hoped that ‘occasions for the exercise of such powers will be few’.

The Finance Minister considered that the proviso as drafted by the Bank was not necessary and that it would suffice if a provision was made on the lines of Section 4 of the Bank of England Act; the relevant sub-section read as:
4(1) The Treasury may from time to time give such directions to the Bank as, after consultation with the Governor of the Bank, they think necessary in the public interest. 

The clause thus provided for prior consultation with the Governor before issue of directives by the Treasury, but was silent as to the devolvement of responsibility, in the case of difference of opinion between the Treasury and the Bank. The prior consultation with the Governor would ensure that Government got the benefit of the Governor’s views on matters of importance to the country. The clause was redrafted accordingly.

Later, the second volume summed this:

While these provisions, other than those relating to the nomination of Central and Local Board members, have been in the statute book since the original Act was passed, section 7(1) of the Bank Act was amended at the time of nationalization in 1949 along the lines of section 4 of the Bank of England Act, to empower the central government to give ‘from time to time … such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest’. The Bank sought a more elaborate provision requiring  the government to formally ‘accept responsibility’ for the action resulting from its directions, but yielded to the latter’s preference for the English precedent.

How Governments use legal ways to ensure final powers remain with them.



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