Fiduciary Capacity of Regulators and the Right to Information

[The following guest post is contributed by Apoorv Chaturvedi, who is a 4th year BA LLB student at the Jindal Global Law School]The regulatory regime in India is a complex system with multiple regulators set up for promoting “healthy and orderly development”[1]and to “prevent malpractices”[2] of companies, banks, stock markets etc. This healthy development is very closely related to the principle of transparency enshrined under the Right to Information Act, 2005 (“RTI Act”). It is however the case that even after the enactment of the RTI Act, government authorities and regulatory bodies have held back the information sought for on the grounds of exemption under Section 8(1) of the RTI Act or on the grounds of holding the information in a fiduciary capacity. However, the ground of “fiduciary relationship” cannot be used anymore. In a recent judgement, Reserve Bank of India v Jayantilal N Mistry (decided on December 16, 2015), the Supreme Court made it mandatory for the Reserve Bank of India (“RBI”) to disclose information about banks under the RTI Act.  The principal issue in the case was whether the information sought for under the RTI Act can be denied by the RBI and other banks to the public on the grounds of economic interest, commercial confidence and fiduciary relationship with other banks.Counsel for the RBI (the petitioner in this case) argued that RBI is vested with the powers to determine the banking policies in the interest of the banking system, monetary stability and sound economic growth. It was further submitted that through section 35 of the Banking Regulation Act, 1949, the RBI has the power to conduct inspection of the banks in the country. During this inspection conducted by the inspecting team, most of the information accessed would be confidential. Under section 28 of the Banking Regulation Act, it was submitted that the RBI in the public interest may publish the information obtained by it in a consolidated form, but not otherwise. The RBI further submitted that its role is to safeguard the economic and financial stability of the country and is backed by a huge contingent of expert advisors to advice on matters related to economy of the country and nobody should doubt the bona fide activities of the bank. The petitioner relied on B. Suryanarayana v. Kolluru Parvathi Co-op Bank Ltd in which the Andhra Pradesh High Court held that “the court would be highly chary to enter into area or scrutinising the decision of the Reserve Bank of India”. It also relied on Pearless General Finance and Investment Co. Limited v Reserve Bank of India in which the court stated that it should not be interfering with the economic policies of the country as it is a function of the experts.The petitioner had further submitted that while RBI “recognizes and promotes enhanced transparency” as it strengthens the market discipline, a bank cannot disclose all the information because of the inherent need to preserve confidentiality in relation to its customers. This reluctance in disclosures by the RBI arises from “the potential market reaction that such disclosure might trigger which may not be desirable”. The disclosure, according to the petitioner would not really serve the public interest as it would instead create misunderstanding in the minds of the public and produce an adverse impact on public’s confidence on banks. This would in turn affect the financial stability of the country as it rests on the public confidence. The petitioner further contended that the information sought for was exempted under section 8(1) of the RTI Act under clause (a), (d) and (e). However, under section 8(2) of the RTI Act a public authority may allow access to information, if public interest in disclosure outweighs the harm to the protected interests. The petitioner referred to various provisions of different statute like the Banking Regulation Act, 1949 (section 34A), the Reserve Bank of India Act, 1934 (section 45E), the Credit Information Companies (Regulation) Act, 2005 (sections 17(4), 20 and 22) all of which deal with confidentiality and privacy of information of banks. It was further submitted by the petitioner that the Credit Information Companies Act, 2005 was brought into force after the RTI Act and that section 28 of the Banking Regulation Act, 1949 was amended by the Credit Information Companies (Regulation) Act, 2005. This, according to the petitioner, clearly indicates that the RTI Act cannot override credit information sought by any person in contradiction to the statutory provisions for confidentiality. According to the RBI, the right to information is a general provision which cannot override specific provisions relating to confidentiality in earlier legislation in accordance with the principle generalia specialibus non derogant. The respondent on the other hand contended that the right to information regarding the functioning of public institutions is a fundamental right under Article 19 of the Constitution of India. The respondent relied upon Union of India v Association for Democratic Reforms[3], where the court held that “the right to get information in a democracy is recognized all throughout and is a natural right flowing from the concept of democracy.” With regard to the point of “fiduciary relationship” the respondent cited Central Board of Secondary Education v. Aditya Bandopadhyay in which the Court held that “the words “information available to a person in his fiduciary relationship” are used in section 8(1)(e) of the RTI Act in its normal and well recognised sense, that is to refer to persons who act in in fiduciary capacity, with respect to a certain beneficiary who are expected to be protected or benefited by the action of the fiduciary.”According to the court, “fiduciary relationship” has been defined as “a relationship in which one person is under a duty to act for the benefit of the other on the matters within the scope of the fiduciary relationship. It usually arises in one of the four situations:(1) When one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first; or(2) When one person assumes control and responsibility over another; or(3) When one person has a duty to act or give advice to another on matters falling within the scope the relationship; or(4) When there is specific relationship that has traditionally been recognised as involving fiduciary duties as with a lawyer and a client, or a stock broker and customer.” (para 55 of Reserve Bank of India v Jayantilal N Mistry).The scope of the fiduciary relationship consists of the following rules:[4](i)  “No Conflict rule – A fiduciary must not place himself in a position where his own interests conflicts with that of his customer or the beneficiary. There must be real sensible possibility of conflict.(ii) No profit rule – A fiduciary must not profit from his position at the expense of his customer, the beneficiary.(iii)            Undivided loyalty rule – A fiduciary owes undivided loyalty to the beneficiary, not to place himself in a position where his duty towards one customer conflicts with a duty he owes to another customer. A consequence of this duty is that a fiduciary must make available to a customer all the information that is relevant to the customer’s affairs.(iv)            Duty of confidentiality – A fiduciary must only use information obtained in confidence and must not use it for his own advantage, or for the benefit of another person.”The Court upheld Central Information Commission’s (“CIC”) decisions and stated that the “RBI does not place itself in a fiduciary relationship with the Financial Institutions because the reports of the inspections, statements of the bank, information related to the business obtained by the RBI are not under the pretext of confidence or trust. In such cases, neither the RBI nor the banks act in interest of each other. By attaching an additional “fiduciary” label to the statutory duty, the regulatory authorities have intentional or unintentionally created an in terrorem effect.”[5]It was further stated that the RBI has no legal duty to maximise the benefit of any public or private sector bank, and thus there is no fiduciary relationship of ‘trust’ between them. The RBI is supposed to uphold public interest and not the interest of individual banks. According to the Court, one of the main characteristics of a fiduciary relationship is “trust and confidence” which is not there between RBI and the banks.According to the Court, the RBI has a statutory duty to uphold the interest of the public at large, the depositors, the country’s economy and the banking sector. Thus, the Court held that the RBI ought to act with transparency and is bound to comply with provision of the RTI Act. It was further held that people should know about the irregularities being committed by the banks and it is the contrary that the same would go against the public interest. The Court stated that even if there was a “fiduciary relationship” under Section 2(f) of the RTI Act, the “information” shared between them should be accessible by the public. This judgment rendered by the Supreme Court could impact the other regulatory bodies of India as well. Regulatory bodies like the Securities and Exchange Board of India (“SEBI”) and the Insurance Regulatory and Development Authority (“IRDA”) could now be asked to provide information through the RTI Act and they cannot deny that request on the grounds of “fiduciary relationship”. The relationship of any particular company or bank with the respective regulatory body cannot anymore be regarded as “fiduciary” in nature. Furthermore, the Court also held that “the free flow of information about affairs of Government paves way for debate in public policy and fosters accountability in Government”. Thus the argument of “economic interest” (as raised by the RBI) would also not work.These regulatory bodies were already under the ambit of the RTI Act in regards with the internal matters but after the judgement, the RTI Act could be enforced to seek information in regards with other organizations that are being regulated under these bodies. Consequently, like RBI, even IRDA’s and SEBI’s reports of inspection of insurance companies can be sought to be disclosed.However, it is important to note that these regulatory bodies should not be compelled to disclose information with respect to ongoing matters. This is because it might cause huge damage to a particular company or bank if a show cause notice issued to it is publicly released before the matter is closed and the bank or company is actually find guilty of a violation. If a regulated company or the regulated bank has not committed any wrong, they would suffer from a huge loss only because of a publicly available show-cause notice for no reason. Thus, the matter needs to be closed before it is disclosed to the public under the RTI.   – Apoorv Chaturvedi [1] SEBI Annual Report, 1988-89, p.1. [2] Agrawal, S. and Baby, R. Agrawal & Baby on SEBI ACT, A Legal Commentary on Securities & Exchange Board of India, 1992. Taxmann. [3] AIR 2002 SC 2112[4]Law Commission of UK, (1995). Fiduciary Duties and Regulatory Rules. [online] London: Law Commission, p.2. Available at: [Accessed 21 Jan. 2016]. Also see: para 56 of Reserve Bank of India v Jayantilal N Mistry [5] Para 58, Reserve Bank of India v Jayantilal N Mistry

Source: Corporate

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