Supreme Court: Six years after the country went through demonetisation, that was severely criticised for being poorly planned, unfair and unlawful, the Constitution Bench of S. Abdul Nazeer, B.R Gavai*, A.S. Bopanna, V. Ramasubramanian, B.V. Nagarathna**, JJ. has upheld the Centre’s 2016 demonetisation scheme in a 4:1 majority and held that demonetisation was proportionate to the Union’s stated objectives and was implemented in a reasonable manner. While Gavai, J has written the majority opinion for himself and SA Nazeer, A.S. Bopanna, V. Ramasubramanian, JJ, Nagarathna, J is the lone dissenter who has held that though demonetisation was well-intentioned and well thought of, the manner in which it was carried out was improper and unlawful.
Here’s the breakdown of the 382-pages-long verdict:
While on 16.12.2016, the Supreme had framed 9 questions to be decided by a larger bench, the Constitution Bench reframed the questions into the following 6 issues:
- Whether the power available to Central Government under Section 26(2)of Reserve Bank of India (‘RBI’) Act, 1934 can be restricted to mean that, it can be exercise for only one or some series of bank notes and not for all, because the word “any” appearing before the series in the sub- section, specifically so in the earlier two occasions the demonetisation exercise was done through the plenary legislations?
- In the event it is held that the power under Section 26(2)of the RBI Act is constituted to mean that it can be done in all series of bank notes, whether the power vested with Central Government will amount to conferring excessive delegation and hence needs be struck down?
- Whether the impugned notification dated 08-11-2016 is liable to be struck down on the ground of that the decision-making process is fraud in law?
- Whether the impugned notification dated 08-11-2016 is liable to be struck down applying the test of proportionality?
- Whether the period provided for the exchange of notes by the impugned notification can be said to be unreasonable?
- Whether RBI has independent power under Section 4(2)of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 (‘2017 Act’) in isolation of provision of Section 3 and Section 4 (1) thereof, to accept the demonitisation of notes beyond the period specified in notification issued under Section 4(1)?
Issue 1: ‘Any’ series of notes under Section 26(2) if the RBI Act – Interpreted
The policy underlining the provisions of Section 26 of the RBI Act is to enable the Central Government on the recommendation of the Central Board, to effect demonetization. The same can be done in respect of any series of bank notes of any denomination. The legislative policy is with regard to management and regulation of currency. Demonetization of notes would certainly be a part of management and regulation of currency. The legislature has empowered the Central Government to exercise such a power. The Central Government may take recourse to such a power when it finds necessary to do so taking into consideration myriad factors. No doubt that such factors must have reasonable nexus with the object sought to be achieved.
The Court observed that if the argument that the provisions of sub-section (2) of Section 26 of the RBI Act have to be interpreted in a restricted manner, is to be accepted, it may, at times, lead to an anomalous situation.
Explaining by way of an example, the Court said that if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetize 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation.
“If the Central Government finds that fake notes of a particular denomination are widely in circulation or that they are being used to promote terrorism, can it be said, for instance, that out of 20 series of bank notes of a particular denomination, it can demonetize only 19 series of bank notes but not all 20 series? In our view, this will result in nothing else but absurdity and the very purpose for which the power is vested shall stand frustrated.”
On the argument that the power under subsection (2) of Section 26 of the RBI Act has to be construed to restricting it to “one” or “some” series of bank notes, is that the Parliament also meant the same inasmuch as on earlier two occasions i.e. in 1946 and 1978 the demonetisation exercise in respect of “all” series was done by resorting to plenary legislations, the Court has observed that, merely because on earlier two occasions the Government decided to take recourse to plenary power of legislation, this, by itself, cannot be a ground to give a restricted meaning to the word “any” in sub-section (2) of Section 26 of the RBI Act.
Hence, the word “any” would mean “all” under sub-section (2) of Section 26 of the RBI Act.
Issue 2: Excessive Delegation
The role assigned to the RBI in management and issuance of currency notes, so also in evolving monetary policy of the country, is well recognised. Insofar as the decision to be taken by the Central Government under sub-section (2) of Section 26 of the RBI Act is concerned, it is to be taken on the recommendation of the Central Board.
Hence, there is an inbuilt safeguard in sub-section (2) of Section 26 of the RBI Act inasmuch as the Central Government is required to take a decision on the recommendation of the RBI. Further, there is sufficient guidance to the delegatee when it exercises its powers under sub-section (2) of Section 26 of the RBI Act, from the subject matter of the statute, and the other provisions of the Act.
Issue 3: 08.11.2016 Notification – Flawed decision making
Relevant factors – If considered
After scrutinising the relevant record i.e. the communication dated 7th November 2016 addressed by the Secretary, Department of Economic Affairs, Ministry of Finance to the Governor, RBI, the Minutes of the Meeting of the Central Board dated 8th November 2016, the recommendations by the RBI dated 8th November 2016 and the Note for the Cabinet Meeting held on 8th November 2016, the Court noticed that the Central Board had taken into consideration the relevant factors while recommending withdrawal of legal tender of bank notes in the denomination of Rs.500/- and Rs.1000/- of existing and any older series in circulation. Similarly, all the relevant factors were placed for consideration before the Cabinet when it took the decision to demonetize.
Further, a draft scheme to implement the proposal for demonetisation in a non-disruptive manner with as little inconvenience to the public and business entities as possible was also prepared by the RBI along with the recommendation for demonetization. The same was also taken into consideration by the Cabinet.
Hence, the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors, was held to be without substance.
Want of Requisite Quorum
Insofar as the contention of the petitioners that there was no quorum as required under the 1949 Regulations is concerned, it was noticed that the requisite quorum of four directors of whom not less than three directors nominated under Section 8(1)(b) or 8(1)(c) were present for the meeting. Hence, the contention that the Meeting of the Central Board dated 8th November 2016 is not validly held for want of quorum, was also rejected.
The scheme mandates that before the Central Government takes a decision with regard to demonetisation, it would be required to consider the recommendation of the Central Board. Hence, in the context in which it is used, the word “recommendation” would mean a consultative process between the Central Board and the Central Government.
The matter was under active consideration for a period of six months between the RBI and the Central Government. The record would also reveal that all the relevant information was shared by both the Central Board as well as the Central Government with each other. As such, it cannot be said that there was no conscious, effective, meaningful and purposeful consultation.
Hence, merely because the Central Government has advised the Central Board to consider recommending demonetisation and that the Central Board, on the advice of the Central Government, has considered the proposal for demonetization and recommended it and, thereafter, the Central Government has taken a decision, cannot be a ground to hold that the procedure prescribed under Section 26 of the RBI Act was breached.
Objective not met
It was argued that the objective with which the impugned Notification was issued, i.e., to combat fake currency, black money and parallel financing are concerned, the same has utterly failed, as, immediately after demonetisation was effected, currency notes of new series have been seized. It is also submitted that the fake currency is also in vogue. New series of notes have been seized from terrorists. The Attorney General, on the other hand, submitted that the long term benefits of demonetization have been enormous, direct and indirect.
The Court, however, observed that, in any case, mere errors of judgment by the government seen in retrospect is not subject to judicial review. In such matters, legislative and quasi-legislative authorities are entitled to a free play, and unless the action suffers from patent illegality, manifest or palpable arbitrariness, the Court should be slow in interfering with the same.
The Court observed that ‘hasty’ argument would be destructive of the very purpose of demonetisation. Such measures undisputedly are required to be taken with utmost confidentiality and speed. If the news of such a measure is leaked out, it is difficult to imagine how disastrous the consequences would be.
Hardships of citizens
On the contention that, on account of a hasty decision by the Central Government, citizens had to suffer at large, that many people were required to stand in the queues for hours, that many citizens were deprived of their meals, and that many citizens lost their jobs, the Court observed that the Central Government had advised the Central Board to draft a scheme to implement demonetisation in a non-disruptive manner with as little inconvenience to the public and business entities as possible. Accordingly, a draft scheme was also submitted by the Central Board along with its recommendations for demonetization. Further, the RBI has subsequently issued relaxations from time to time taking into consideration the difficulties of the people and availability of the new notes. No doubt that on account of demonetisation, the citizens were faced with various hardships, however, if the impugned Notification had a nexus with the objectives to be achieved, then, merely because some citizens have suffered through hardships would not be a ground to hold the impugned Notification to be bad in law.
Issue 4: 08.11.2016 Notification – Proportionality
The doctrine of proportionality was found to be fully satisfied based on the four-pronged test:
For the purpose of achieving three objectives, namely three purposes, i.e., elimination of fake currency, black money and terror financing, the Central Government, on the recommendations of the Central Board, took a decision to demonetize the bank notes of denominational value of Rs.500/- and Rs.1000/-. Assuming that holding bank notes is a right under Article 300-A of the Constitution of India, the limitation that is imposed is designated for a proper purpose. By no stretch of imagination could it be said that the aforesaid three purposes are not proper purposes.
Demonetisation of high denomination bank notes of Rs.500/- and Rs.1000/- has a reasonable nexus with the three purposes sought to be achieved.
What alternate measure could have been undertaken with a lesser degree of limitation is very difficult to define. Whether demonetization of only Rs.500/- denomination notes ought to have been done or the denomination of only the notes of Rs.1000/- ought to have been done or as to whether particular series of the bank notes ought to have been demonetised, are areas which are purely within the domain of the experts and beyond the arena of judicial review.
By demonetisation, the right vested in the notes was not taken away. The only restrictions were with regard to exchange of old notes with the new notes, which were also gradually relaxed from time to time. As such, the right to property in bank notes was not taken away. A full value of legitimate currency was entitled to be deposited in the bank account, however, up to a particular date.
Even if there were reasonable restrictions on the said right, the said restrictions were in the public interest of curbing evils of fake currency, black money, drug trafficking & terror financing.
Issue 5: Period for exchange of notes
The Court took note of the fact that under the 1978 Act, three days’ period was provided for exchanging the demonetised notes. If a person could not avail of the said period, five days’ grace period was made available during which period the money could be exchanged subject to the RBI being satisfied with the genuineness of the reasons for not submitting the same within three days.
However, in 2016 Demonetisation, the period for exchanging any amount of SBNs and depositing the same in the KYC compliant bank account without any limit or hindrance was 52 days. The Court, hence, failed 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.
Issue 6: RBI’s independent power
The RBI does not have independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of the provisions of Sections 3 and 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act.
The purpose of the 2017 Act is to extinguish the liabilities of the SBNs which have ceased to be legal tender with effect from 9th November 2016 so as to give clarity and finality to the liabilities of the RBI and the Central Government arising from such bank notes which have ceased to be legal tender. However, in order to provide a grace period to genuine cases, Section 4 of the 2017 Act has been incorporated. Section 5 of the 2017 Act provides for prohibition on holding, transferring or receiving SBNs. Sections 6 and 7 of the 2017 Act are penal sections which provide for penalty for contravention of Sections 4 and 5 of the 2017 Act, respectively.
Under sub- section (2) thereof, the RBI is required to satisfy as to whether a person seeking to take benefit of grace period under sub-section (1) is entitled thereto after satisfying that the reasons for not depositing the SBNs prior to 30th December 2016, are genuine, and thereafter, credit the value of the said notes in his ‘KYC compliant bank account’. Sub-section (3) thereof provides for an appeal. Hence, subsection (2) of Section 4 of the 2017 Act cannot be read independently to provide power to the RBI in isolation of subsections (3) and (4) thereof. It is to be read as a part of the scheme of Section 4 of the 2017 Act.
Nagarathna, J expressed the following dissenting opinion on the first three issues and did not go into the last three issues:
Issue 1: ‘Any’ series of notes under Section 26(2) if the RBI Act – Interpreted
i) The Central Government possesses the power to initiate and carry out the process of demonetisation of all series of bank notes, of all denominations. However, all series of bank notes, of all denominations could not be recommended to be demonetised, by the Central Board of the Bank under Section 26 (2) of the Act.
ii) Sub-section (2) of Section 26 of the Act applies only when a proposal for demonetisation is initiated by the Central Board of the Bank by way of a recommendation being made to the Central Government.
iii) On receipt of a recommendation from the Central Board of the Bank for demonetisation under Section 26 (2) of the Act, the Central Government may accept the said recommendation or may not do so. If the Central Government accepts the recommendation, it may issue a notification in the Gazette in this regard.
iv) The Central Government may also initiate and carry out demonetisation, even in the absence of a recommendation by the Central Board of the Bank. However, this must be carried out only by enacting a plenary legislation or law in this regard, and not through issuance of a Notification under subsection (2) of Section 26 of the Act as this provision is not applicable in cases where the proposal for demonetisation is initiated by the Central Government.
Issue 2: Excessive Delegation
- i) This question does not arise for consideration as it has been held that the power under sub-section (2) of Section 26 of the Act cannot be construed to mean “all” series or “all” denominations.
- ii) If the Central Board of the Bank is vested with the power to recommend demonetisation of “all” series or “all” denominations of bank notes, the same would amount to a case of excessive vesting of powers with the Bank.
Issue 3: 08.11.2016 Notification – Flawed decision making
i) That the measure of demonetisation ought to have been carried out by the Central Government by way of enacting an Act or plenary legislation.
ii) The proposal for demonetisation arose from the Central Government and therefore, could not be given effect to by way of issuance of a Notification as contemplated under sub-section (2) of Section 26 of the Act, as, such provision would not apply in cases where the proposal for demonetisation has originated from the Central Government, such as the instant case.
iii) That the decision-making process was also tainted with elements of “non-exercise of discretion” by the Central Board of the Bank in rendering its advise on the impugned measure. That the Bank acted at the behest of the Central Government and did not render an independent opinion to the Central Government.
iv) Therefore, the impugned Notification dated 8th November, 2016 issued under subsection (2) of Section 26 of the Act is unlawful. Further, the subsequent Ordinance of 2016 and Act of 2017 incorporating the terms of the impugned Notification are also unlawful.
Nagarathna, J did not answer the remaining questions in light of the answers to the first three issues.
She concluded by saying that demonetisation was an initiative of the Central Government, targeted to address disparate evils, plaguing the Nation’s economy, including, practices of hoarding “black” money, counterfeiting, which in turn enable even greater evils, including terror funding, drug trafficking, emergence of a parallel economy, money laundering including Havala transactions. It is beyond the pale of doubt that the said measure, which was aimed at eliminating these depraved practices, was well-intentioned. However, the measure has been regarded as unlawful only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation.
Considering that the impugned notification dated 8th November, 2016 and the Act have been acted upon, It has been clarified that the judgment would apply prospectively and would not affect any action taken by the Central Government or the Bank pursuant to the issuance of the Notification dated 8th November, 2016. Hence, no relief has been granted in the individual matters.
[Vivek Narayan Sharma v. Union of India, 2023 SCC OnLine SC 1, decided on 02.01.2023]
Majority Opinion by: Justice BR Gavai
Minority Opinion by: Justice BV Nagarathna
For petitioners: Senior Advocate P. Chidambaram and Shyam Divan, Advocate Prashant Bhushan, and petitioner-in-person Viplav Sharma
For UOI: Attorney general R. Venkataramani
For RBI: Senior Advocate Jaideep Gupta