Even As SC Declares Demonetisation As Legal, Was The Govt's 2016 Decision Right?

The decision was a blow to India’s economy with currencies worth Rs 15,44,000 crore being unsheathed in a few hours.

6 min read
Hindi Female

Remember the harrowing days of long ATM queues, arbitrary lay-offs and widespread chaos six years back when an announcement from our Prime Minister rendered Rs 500 and Rs 1,000 notes null and void overnight?

This sudden decision did inflict a strong blow to India’s economy with currencies worth Rs 15,44,000 crore being unsheathed within a span of a few hours.

Since then, the lawfulness of this decision has been contested before different Courts of India. Finally, the Constitution Bench of the Supreme Court on 2 January, rendered a conclusive view on this issue.  


Demonetisation: A Lowdown and Who Can Demonetise

For anything to be a valid and nationally accepted unit of exchange, it needs to be recognised by the law. Once such objects get legal recognition, they become legal tenders and can be used to purchase goods and services or settle public debt. In other words, they are lawfully “monetised”.

In India, bank notes and coins are the only legitimate forms of legal tenders. The Reserve Bank of India Act, 1934 (RBI Act)  vests the Central government with the power to declare any bank note as no longer being a legal tender by issuing a notification. 

As such, on 8 November 2016, the Central government instructed the citizens to exchange both the notes for the new currencies within the next two days, barring certain exceptions. 


Why Was Govt’s Note Ban Decision a Big Deal?

Although rooted in the provisions of the RBg Act, this declaration was unexpected and abrupt and precipitated into nationwide commotion.

Citizens flocked to the banks in ginormous numbers to exchange their notes even before the banks could build preparedness for this scale of operation; ATMs saw unprecedented queues; many were left with invalid notes thus, incurring financial losses.

Data collected eventually revealed that even the stated purpose of arresting black money laundering was not wholly realised since only 0.0028% of the total old currency notes said to be in circulation, seems to have been returned through the banking system. As a result, some of the harassed and aggrieved citizens challenged this decision before various courts of law in India.


What Was the Challenge Before the Supreme Court?

Since numerous challenges to demonetisation were filed in different courts since 2016, the state through a transfer petition, had sought all other petitions to be heard collectively by the Apex Court. Accordingly, in December 2016, a division bench of the Supreme Court considered the legal validity of demonetisation through the lens of eight questions namely:

  1. Did the Reserve Bank of India at all had the power to pass a notification like the one on 8 November?

  2. Did the decision violate the citizens' Right to Property, Right to Equality and Right to Freedom?

  3. Were the limits on cash withdrawal imposed due to demonetisation unlawful?

  4. Was the implementation of demonetisation 'unreasonable' and thus, violative of the fundamental rights of the citizens?

  5. Was the imposition of demonetisation through the RBI Act beyond constitutional processes?

  6. Could an economic decision by the government be reviewed by the courts?

  7. Can a political party challenge such a decision by the government?

  8. Did the demonetisation policy discriminate against district and co-operative banks by forbidding them from exchanging old notes?


These questions were further referred before the Constitution Bench of the Supreme Court which pronounced the current judgment. Delving into the matter, the Hon’ble bench reframed the above questions to focus on the following issues:

  1. Is the Central government authorised to demonetise all currency notes of a particular denomination or only a particular series of such denomination under the RBI Act?

  2. Can the power to decide on demonetisation be delegated to the Central government?

  3. Was the decision-making process of demonetisation flawed?

  4. Does the decision to demonetise fail the legal test of proportionality?

  5. Was the window of exchange provided to the citizens during the course of demonetisation unreasonable?

  6. Can the RBI independently facilitate exchange of notes even after the permitted period has elapsed, pursuant to the provisions of the RBI Act?


How Much Power the Government Holds in Such Matters?

The petitioners contended that under section 26(2) of the RBI Act, the central government may demonetise “any series” of a currency of a certain denomination and cannot withdraw all such currency notes. This Act limits the power of the government to demonetise only a particular series of notes.

Further, under the same provision, the government can only act upon the recommendation of the Central Board of Banks and even so, a decision of such proportion must be validated through the legislative process of the Parliament as was the case in the past episodes of demonetisation in 1946 and 1978.

Since neither of these was followed in the 2016 notification, it amounts to an “excessive delegation” of power to the Central government. Further, even if the court cannot review a fiscal decision of the government, the decision-making process can surely come under the purview of judicial review since the scheme of making the declaration portrayed that the Central Board’s recommendations did not entail “application of mind”.

Moreover, the nature of execution of demonetisation was “uncanalised and arbitrary” leading to innumerable infringements on the fundamental rights of the citizens. So, demonetisation was neither proportional nor reasonable. Finally, the RBI under the provisions of section 4(1) of the RBI Act should be allowed to independently exchange the notes of the aggrieved citizens. 


What Did the Supreme Court Uphold?

Considering each of the reframed issues in substantive depth, the Hon’ble bench upheld the legal validity of demonetisation on the following grounds.

  • Judicial precedents as well as common usage of the word “any” is construed to mean everyone. So, this authorises the government to notify any bank note as ceasing to be a legal tender and cannot be withheld by a restricted reading of the term “any”.

  • The vice of excessive delegation refers to conferring power to a body which does not have the relevant expertise. In this case, the RBI act provides an inbuilt safeguard wherein the Central government cannot act without the recommendation of the expert body. Further, empowering the highest executive authority of the country to take a fiscal decision cannot be said to amount to “excessive delegation.”

  • While the petitioners argue that the decision to demonetise was adopted in a hasty manner, the Centre stated that to fulfil the objectives of the decision, confidentiality and promptness were of utmost importance. The Court affirmed the Centre’s position and observed that since the experts from RBI were consulted and the decision was subsequently ratified by the Specified Bank Notes(Cessation of Liabilities) Act, 2017 enacted by the parliament, it cannot be deemed flawed. The Court also acknowledged that while it caused hardship to the citizens, the long-term objectives of the Act makes it a valuable social legislation. 

  • The Court also observed that the decision of demonetisation satisfied the four-pronged test of proportionality because it was implemented for a proper purpose of curbing money laundering, the limitations imposed were reasonably connected to this purpose because any prior notification could provide escape routes for smuggling of black money, the measures were necessary and least disruptive as per the scheme designed by the RBI and no alternative measures have been concurrently defined and given the relaxations provided to the citizens for exchanging notes, there was an adequate balance between the purpose and the limitations imposed. Finally, the Court stated where we are in terms of achievements of such objectives, is an assessment that the court does not have the expertise in. 

  • The power of the RBI to accept old notes beyond the grace period has been integrated within the 2017 Act with adequate safeguards to determine the genuineness of the case. Thus, the Court did not find it necessary to mandate an independent scheme for exchanging old notes for the RBI beyond the scope of the 2017 Act without the due expertise.


What Lies Ahead?

Further applications for reliefs and considerations related to demonetisation, should rely on the 2017 Act besides the constitutional provisions of judicial review of the High Courts and the Supreme Court. The current petitions have now been referred back to other appropriate benches for consideration of the individual contentions in them. So effectively, the legal validity of demonetisation may have been upheld, but the road to redress grievances related to demonetisation remains open to the citizens.

(Yashaswini works as the Outreach Lead at Nyaaya, an initiative of Vidhi Centre For Legal Policy to provide simple, actionable, reliable, accessible legal information for all. She holds a law degree from SOAS, University of London. She tweets at @yashaswini_1010. This is an opinion piece and the views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)

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