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In upholding the Centre’s 2016 decision to demonetise currency notes of Rs 500 and Rs 1,000, Supreme Court gives a wide interpretation to the law on the decision-making process and extends the benefit of doubt to the government on the key events leading up to the decision.
The majority ruling by four judges accepts all contentions of the Centre: from who can initiate the proposal for demonetisation, whether the decision was needed to be done in haste and secrecy to the court’s adjudication being essentially an “academic” exercise.
The majority view also places reliance on the “record” submitted by the government after the hearing was complete and the Court reserved its verdict to hold that the RBI was sufficiently consulted on the issue. It is from this record, which the petitioners were not given an opportunity to reply to, that the Court holds that the Centre and RBI discussed the demonetisation issue for over six months.
“As such, merely because the Central Government has advised the (RBI’s) Central Board to consider recommending demonetisation and that the Central Board, on the advice of the Central Government, has considered the proposal for demonetisation and recommended it and, thereafter, the Central Government has taken a decision, in our view, cannot be a ground to hold that the procedure prescribed under Section 26 of the RBI Act was breached,” the majority view stated.
Section 26(2) of the Reserve Bank of India Act, 1934 gives Centre the power to demonetise currency “on recommendation of the Central Board” of the RBI. The majority view found that “in the context in which it is used, the word ‘recommendation’ would mean a consultative process between the Central Board and the Central Government.”
“In a matter like the present one, it cannot be expected that the RBI and the Central Government will act in two isolated boxes. An element of interaction/consultation in such important matters pertaining to economic and monetary policies cannot be denied to the RBI and the Central Government,” the court said.
On the key question of whether the Centre’s decision was proportional to the objectives it aimed to achieve, the court, while applying a three-pronged proportionality test, said that the Centre is “the best judge since it has all the inputs with regard to fake currency, black money, terror financing & drug trafficking.”
“As to what measure is required to meet the aforesaid objectives is exclusively within the domain of the experts. The RBI, as already held, plays a material role in economic and monetary policy and issues relating to management and regulation of currency,” the Court added.
Affirming the Centre’s argument that the hearing was an “academic exercise,” the majority view states that the Centre’s 2016 decision has been given the Parliament’s seal of approval.
“In any case now, the action which was taken by the Central Government by the impugned Notification, has been validated by the 2016 Ordinance and which has fructified in the 2017 Act. The Central Government is answerable to the Parliament and the Parliament, in turn, represents the will of the citizens of the country. The Parliament has therefore put its imprimatur on the executive action. This is apart from the fact that we have not found any flaw in the decision-making process…” the Court said.
This is a reference to the Specified Bank Notes (Cessation of liabilities) Act, 2017, which prohibited and penalised the holding or transferring or receiving of demonetised currency.
