Demonetisation #1: Does the RBI Act Allow Demonetisation?

Challenge 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

A Constitution Bench led by Justice Abdul Nazeer heard arguments from Senior Advocates Shyam Divan and P Chidambaram challenging demonetisation today. Both attempted to convince the Court that the case continues to raise important legal questions, not merely academic discussions. Countering them, Solicitor General Tushar Mehta argued that the case became infructuous as it sat pending since 2016. He said it is wasteful for a Constitution Bench to spend its time on the remaining questions, which are merely ‘academic’.


On November 8th, 2016 the Union government issued a notification declaring that all ₹500 and ₹1000 notes were no longer legal and valid currency, and discontinued their circulation. This measure was called ‘demonetisation’. The Union claimed that this would curb the circulation of black money—undeclared and illegally obtained income—and begin the shift to a ‘cashless’ society. Section 26 of the Reserve Bank of India Act, 1934 (RBI Act) gives the Union the power to declare that specific currency notes are no longer legal.

On November 9th, 2016, the day after the demonetisation announcement, advocate Vivek Narayan Sharma challenged the constitutionality of the scheme and the manner of its application at the Supreme Court. The case was heard by a 3-Judge Bench comprising Chief Justice T.S. Thakur, and Justices A.M. Khanwilkar and D.Y. Chandrachud.

On December 16th, 2016 the Bench ordered a stay on all High Court challenges to the demonetisation scheme and transferred the cases to the Supreme Court. In the same Order, they referred the challenges to the scheme to a 5-Judge Constitution Bench.

The Bench laid out a series of issues for the Constitution Bench to deal with:

  1. Does the demonetisation scheme abide by the provisions of the Reserve Bank of India Act, 1934?
  2. Do the limits on withdrawing cash violate the Rights to Equality and Livelihood?
  3. Was the scheme implemented in an unreasonable manner that violated the Rights to Equality and Livelihood?
  4. To what extent can the SC review a scheme relating to the fiscal and economic policy of the government?


Issues In Focus Today

  • Do any legal questions survive in the challenges to demonetisation?
  • Which authority is competent to initiate demonetisation under S26, RBI Act?
  • Does the RBI Act give the Union power to recall all notes of any denomination?
  • Can a government pass a notification based on 'false objectives'?
  • Was demonetisation a proportionate policy measure to combat black money?

Sr. Advs Divan and Chidambaram: The Process and Objective of Demonetisation are Illegal

Mr. Divan laid emphasis on the cases of individuals who were unable to exchange their old notes in 2016 due to unavoidable situations. His client, for instance, was out of the country. Mr. Divan argued that such people were shut out of the system, losing their hard-earned money

Mr. Chidambaram argued that the demonetisation policy took 86.4% of the country’s currency out of circulation in one fell swoop. He articulated four issues with this move.

1. Can the Union initiate demonetisation under S26, RBI Act?

Mr. Chidambaram argued that Section 26 of the RBI Act requires any demonetisation policy to be advised by RBI itself. In 2016, the procedure was reversed. The Union suggested the policy to RBI and then approved it shortly after the RBI submitted its view, without due application of mind to the RBI’s stance.

2. Are the Union’s powers under the RBI Act enough to announce demonetisation?

Mr. Chidambaram argued that the RBI Act empowers the government to recall select notes of a particular denomination, usually under suspicion of forgery or misuse. Parliament, for instance, used this power in 1978 to demonetise select currency notes. The Act however does not give the Union power to entirely demonetise all notes of any denomination. The 2016 demonetisation scheme draws its legitimacy entirely from the RBI Act despite being outside its scope.

3. Can a government pass a notification based on ‘false objectives’?

Mr. Chidambaram suggested that the stated intention of the 2016 demonetisation scheme, to curb the circulation of black money, was not realised. As such, the objective of the sudden move, causing hardship to many citizens, was false.

4. Was demonetisation a proportionate policy measure to combat the circulation of black money?

Mr. Chidambaram stated that 11 crore people stood in queues and faced immense hardship as a result of demonetisation. Is this measure proportionate to the objective, he asked?

Appearing for the Union. SG Tushar Mehta argued that the Court has always refrained from opining on the objective of financial policy, as this is purely an Executive matter. ‘Not true’, Mr. Chidambaram retorted, bringing up two Supreme Court Judgments where financial policy was tested for proportionality.

Mr. Chidambaram further presented a worrying hypothetical. What if the Union decides to demonetise 100% of all currency in circulation? He argued that S26 of the RBI Act lacks adequate safeguards to prevent such a situation. He asked the Court to read it down.

Mr. Chidambaram pointed out that Union had not filed any affidavit explaining how RBI and the Union interacted to arrive at this policy. Key documents from this exchange were also not filed. The Bench directed the Union to file an affidavit. The next hearing will take place after the Union responds.