National University of Advanced Legal Studies, Kochi (Batch of 2020)

Facts: The Five-Judge Bench of the Hon’ble Supreme Court of India was answering a Division Bench reference arising out of the Writ Petitions filed challenging the Notification No. 3407(E) dated 8th November, 2016, issued by the Central Government under Section 2(26) of the Reserve Bank of India Act, 1934, by which it was declared that the bank notes of denominations of five hundred rupees and one thousand rupees shall cease to be legal tender with effect from 9th November, 2016, to the extent specified in the impugned Notification. This is popularly known as ‘demonetisation’.

Issues: There were nine questions framed by the Division Bench in 2016, which were reframed as the following six issues for the purpose of the Judgement.

1. Whether the power available to the Central Government under Section 26(2) of the Reserve Bank of India (‘RBI’) Act, 1934, can be restricted to mean that, it can be exercised 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?
2. 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 the Central Government will amount to conferring excessive delegation and hence need to be struck down?
3. Whether the impugned notification dated 08-11-2016 is liable to be struck down on the ground that the decision-making process is fraud in law?
4. Whether the impugned notification dated 08-11-2016 is liable to be struck down applying the test of proportionality?
5. Whether the period provided for the exchange of notes by the impugned notification can be said to be unreasonable?
6. Whether RBI has independent power under Section 4(2) of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 (‘2017 Act’) in isolation of provisions Section 3 and Section 4 (1) thereof, to accept the demonitisation of notes beyond the period specified in the notification issued under Section 4(1)?

Majority Opinion:

• The Central government in consultation with RBI can bring in demonetisation under Section 26(2) of RBI Act, holding that “Delegation is made to Central Govt. which is answerable to the Parliament which in turn is answerable to the citizens of the country. The Central Govt is required to take the action after the consultation with the Central Board and there is an inbuilt safeguard.”
• The notification is valid and satisfies the test of proportionality. When considering the question of alternative methods to achieve similar objects, the Court held that such speculation falls under the domain of experts, of which RBI is a part, playing a material role in economic and monetary policy in the country. As the Central Government has all the data regarding fake currency, black money, terror financing & drug trafficking, the choice of method is best left to the discretion of the Central Government, in consultation with the RBI. The Hon’ble Court stressed that unless the said discretion has been exercised in a palpably arbitrary and unreasonable manner, it will not be possible for the Court to interfere with the same. Further, the court held that there was a reasonable nexus to bring such a measure with the aforesaid purposes of addressing issues of fake currency bank notes, black money, drug trafficking & terror financing.
• The majority Judgement took the stance that a restrictive interpretation of the word "any" in Section 26(2) of the RBI Act would lead to absurdity, and must be avoided. If the RBI’s powers to demonetise entire denominations of currency were restricted, that would severely undermine the very purpose of the Act, and deter similar governmental action in the future, creating a slippery slope of judicial oversight.
• The Court added that the decision-making process cannot be faulted merely because the proposal emanated from the Central Govt., stating that “there has to be great restraint in matters of economic policy. Court cannot supplant the wisdom of executive with its wisdom.”
• The Court opined that if the time for such exchange was unlimited or extended beyond a reasonable window, the high denomination bank notes could be circulated and transferred without the knowledge of the authorities concerned, and any such transferee could walk into the Bank on any day thereafter and demand exchange of his notes. Further, the Court noted that the challenge that the period of three days was unreasonable, unjust and violative of the Petitioners’ fundamental rights, stood specifically rejected by the Constitution Bench in the case of Jayantilal Ratanchand Shah. In the present case, the period for exchanging was 52 days, whereas the said period in the case of Jayantilal was only three days, which is much less.
• The contention that the impugned notification is liable to be set aside on the ground that it caused hardship to individuals/ citizens was rejected, finding that individual interests must yield to the larger public interest sought to be achieved. The Hon’ble Apex Court held that “If the 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.” Relying on the case of Km. Sonia Bhatia v. State of U.P. and Others., the Court found that “indeed every noble cause claims its martyr."

• Justice B.V. Nagarathna found that there was no independent application of mind on the part of the Reserve Bank of India (RBI) while considering the demonetisation proposal sent by the Central government, as their records say "as recommended by the Central Government". Such a proposal with serious economic ramifications must be placed before the Central Board of the Bank so that there can be application of mind by the experts.
• The learned Judge opined that demonetisation at the bidding of the Centre is a far more serious issue than when it is done by the banks, and with the powers of the Centre being vast, the same had to be done by plenary legislation.
• It was further noted that since ₹2,000 note was also released thereafter, it can be seen that the object which the Centre sought to achieve through demonetisation may not have been achieved at all.
• The learned Judge noted that as per the petitioners, 86% of currency in circulation in the country was demonetized, wondering if the RBI had planned for such socio-economic hardships as well. She held that the action of demonetisation by November 8th  Gazette Notification was unlawful and the 2016 Act and Notification were also unlawful, but found that the status quo ante unfortunately cannot be restored now since it was done in 2016.

Analysis :

While the Judgement did focus on the optics of the RBI notification, and addressed the interpretation of the provisions, the majority opinion overall is the right judicial position to take. To limit the powers of the legislation through judicial review is imprudent and will, undoubtedly, result in dire situations. Judicial activism cannot override the separation of powers which forms part of the basic structure of the Constitution. That, to declare the impugned notification and subsequent administrative actions as legally invalid would have set a bad precedent and led to jurisprudential confusion. The majority opinion was right in not examining whether the object with which demonetization was effected is served or not or as to whether it has resulted in huge direct and indirect benefits or not.