Case Number: WP (C) 906/2016
Petitioners: Vivek Narayan Sharma
Respondent: Union of India
FACTS
On November 8, 2016, Prime Minister Narendra Modi made a startling announcement that shook the nation: Rs. 500 and Rs. 1000 currency notes, which made up Rs. 15.44 lakh crore or 86.9% of the total currency in circulation, were declared invalid and would no longer be legal tender. This move, known as demonetisation, aimed to tackle several critical issues. The government hoped to curb the rampant use of black money, promote the digitisation of financial transactions, formalise the economy, transition towards a cashless society, and ultimately increase tax revenues.
The government provided a window until December 31, 2016, for citizens to deposit the old currency in banks. Initially, people were allowed to exchange Rs. 2500 per person for new currency to meet urgent needs, but this limit was later reduced to Rs. 2000. Bank account withdrawals were also restricted to Rs. 10,000 per person per week. Certain essential payments, such as hospital bills, pharmacy purchases, and utility bills, could still be made using the old notes for a limited period.
As news spread, citizens hurried to their nearest banks, eager to exchange their demonetised notes and withdraw cash. The sudden rush created a tremendous strain on the banking system. Despite the imposed withdrawal limits, long lines outside banks and ATMs became a common sight. People waited for hours, facing a severe cash crunch and liquidity crisis that made it challenging to manage daily expenses. This period was marked by widespread frustration and hardship as individuals grappled with the immediate impact of demonetisation on their lives.
LEGAL HISTORY
On November 9, 2016, Advocate Vivek Narayan Sharma brought a challenge against the constitutionality and implementation of the demonetisation scheme to the Supreme Court of India. This legal challenge was a significant moment in the aftermath of the sudden policy announcement by Prime Minister Narendra Modi. The case was initially heard by a three-judge bench, which included Chief Justice T.S. Thakur, Justice A.M. Khanwilkar, and Justice D.Y. Chandrachud. Recognizing the widespread implications and the surge of related cases in various High Courts, the Bench, on December 16, 2016, ordered a stay on all such cases and consolidated them, transferring the matter to the Supreme Court for a unified decision.
As the legal proceedings progressed, the case was eventually brought before a five-judge Constitution Bench on September 28, 2022. This bench was composed of Justice Abdul Nazeer, Justice B.R. Gavai, Justice A.S. Bopanna, Justice V. Ramasubramanian, and Justice B.V. Nagarathna. After extensive deliberation and consideration of the arguments presented, the Bench delivered its final verdict on January 2, 2023. This judgment was highly anticipated, as it addressed the numerous legal, economic, and social ramifications of the demonetisation policy that had impacted millions across the country.
ISSUES RAISED
The Bench laid out a series of issues for the Constitution Bench to deal with:
- Does the Union have the power to invalidate ‘all’ currency notes of any denominations through a notification?
- Was the implementation of the 2016 demonetisation policy flawed?
- Was the demonetisation exercise proportionate to the union government’s objectives ?
- Can the RBI facilitate the exchange of demonetised notes beyond the deadline granted by the 2016 demonetisation scheme ?
CONTENTIONS
Petitioner’s Arguments:
Senior Counsel Shri P. Chidambaram, who represented the petitioners, argued that Section 26(2) of the RBI Act should not be interpreted to authorise the demonetisation of “all series” of notes within a particular denomination. He put forth the previous instances of demonetisation in 1946 and 1978, to highlight how demonetisation of all series of a particular denomination, was achieved through separate legislative enactments. Additionally, he argued there were flaws in the decision-making process of the government , that warranted the judicial review by the Court. He also pointed out the reverse mechanism i.e. the central government initiating the demonetisation proposal, followed by a meeting of the central board, which then sent the recommendation back to the government, which goes counter to the statutory requirement of demonetisation under Reserve Bank of India Act, 1934.
Respondent’s Arguments:
Attorney General Shri R. Venkataramani , representing the Government of India , argued that any challenge to government decision was invalid because of the ratification of the notification in 2017. He contended that the word “any” before “series of bank notes” in Section 26(2) should be understood as “all,”.
Senior Counsel Shri Jaideep Gupta, representing the RBI, added that Section 26(2) stipulates that the Central Government’s power must be exercised based on the Central Board’s recommendation, providing an inherent safeguard. He further argued that the court’s power to scrutinize policy decisions is limited to cases where the policy is arbitrary or violates constitutional or statutory provisions.
JUDGEMENT
The constitution bench delivered a split verdict. Justice Gavai, with Justices Nazeer, Bopanna and Ramasubramanian upheld the central government’s demonetisation scheme as constitutionally valid by a 4:1 majority. Justice Nagarathna dissented.
RATIONALE
Majority Opinion
The union government was empowered by the statutory provision – Reserve Bank of India Act, 1934 to demonetise all’ currency notes of any denominations through a notification . The Section 26(2) of Reserve Bank of India Act, 1934 states, “On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.”
Justice Gavai stated that Section 26(2) of the Reserve Bank of India Act, 1934 empowers the Union to demonetise all currency notes of any denominations through notification as according to this provision, ‘any series of bank notes’ must encompasses ‘all series’ of banknotes.
The 2016 Demonetisation Scheme was executed under Section 26(2) of the Reserve Bank of India Act, 1934 and hence union government was empowered to demonetise all’ currency notes of any denominations through a notification.
Justice Gavai observed that the demonetisation scheme was duly deliberated by the RBI and the central government for six months before executing it.
He contended that the statutory procedure under Section 26(2) of the RBI Act was not violated merely because the Centre had taken the initiative to “advice” the Central Board to consider recommending demonetisation.
The majority held that the demonetisation scheme satisfied the test of proportionality . They held that demonetisation had a reasonable nexus with its objectives such as eradicating black money, and terror funding, encouraging digitisation of commercial transactions , formalising the economy, and shifting towards a cashless society. The 2016 demonetisation scheme was implemented in a manner to achieve the objectives in reasonable manner. Thus, the demonetisation scheme cannot be declared invalid or disproportionate even if all objectives are not achieved.
The majority held that 52 days’ time given to exchange notes was not unreasonable. Thus, RBI cannot RBI facilitate the exchange of demonetised notes beyond the deadline. Justice Gavai highlighted the comparison between the exchange period allowed by the 2016 demonetisation policy and the 1978 demonetisation Ordinance, which initially provided only three days (with a five-day extension) for exchanging invalidated currency. Given this context, a 52-day window to exchange the demonetised notes was considered a reasonable duration.
Dissenting Opinion
Justice Nagarathna articulated a dissenting view, emphasizing that although the Union has the authority to demonetise currency notes, this power must be exercised through the legislative processes of Parliament as stipulated by the Constitution. According to her, Section 26(2) of the Reserve Bank of India (RBI) Act only allows for the demonetisation of specific series within particular denominations, not an across-the-board demonetisation of all series and denominations.
Justice Nagarathna argued that Section 26(2) does not endow the Union with the power to demonetise all series of currency notes. Such a significant action, she maintained, cannot be undertaken merely through a notification. She suggested that if maintaining secrecy was crucial to achieving the objectives of demonetisation, the Union could have enacted the measure via an Ordinance, which could later be ratified by Parliamentary legislation.
She also pointed to records from the RBI that indicated the demonetisation decision was “as desired by the Central government.” This phrasing, she argued, highlighted a lack of independence on the part of the RBI, implying that the proposal for demonetisation in 2016 originated from the Union, with the RBI merely providing an opinion at the Union’s request. This, according to Justice Nagarathna, cannot be interpreted as a formal recommendation from the Central Board of the RBI.
Moreover, Justice Nagarathna underscored that the entire demonetisation process was carried out within a 24-hour period, suggesting that the RBI did not have sufficient time to fully consider the ramifications of such a sweeping measure before its implementation.
Conclusion
The Supreme Court upheld the 2016 demonetisation policy as lawful. The policy was implemented with proper objectives.
The Court stated that the Central Government is empowered by the statutory provision – Reserve Bank of India Act, 1934 to demonetise ‘all’ currency notes of any denominations through a notification as long as the Central Board makes the recommendation and initiates the process. The Court found that the notification met the test of proportionality, so it cannot be invalidated on that basis.
Additionally, the Court noted that Section 26(2) of the RBI Act has built-in safeguards, ensuring there is no excessive delegation of power.