Two views on six issues: What the Supreme Court’s demonetisation verdict says

Majority view: Section 26(2) of the RBI Act states that “on recommendation of the Central Board (of the RBI) the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.”

The petitioners argued that the word “any” would have to be given a restricted meaning to mean “some” and not “all” legal tender of a given denomination. Senior Advocate P Chidambaram argued that RBI has power only to recommend “a particular series” of notes, but to demonetise “all series” of a particular denomination, it was considered necessary to do so by way of a separate enactment of Parliament.

The majority view disagreed, and held that the term has to be given a purposive interpretation and that any other meaning would lead to absurdity. Citing an example, the court said: “If there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetise 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation.”

Dissenting view: Justice Nagarathna held that if the word “any” could mean “all”, it would confer excessive and arbitrary powers on the RBI. In her view, “the contention of the Union of India that the Central Government has the power to demonetise “all” series of bank notes of “all” denominations which would mean that every Rs 1/-, Rs 5/-, Rs 10/-, Rs 20/-, Rs 50/-, Rs 100/-, Rs 500/-, Rs 1,000/-, Rs 5,000/-, Rs 10,000/-, could be demonetised. Since the same is possible theoretically, in my view, such an extensive power cannot be exercised by issuance of a simple gazette notification in exercise of an executive power of the Central Government as if it is one under sub-section (2) of Section 26 of the Act. The same can only be through a plenary legislation, by way of an enactment following a meaningful debate in Parliament, on the proposal of the Central Government.”

2. In the event it is held that the power under sub-section (2) of Section 26 of the RBI Act is construed to mean that it can be exercised in respect of “all” series of bank notes, whether the power vested with the Central Government under the said sub-section would amount to conferring excessive delegation and as such, liable to be struck down?

Majority view: On the issue of whether the RBI Act delegates excessive power to make law to the Centre, and is therefore unconstitutional, the majority view disagreed with the petitioners. “Insofar as the decision to be taken by the Central Government under sub-section (2) of Section 26 of the RBI Act is concerned, it is to be taken on the recommendation of the Central Board. We, therefore, find that there is an inbuilt safeguard in sub-section (2) of Section 26 of the RBI Act inasmuch as the Central Government is required to take a decision on the recommendation of the RBI,” the court said. It also said that the delegation of power is in any case to the central government, which is answerable to Parliament.

Dissenting view: Since Justice Nagarathna held that Section 26(2) gives excessive powers to the Centre to demonetise currency by just issuing a gazette notification, it follows that the Centre’s 2016 decision was unconstitutional.

3.  As to whether the impugned Notification dated 8th November 2016 is liable to be struck down on the ground that the decision making process is flawed in law?

Majority view: The majority view relied on the government’s argument that merely because the process was initiated by the Centre, it could not be struck down. The ruling notes that the minutes of the RBI Central Board meeting that recommended demonetisation on November 8, 2016 itself stated that the RBI and the Centre had discussed the idea for over six months before it was notified.

On the merits and soundness of the decision, the majority stated that the court cannot determine the effectiveness of economic policy. However, it agreed with the Centre’s contention that the decision had to be made in secrecy and in haste for it to be effective.

Dissenting view: Justice Nagarathna held that it is in violation of Section 26(2) RBI Act that the recommendation for demonetisation originated from the Centre and not the RBI’s Central Board.

“The use of the words/ phrases such as, “as desired” by the Central Government; Government had “recommended” the withdrawal of the legal tender of existing Rs 500/- and Rs 1,000/- notes; recommendation has been “obtained”; etc., are self-explanatory,” the dissenting opinion states.

The dissenting view also states that if the Centre indeed initiated the proposal, then it ought to have brought in legislation in Parliament. If urgency and haste were needed, the dissent asks why an Ordinance could not have been brought which could have been subsequently ratified by Parliament. For example, the August 2019 decision to remove the special status of Jammu and Kashmir was done through an Ordinance.

4. As to whether the impugned notification dated 8th November 2016 is liable to be struck down applying the test of proportionality?

Majority view: The majority decision applies a four-pronged test of proportionality to the constitutionality of the decision. The four ingredients of the test to be satisfied are: i) legitimate purpose (ii) rational connection with the purpose (iii) necessity (iv) whether the action taken is proportional or balanced.

The majority verdict states that curbing fake currency, black money and terror funding are legitimate interests of the state and have a rational nexus with demonetisation. For the third aspect, the court has to determine if the decision was necessary, and that there were no alternative measures that could have achieved a similar purpose with a lesser degree of harm for citizens.

Here, the court said that it is “exclusively within the domain of the experts”, that is the RBI, to answer this question.

On the fourth aspect, the court said “what alternate measure could have been undertaken with a lesser degree of limitation is very difficult to define”.

Dissenting view: Justice Nagarathna said that since she had already held the demonetisation decision unlawful, this question need not be answered.

5. As to whether the period provided for exchange of notes vide the impugned notification dated 8th November 2016 can be said to be unreasonable?

Majority view: The court cited an earlier instance of demonetisation in 1978 where a three-day period was provided for exchanging the demonetised notes. This was upheld by a Constitution Bench of the court. Relying on this decision, the majority view said, “we fail to understand as to how the said period of 52 days could be construed to be unreasonable, unjust and violative of the petitioners’ fundamental rights.”

Dissenting view: Since the dissent had already held the demonetisation decision unlawful, it did not answer this question.

6. As to whether the RBI has independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of provisions of Section 3 and Section 4(1) thereof to accept the demonetised notes beyond the period specified in notifications issued under sub- section (1) of Section 4?

Majority view: The Specified Bank Notes (Cessation of Liabilities) Act, 2017 prohibits and penalises holding, transferring, or receiving demonetised currency. However, some earlier notifications allowed a grace period for certain individuals, like those who were abroad when demonetisation was notified, to exchange their old currency.

The petitioners argued that RBI had no independent powers to allow that when the 2017 Act had been passed by Parliament. The majority view stated that the earlier notifications have to be read as part of the 2017 law, giving it a “contextual and harmonious construction”.

Dissenting view: Same as 4, 5 above.