Demonetisation #4 (Noon): AG Venkataramani Claims Demonetisation Achieved Its ObjectivesChallenge to Union’s 2016 Demonetisation Scheme
Judges: Abdul Nazeer J, B.R. Gavai J, A.S. Bopanna J, V Ramasubramanian J, B.V. Nagarathna J
On November 25th, 2022, a 5-Judge Constitution Bench began hearing Attorney General R. Venkataramani’s defence of the Union’s 2016 Demonetisation scheme. The AG claimed that the Union was empowered to carry out the demonetisation exercise under the RBI Act, the objectives of the scheme were achieved and that demonetisation must be viewed through a wide lens. The AG heavily relied on the outcome to justify the process of announcing demonetisation, an argument that the Bench heavily pushed back on.
On November 8th, 2016, the Union government declared all ₹500 and ₹1000 notes as invalid tenders and discontinued their circulation. The Union claimed that this measure was to curb the circulation of black money—undeclared and illegally obtained income—and that the measure would aid the shift to a ‘cashless society’. The Union is empowered to declare specific currency notes as illegal under Section 26 of the Reserve Bank of India Act, 1934.
On the day after the announcement, advocate Vivek Narayan Sharma challenged the demonetisation scheme claiming that it was unconstitutional and that its application was carried out in an unreasonable manner. A 3-Judge Bench comprising former Chief Justice T.S. Thakur, former Justice A.M. Khanwilkar and Justice D.Y. Chandrachud heard the challenge.
On December 16th, 2016, the Bench ordered a stay on similar pending challenges before various High Courts and transferred the cases to the Supreme Court. The Bench also referred the challenges to the scheme to a 5-Judge Constitution Bench. However, the case remained pending for 6 years.
Issues in Focus Today
- Did the Union have the power under Section 26(2) of the RBI Act to demonetise all Rs. 500 and Rs 1000 currency notes?
- Did the Union and the RBI duly apply their mind before carrying out the demonetisation exercise?
Is the RBI Duty-Bound to Exchange Demonetised Notes?
At the outset, Mr. Venkataramani addressed Sr. Adv. Shyam Divan’s argument that the RBI was duty-bound to grant relief to citizens who were unable to exchange their demonetised currency notes within the prescribed window. Mr. Divan had claimed that RBI had the power to exchange demonetised notes, which was coupled with the duty to do so. Mr. Venkataramani stated that the RBI was considering over 700 applications seeking the exchange of demonetised currency notes. He pointed out that the Union was adamant about not opening a second window for the exchange of old currency notes. He argued that allowing a series of exceptions for the extension of the deadline to exchange old currency notes would introduce several uncertainties. Instead, the applications would be considered on a case-to-case basis and genuine cases would be allowed.
Justice B.R. Gavai interjected. He pointed out that the RBI had the power and the duty to deal with genuine cases. Refusing to provide relief to genuine applicants would be an arbitrary exercise of power.
The Attorney General then highlighted challenges to demonetisation which claimed that it was an ‘acquisition of property’. The AG pointed out that the RBI Act had an exchange provision for demonetised notes. As such, the demonetisation scheme could not be treated as an acquisition of property. Further, the consideration over setting a deadline for the exchange of demonetised currency notes was not within the purview of the Judiciary.
AG Venktaramani: Demonetisation Achieved Goals of Digitalisation and Tax Collection
Mr. Venkataramani then proceeded to read out statistics on the increase in digital currency usage, the number of PAN cards issued, and the tax received by the government following the demonetisation exercise. He repeatedly claimed that these statistics indicated that the 2016 demonetisation scheme was successful in achieving its objectives.
Justice A.S. Bopanna appeared unconvinced. He pointed out that the AG was arguing that the objectives of demonetisation were achieved without showing that procedural requirements were complied with. Justice Abdul Nazeer directed the AG to respond to the questions posed by the petitioners. However, the AG insisted on reading his note first and said he would address the questions later on.
AG Venkataramani: Demonetisation Must be Viewed Through a Broad Lens
Mr. Venkataramani stated that Section 26 of the RBI Act, under which the Union carried out the demonetisation exercise, could not be examined in isolation. Instead, the Court must consider the entire scheme of the RBI, its role as a Central Bank, and the manner in which it exercises its functions. To summarise, Section 26 must be examined under the lens of the Central Banking functions of the RBI. Justice B.V. Nagarathna pointed out that Section 26 was a Central Banking Function and fell under a Chapter titled the same in the Act.
The AG claimed that demonetisation could not be viewed as an isolated economic policy and must instead be considered ‘a monetary policy’. He drew attention to the Preamble of the RBI Act which states that the RBI will ‘manage credit system to its advantage’ keeping with the ‘objective of growth’. He continued to say that the government was not looking at small instances of accumulating black money, but at a much larger problem. He then stated that the petitioners challenging the demonetisation scheme had claimed that it had failed its objectives. ‘Just because your objectives have failed doesn’t mean your intentions are faulty’, the AG retorted.
Can the Union Demonetise All Currency Notes of a Denomination?
Mr. Venktaramani raised Section 26 of the RBI Act with a specific focus on the words ‘any denomination’. If only a specific series of currency notes could be demonetised, it would lead to mass confusion. The provision, according to the AG, would allow the government to demonetise a different series of notes on different days. Justice Gavai, seeming unconvinced, asked the AG to explain the reasoning behind demonetising Rs. 500 denomination notes only to revive the same denomination on the very same day. The AG responded that the two were different issues.
Justice Nazeer attempted to bring the AG back on track. He raised Mr. Chidambaram’s arguments that Section 26(2) allows for the demonetisation of only a specific series of notes and not all series of all denominations. Justice Gavai pointed out that Section 26(2) used the word ‘any’ twice—any series and any denomination. The AG remained adamant that ‘any’ could mean ‘all’. Justice Nagarathna interjected once more. ‘That means you can demonetise all series of all denominations in one day’ she pointed out.
The AG stated that his understanding was such but soon followed up by saying ‘any’ doesn’t mean ‘all’. However, stressing the importance of a dynamic interpretation of the clause, he argued that context was important to interpret the provision.
Who Can Initiate a Demonetisation Scheme: The Union or the RBI?
Justice B.V. Nagarathna, recalling the petitioners’ arguments, pointed out that the Act recognised the expertise of the RBI Central Board. Even if the RBI’s advice does not bind the Union, the question of where such a recommendation should emanate from was settled. The government was bound to show an application of the mind when accepting or rejecting the RBI’s recommendation. She also directed the AG to depict the application of mind behind the RBI Central Board’s recommendation.
The AG responded that a symbiotic relationship between the Union and the RBI was important. He contextualised his argument by reading out Section 7 of the Act which allows the Union to make recommendations to the RBI. He then pointed out the functions of the RBI which made it central to the nation’s economy. He followed up by discussing the RBI’s functions over the issue and recall of currency notes, and the denominations of banknotes.
Justice Nazeer questioned Mr. Venkataramani over the 1946 and 1978 legislations that accompanied the demonetisation exercises of those years. If the Union had the power to conduct demonetisation under Section 26(2), then why did the Parliament pass separate laws to the same effect? The AG responded that a statutory provision did not take away from the law-making power of the Parliament.
The Bench will resume hearing arguments on December 5th, 2022.