SC upholds repeal of J&K special status (GS Paper 2, Judiciary)
Why in news?
- A Constitution Bench led by Chief Justice of India (CJI) D Y Chandrachud upheld the constitutional validity of the two Presidential Orders CO (The Constitution (Application To Jammu and Kashmir) Order) 272 and 273 of August 5 and 6, 2019 respectively by which the entire Constitution of India was made applicable to J&K, and all provisions of Article 370 were declared inoperative.
- It confirmed that the President could “unilaterally issue a notification that Article 370 ceases to exist”.
Key issues in the challenge to the decisions of the government:
On the sovereignty of Jammu and Kashmir:
- The petitioners had argued that J&K retained an element of sovereignty when it joined the Indian Union in 1947. This arrangement, they argued, was distinct from the relationship with the other princely states that merged with India.
- The court examined the constitutional set-up of the erstwhile state to examine if it retained an element of sovereignty, which would allow Article 370 to operate in “unique circumstances”.
- First, Article 1 of the Constitution of India provides that India is a Union of States. Article 1 references “Part III states”, and Jammu and Kashmir was listed as a Part III state (before 2019) in the First Schedule to the Constitution of India.
- Second, Section 3 of the Constitution of Jammu and Kashmir declared that Jammu and Kashmir is an integral part of India.
- The provision read: “Relationship of the State with the Union of India: The State of Jammu and Kashmir is and shall be an integral part of the Union of India.” Section 147 of the J&K Constitution prohibited any amendment to Section 3.
- The court held that these provisions contradict the argument that an agreement of merger was necessary for Jammu and Kashmir to surrender its sovereignty. It noted that when Yuvraj Karan Singh issued the Proclamation adopting the Indian Constitution on November 25, 1949, it effectively had the effect of a “merger” like any other princely state.
Courts verdict:
- The declaration that the Constitution of India would not only supersede all other constitutional provisions in the State which were inconsistent with it but also abrogate them achieves what would have been attained by an agreement of merger,” the CJI said in his opinion, written also for Justices B R Gavai and Surya Kant.
- However, Justice S K Kaul in his concurring opinion held that J&K retained an element of internal sovereignty despite Maharaja Hari Singh signing the Instrument of Accession (IoA) with India.
- He cited the recognition of this internal sovereignty in Article 370 when it recognised the Constituent Assembly of the State. However, this had no bearing on the final conclusions reached by Justice Kaul.
On whether Art 370 is temporary or permanent:
- A range of arguments were made before the Court on the permanence (or lack thereof) of Article 370. The petitioners argued that the provision could not be abrogated since it had attained permanence, and as the original part of the Constitution forms the basic structure, which cannot be tinkered with.
- It was argued that since 370(3) prescribes the recommendation of the Constituent Assembly of the State (which has ceased to exist) as a prerequisite to abrogate Article 370, its abrogation is essentially infructuous. This means no constitutional means existed to abrogate Article 370 once the J&K Constituent Assembly had ceased to exist.
Courts verdict:
- The opinions of both the CJI and Justice Kaul held that Article 370 was always meant to be a “temporary” feature.
- Justice Kaul held that since Article 370 is meant to be a temporary arrangement, it cannot be said that the mechanism under Article 370(3) came to an end after the State Constituent Assembly was dissolved.
- The CJI said that there were two aspects that showed the temporary nature of Article 370. First, it was intended as an interim arrangement until the Constituent Assembly of the State was formed since in the interim, there was needed a legal bridge between J&K and India.
- Once the J & K Constitution was enacted and it was adopted to be a part of India, this arrangement would not have been necessary.
- Second, the provision was adopted because of the special circumstances in the state, which was experiencing war conditions.
On the legality of the abrogation of Article 370:
- The legal route for the abrogation of Article 370 was twofold.
- First, on August 5, 2019, then President Ram Nath Kovind issued CO 272, which amended Article 367 of the Constitution. Article 367 deals with interpretation of the Constitution, and the CO added a new meaning to “Constituent Assembly of Jammu and Kashmir” to mean “legislative assembly of Jammu and Kashmir.
- Then, CO 273 was promulgated seeking the consent of Parliament (which had assumed powers of the J&K legislature) to recommend that “all clauses of the said article 370 shall cease to be operative”.
Courts verdict:
- While Justice Kaul upheld this process, CJI Chandrachud in his opinion said that the circuitous route of first changing the meaning of the Constituent Assembly of J&K was not needed.
- Essentially, after the Constituent Assembly of the state ceased to exist, the President could have always unilaterally abrogated Article 370.
- The power under Article 370 (3) did not cease to exist upon the dissolution of the Constituent Assembly of Jammu and Kashmir.
- When the Constituent Assembly was dissolved, only the transitional power recognised in the proviso to Article 370 (3) which empowered the Constituent Assembly to make its recommendations ceased to exist. It did not affect the power held by the President under Article 370(3).
On the action that was taken under President’s rule:
- The petitioners had argued that the Union took “irrevocable” action without the state’s consent when it was under President’s rule. Here, the challenge was to the extent of powers that can be appropriated when Article 356 is in operation.
- Both the CJI and Justice Kaul cited the 1994 ruling in S R Bommai v Union of India that defined the contours of proclamation of President’s rule. The Bommai ruling was a nine-judge Bench verdict that is binding on a smaller 5-judge Bench.
- Relying on the Bommai ruling, the court said that the standard to decide the validity of the President’s action was to see whether it was not “mala fide or palpably irrational”, or that the “advisability and necessity of the action was not borne in mind by the President”.
- The court also held that the petitioner and the Union government must show mala fides to the court. The ruling rejected the argument that irrevocable action being taken cannot be accepted as proof of mala fides.
Can Bihar increase its reservation pool?
(GS Paper 2, Social Issues)
Why in news?
- Recently, the Governor of Bihar approved two laws increasing the quantum of reservations in jobs and education in the State to 75%, including 20% for Scheduled Castes, 2% for Scheduled Tribes, 18% for Other Backward Classes, and 25% for Extremely Backward Classes, and 10% for economically weaker sections (EWS).
- The two laws have once again sparked debate around the permissible limits of reservations in India, particularly in view of the “50%” limit prescribed by the Supreme Court of India in the Mandal Commission case (Indra Sawhney, 1992), as well as the court’s emphasis on “adequate” representation of the oppressed classes as opposed to “proportionate representation”.
What is the 50% rule?
- The Supreme Court has historically maintained that reservations, whether in jobs or education, should not exceed 50% of the total seats/posts.
- In 1963, a seven judge bench in M.R. Balaji explained that reservations were in the nature of an “exception“ or “special provision“ under our constitutional scheme. Therefore, they cannot be provided for more than 50% of the posts or seats.
- Though this understanding of reservations changed in 1976, the 50% limit has remained unaltered.
- A nine judge bench in the Mandal commission case in 1990 reaffirmed the 50% limit and held that it is a binding rule, and not merely a matter of prudence. However, it is not a rule without exceptions.
- A State can exceed the limit in exceptional circumstances, that is, to provide reservations to communities which hail from far flung areas of the country and have been kept out of the mainstream of the society. This is not a geographical test but a social one.
- Besides, in 2022 the Supreme Court upheld the 103rd Constitutional Amendment which provides for 10% additional reservations to the EWS. This means, for the time being, that the 50% limit applies only to non-EWS reservations, and States are permitted to reserve a total of 60% of the seats/posts including EWS reservations.
What do laws in Bihar state?
- In January 2023, the Bihar government announced a caste based census/survey to be conducted across the State. The results of this Census were announced in October. Shortly thereafter, the two Bills (now laws) where introduced in the Legislative Assembly.
Two striking aspects of these laws deserve to be noticed:
- The first is the obvious breach of the 50% (now 60%) ceiling limit. If and when the laws are challenged in court, the government of Bihar will have to prove that there case falls within the exception carved out in the Mandal Commission case. That is, the communities to whom reservations have been granted hail from far flung areas or have been kept out of the social mainstream.
- The second is the justification offered by the State government for this breach. Chief Minister Nitish Kumar expressly stated on the floor of the House that the intent is to increase the quantum of reservations in view of the results of the caste Census.
- However, the Supreme Court has repeatedly held that the State cannot fix the quantum of reservation simply in proportion to the population of the reserved classes.
- This is because the only valid aim behind reservations is to secure “adequate” representation of the depressed classes, which is different from “proportionate” representation. Therefore, one major challenge before the State government will be to defend the motive behind the move.
Similar instances in other states:
- Bihar is not the first to cross the line. Other States that have already surpassed the 50% limit, even excluding the EWS quota, are Chhattisgarh (72%), Tamil Nadu (69%, under a 1994 Act protected under the ninth Schedule of the Constitution), and several north-eastern States including Arunachal Pradesh, Meghalaya, Mizoram and Nagaland (80% each).
- Lakshadweep has a whopping 100% reservations for Scheduled Tribes. Previous attempts by Maharashtra and Rajasthan have been struck down by the courts.
What’s next?
- The Bihar Government appears to be following the footsteps of other States that have already breached the 50% ceiling limit.
- It seems inevitable that the validity of the two Bihar laws will be carried to the Supreme Court, and the Court will be urged to reconsider the 50% ceiling limit entirely. It remains to be seen whether the court will be inclined to do so.
FSB concerns about crypto asset intermediaries
(GS Paper 3, Economy)
Why in news?
- The international Financial Stability Board (FSB)’s latest report on crypto-asset intermediaries sought measures to enhance cross-border cooperation and information sharing among local authorities.
- This is to effectively regulate and address gaps in multi-function crypto-asset intermediaries (MCIs) operating globally.
- Specifically referring to the FTX collapse in November 2022, it highlights potential risks associated with MCIs that combine different activities within the platform.
How does the report define MCIs?
- The report defines MCIs as individual firms, or groups of affiliated firms that offer a range of crypto-based services, products and functions which primarily revolve around operating of the trading platform. Examples include Binance, Bitfinex and Coinbase.
- In the traditional financial landscape, the functions are provided by separate entities, instead of the same entity. This prevents conflict of interest and promotes market integrity, investor protection and financial stability.
- The primary source of revenue for these platforms are the transaction fees generated from trading-related activities, the traded security here being self-issued crypto assets. Trades from alternative platforms may also indirectly drive additional demand for other services offered by the platform.
- These may include prepaid debit cards and lending, among other services. This shows that the aspirations of MCIs extend beyond just trading to becoming a “one-stop shop” for crypto-based services.
- FSB’s report observes that the magnitude of these revenue sources is unclear because of the limited publicly disclosed information.
What about transparency?
- The report observes that most MCIs are not transparent about their corporate structure. Further, they are privately held. Even if they disclose information, it is typically for a small part of their business, specific to a jurisdiction.
- Much of the available information has surfaced through press coverage, court filings and regulatory actions and not public disclosures.
- It observed that MCIs failed to create a “meaningful separation” between potentially conflicting business lines, and provide clear account of transactions and activities or audit practices, among other things.
- The report suggests this could be intentional, to limit understanding of their vulnerabilities, economic models and activities, thus, to also evade regulatory oversight. Overall, this translates to lowered or non-existent oversight parameters for management of risk and governance frameworks.
What about spillovers?
- Based on available evidence, the threat to global financial stability and to the real economy from the failure of an MCI is presently “limited.”
- However, recent experience about failure or closure of “crypto-asset-friendly” banks reveal the prevalence of concentrated deposit exposures to firms whose business models rely in some form on crypto assets.
- In March 2023, Silvergate Bank had to wind down its operations and voluntarily liquidate. This was after the FTX collapse and an ensuing loss of confidence (in crypto-assets) that resulted in a ‘run-off’ (investors moving away from riskier to safer assets).
