Supreme Court’s Judgment on Demonetisation – Explained, pointwise

Introduction

On 02 January, 2023, a 5-judge bench of the Supreme Court’s Constitution Bench ruled on a number of petitions challenging the legality of the Union Government’s decision in November 2016 to demonetise the currency notes of INR 500 and INR 1,000. The Supreme Court’s Judgment on Demonetisation has upheld the decision of the Government and dismissed the petitions.

What is the Supreme Court’s Judgment regarding Demonetisation?

In November 2016, the Union Government had demonetised the currency notes of denominations INR 500 and INR 1000. The Supreme Court has upheld the legal aspects of the decision of the Government by a majority vote of 4:1.

The Court adjudicated that the notification from the Government (November 8, 2016) is lawful and that it passes the proportionality test. One Judge (Justice V Nagarathna) has given a dissenting judgment noting that even though demonetization was well-intended and well-thought-out, it still needs to be declared unlawful on legal grounds and not on the basis of objects.

What questions were considered by the Supreme Court Judgment on Demonetisation?

The Supreme Court had identified six issues in the challenge to the government’s demonetisation decision.

A. Sub-section (2) of Section 26 of the RBI Act states that, “On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that…..any series of bank notes of any denomination shall cease to be legal tender…specified in the notification“. The Supreme Court considered whether the power available under this clause can be restricted to mean that it can be exercised only for “one” or “some” series of bank notes and not “all” series? 

Majority view: The majority opinion held that Section 26(2) RBI Act, which empowers Centre to demonetize any series of bank notes of any denomination, can be used to demonetize the whole series of currency. It observed ‘restrictive meaning cannot be given to word “any’ in Section 26(2) of RBI Act’. The purposes of the Act must be considered while interpretation. The bench added that Section 26(2) cannot be struck down as unconstitutional on the ground of excessive delegation, adding that there are inbuilt safeguards.

Minority view: The Judge held that “Any series” under Section 26(2) RBI Act cannot mean “all series”. “All Series” would mean that the Government can demonetize all series of all denominations by gazette notification. Such an extensive power can be “exercised only through a plenary legislation, by way of an enactment following a meaningful debate in Parliament”.

Source: The Times of India

B. If the power under Section 26 (Question A above) means “all series” of bank notes, whether this power would amount to conferring excessive delegation and as such, liable to be struck down?

Majority view: The decision under sub-section (2) of Section 26 has to be taken by the Central Government on the recommendation of the Central Board. Thus there is an inbuilt safeguard in the RBI Act. It also said that the delegation of power is in any case to the Central Government, which is answerable to Parliament.

Minority view: The Judge held that RBI Act does not envisage initiation of demonetisation by the Central Government. As per Section 26(2), the proposal for demonetisation to emanate from the central board of the RBI. The Judge further held that if demonetisation is to be initiated by the Central Government, such power is to be through a legislation or an ordinance derived from Entry 36 of List I (Currency, Coinage, Legal Tender, and Foreign Exchange).

C. Is there a possibility that the Notification of Demonetisation (issued on November 8th, 2016) could be overturned on the ground of legal flaws in the decision-making process?

Majority view: The majority view relied on the Government’s argument that merely because the process was initiated by the Centre, it could not be struck down. The ruling notes that the minutes of the RBI Central Board meeting that recommended demonetisation on November 8, 2016 itself stated that the RBI and the Centre had discussed the idea for over six months before it was notified.

On the merits of the decision, the majority stated that the Court cannot determine the effectiveness of economic policy. However, it agreed with the Centre’s contention that the decision had to be made in secrecy and in haste for it to be effective.

Source: The Times of India

Minority view: The Judge observed that the statement in the records submitted by the RBI “as desired by the Central Government” demonstrates that there was no independent application by the RBI and merely approved Centre’s decision. The entire exercise was carried out in 24 hours. The Judge held it in the violation of Section 26(2) of the RBI Act.

D. Does the Government Notification of Demonetisation (issued on November 8th, 2016) fail the Test of Proportionality and thus be subject to being overturned?

Majority view: The majority decision applies a four-pronged test of proportionality to the constitutionality of the decision. The four ingredients of the test to be satisfied are: (a) Legitimate purpose; (b) Rational connection with the purpose; (c) Necessity; (d) Whether the action taken is proportional or balanced.

The majority verdict states that curbing fake currency, black money and terror funding are legitimate interests of the State and have a rational connection with demonetisation. On the question of necessity, the Court said that it is “exclusively within the domain of the experts“, (RBI) to answer this question.

On the question of Proportionality, the Court said “what alternate measure could have been undertaken with a lesser degree of limitation is very difficult to define”.

Minority view: The Judge said that since she had already held the demonetisation decision unlawful, this question need not be answered.

E. Whether the period of exchange of notes (after demonetisation) can be said to be unreasonable?

Majority view: The Court cited an earlier instance of demonetisation in 1978 where a 3-day period was provided for exchanging the demonetised notes. This was upheld by a Constitution Bench of the court. Relying on this decision, the majority view said, “we fail 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.”

Minority view: Since the dissent had already held the demonetisation decision unlawful, it did not answer this question.

F. Is the RBI authorised to continue accepting the demonetised notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act?

Majority view: The Specified Bank Notes (Cessation of Liabilities) Act, 2017 prohibits and penalises holding, transferring, or receiving demonetised currency. However, some earlier notifications allowed a grace period for certain individuals, like those who were abroad when demonetisation was notified, to exchange their old currency. The petitioners argued that RBI had no independent powers to allow that when the 2017 Act had been passed by Parliament. The majority view stated that the earlier notifications have to be read as part of the 2017 law, giving it a “contextual and harmonious construction”.

Minority view: Since the dissent had already held the demonetisation decision unlawful, it did not answer this question.

Conclusion

During the hearing in November-December 2022, the Supreme Court indicated that demonetization might not be scrapped because “the clock cannot be turned back”. After six years, the economy and society have finally recovered from the shock of the demonetisation decision. However, the Supreme Court’s Judgment on Demonetisation and arguments may lead it to establish guidelines for future such exercises.

Syllabus: GS II, Government policies and interventions for development in various sectors and issues arising out of their design and implementation; GS III, Indian Economy.

Source: Indian Express, Indian Express, The Times of India