Two views on demonetisation: What the Supreme Court’s demonetisation verdict says

Source: The post is based on the article “Two views on demonetisation: What the Supreme Court’s demonetisation verdict says” published in Indian Express on 3rd January 2023

What is the News?

The Supreme Court has upheld the government’s 2016 decision to demonetise currency notes of Rs 500 and Rs 1,000 by a 4:1 majority.

What is Demonetization?

Click Here to read

What was the majority view on Demonetization?

The majority held that the demonetization was valid on the following grounds: 

The Centre has the power, under the RBI Act to demonetise all series of bank notes: The petitioners challenging demonetisation had contended that the Union Government’s powers to demonetise bank notes under Section 26(2) of the Reserve Bank Of India Act, 1934, are restricted only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes.

– However, the majority judgment held that the power available to the central government under Section 26(2) of the RBI Act can be exercised for all series of bank notes.

– The court said that this section cannot be interpreted to give the government “restricted power” to demonetise notes as it would lead to a situation where the authorities could demonetise some counterfeit notes of a specific denomination but not all notes. Such a scenario “will result in nothing else but absurdity.

Demonetisation notification does not suffer from any flaws in the decision-making process: There was consultation between the Centre and the Reserve Bank of India (RBI) for six months indicating a reasonable nexus between the measures undertaken and the object sought to be achieved and, therefore, the demonetisation passed the test of doctrine of “proportionality”. 

The time provided for the exchange of demonetised notes was reasonable: The court referred to the judgment of a Constitution Bench in Jayantilal Ratanchand Shah Vs RBI (1996) which upheld the validity of 1978’s Demonetisation Act. 

The 1996 judgment notes that if the time for such exchange was not limited, the high denomination bank notes could be circulated and transferred from one person to another and any such transferee could walk into the Bank on any day thereafter and demand the exchange of his notes.

What was the minority view on Demonetization?

The dissenting judge held that the government’s demonetisation exercise was well-intentioned and thought-through. But was unlawful on the following grounds: 

No independent application of mind by RBI: The dissenting judge held that the central bank did not apply its mind independently while recommending the cancellation of Rs 500 and Rs 1000 notes as proposed by the Centre.

Executive order is not enough for such a step: The demonetisation of all series of notes at the instance of the central government is a far more serious issue than the demonetisation of a particular series by the bank. So, it has to be done through legislation rather than through executive notification.

Interpretation of Section 26(2) of the RBI Act: Section 26(2) only contemplates the demonetisation of banknotes at the instance of the Central Board of the RBI. However, since in this case the proposal was not initiated by the RBI, the demonetisation exercise could have been undertaken by the central government only through an ordinance or a parliamentary law.

– The dissenting judge also said that the word ‘any’ in sub-section (2) of Section 26 cannot be read to mean ‘all series of bank notes’ as this would vest with the Central Board of the Bank unguided and unlimited powers.