Challenge to Union’s 2016 Demonetisation Scheme | Judgement Summary

Interpretation of ‘any series of bank notes’ under Section 26(2) of the RBI Act

The Union had issued a notification under Section 26(2) of the RBI Act to invalidate all ₹500 and ₹1,000 bank notes. The provision states that the Union, on advice by the Central Board of the RBI, can by notification declare any series of bank notes as illegal. The meaning of the phrase “any series” was a contentious issue. Petitioners had argued that they mean “any specified series” and not “all series” of notes. 

Justice Gavai held that the phrase ‘any series of bank notes’ within Section 26(2) must be construed to include ‘all series’ of bank notes. The majority took a “purposive interpretation” of the provision and rejected arguments of the petitioners stating that Section 26(2) cannot be restricted to mean that it can only be exercised by the Union government on ‘some’ notes. It found that the overall scheme and objective of the Act required a wider interpretation to the word “any.” The petitioners had also relied on two instances where the Union government had undertaken the demonetisation exercise in 1946 and 1978 through legislative means. The majority dismissed that argument as well, by noting that the restrictive interpretation of Section 26(2) cannot be undertaken “merely because on earlier two occasions the Government decided to take recourse to plenary power of legislation”. 

In contrast, Justice Nagarathna held that any series of bank notes can be declared as illegal tender under Section 26(2) through a notification on the advice of the Central Board. She noted that such exercise “cannot be carried out by the issuance of a simple notification in the Gazette of India declaring that all bank notes or currency notes are demonetised”. The section, she held, only permits the demonetisation of a particular series of a particular denomination, not the withdrawal of all series of all denominations. Such interpretation would mean that the Union can demonetise “every Rs.1/-, Rs.5/-, Rs.10/-, Rs.20/-, Rs.50/-, Rs.100/-, Rs.500/-, Rs.1,000/-, Rs.5,000/-, Rs.10,000/-” note. Moreover, she held that such interpretation would lead to “disastrous consequences” as it would allow the Central Board of the RBI to recommend the demonetisation of all bank notes. She held that, while the Union has the authority to demonetise all series of all currency notes, such a measure must be implemented through a law enacted by Parliament. She emphasised that when confidentiality is imperative to the success of such an initiative, the appropriate constitutional mechanism would be the promulgation of an ordinance, subsequently ratified by Parliament. She concluded that a matter as serious as the 2016 demonetisation could not have been lawfully executed through the issuance of a mere executive notification. 

Grant of excessive powers to the Union

The petitioners had argued that the delegation of power by the Executive was excessive and arbitrary. Parliament would have clearly outlined that “any series” would mean “all series” of bank notes if it intended to give that power to the Union. 

On the other hand, the Union contended that the delegation was not excessive as it was to the Union government and not a subordinate body. 

The majority held that the power granted to the Union government under Section 26(2) of the RBI Act could not be invalidated on the ground of conferring excessive delegation. The judgement noted that the RBI Act provided sufficient guidance within its entire scheme to determine whether the provision amounted to excessive delegation or not. Accordingly, the majority observed that the law had an inbuilt safeguard within itself, which is the requirement of the recommendation of the Central Board before notifying the demonetisation of the notes. 

Justice Nagarathna held that the question of excessive delegation did not arise as she had already held that Section 26(2) was not the correct route to demonetise ‘all’ series bank notes. Nonetheless, she observed that the Central Board, if granted the authority to declare invalid “all” series of notes, would amount to excessive conferment of powers. . Further, she held that the constitutionality of Section 26(2) could be upheld only if the provision was read down to mean a particular series of banknotes and not all. 

Implementation of the demonetisation scheme

The petitioners had argued that the Union had taken the decision to demonetise the notes in a “hasty manner”. This did not give sufficient time to the RBI or the Central Board to consider all the factors. Therefore, the scheme was patently arbitrary. 

The majority held that the word “recommendation” must be interpreted as a “consultative process” between the Union and the RBI. The Court held that while the final decision rests with the Government, the RBI plays a crucial advisory role. Consultation between the two is inherent in matters of economic policy. The law does not require them to act in isolation. Justice Gavai noted that the Union government had engaged in deliberations with the Reserve Bank of India for a period of six months prior to implementing the scheme.  This, the majority held, demonstrated that the Union had adequately consulted experts in monetary and economic policy before proceeding. The judgement stated that “it cannot be said that there was no conscious, effective, meaningful and purposeful consultation”. They further observed that the Union was accountable to Parliament, which in turn was accountable to the people, and that this chain of responsibility provided sufficient institutional safeguards to ensure that the Union acted within reasonable limits. 

Justice Nagarathna disagreed with this view. She stated that the proposal to demonetise the notes came from the Union government as per the records submitted by RBI which used key phrases like “as desired” by the Union, or as “recommended” by the Union. She observed that there was “no independent application of mind” by the Bank. In her assessment, the proposal for the scheme originated from the Union to which the RBI had merely offered its opinion at the Union’s request. This could not be treated as a formal recommendation from the board. She held that “the Central Government cannot in the guise of seeking an opinion on its proposal to demonetise bank notes, obtain a recommendation from the Central Board of the Bank”. She also noted that the entire process was completed within 24 hours, indicating that the RBI had not adequately applied its mind before the scheme was implemented. Moreover, as the proposal for demonetisation was initiated by the Union, it could not have been done under Section 26(2). The use of Section 26(2) to demonetise notes is for instances when the Central Board recommends it. Hence, the issuance of the notification was clearly based “on an incorrect understanding” of Section 26(2). 

Rational connection between demonetisation and Union’s objectives 

The petitioners had argued that the exercise had demonetised 86.4 percent of currency worth Rs. 15.44 lakh crore. This was grossly disproportionate causing severe economic disruption and undue hardship, especially to the poor. They contended that the Union and the RBI ought to have explored less intrusive alternatives. 

In response, the Union argued that the exercise was carried out to combat black money, fake currency and terror financing. . The Union argued that the measure satisfied the rational nexus test, as demonetisation directly addressed the stated objectives. With regard to whether less stricter alternatives were available, the Union submitted that such scrutiny is inappropriate in matters of economic policy. Further, the full value of legitimate currency was assured and alternate transaction modes, for example, credit/debit cards, online payments, remained available during the transition. The majority applied the four-pronged test of proportionality to assess the reasonableness of the 2016 demonetisation. First, the measures satisfied the objectives of combating black money, fake currency and terrorfinancing. Second, there was a rational connection between the measure and the objective as there was a reasonable nexus between the two. The majority also agreed with the Union on the point that a policy decision like the demonetisation should be best left to the Union and the RBI. Lastly, the exercise did not violate any fundamental rights, including the right to property, as cashless transactions continued to exist. The restrictions on physical exchange of currency were only temporary.

Accordingly, it was held that the demonetisation exercise satisfied the proportionality test. Therefore, the policy could not be declared unlawful. 

Justice Nagarathna did not delve into this issue in view of her preceding opinions. 

Reasonableness of the 52-day exchange window 

The majority opined that the 52-day period granted for exchanging demonetised currency was reasonable. They relied on Jayantilal Ratanchand Shah v Reserve Bank of India (1996) where a Constitution Bench had upheld a three day period for exchange of currency notes during the 1978 demonetisation. 

Comparing the period with the 2016 notification, the majority observed that it failed “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.” They further stated that the RBI does not have the authority to permit exchanges beyond the period specified in the notification.