Supreme Court upholds demonetisation: What was the challenge about?

In a surprise announcement on the evening of November 8, 2016, Prime Minister Narendra Modi said in a televised address to the nation that the two banknotes will be “just worthless piece of paper” with immediate effect, and went on to introduce new notes of Rs 2,000 and Rs 500 for public circulation.

While many termed it as a “bold” move, the Opposition, over the years, has criticised the government. What was the legal challenge to the government’s move, and what has the court said now? We explain.

What is the Supreme Court’s verdict on demonetisation?

Congress leader and Senior Advocate P Chidambaram, appearing for one of the petitioners, referred to the Preamble of the Reserve Bank of India Act, 1934, which said the right to regulate the issue of banknotes is entirely with RBI. It also generally operates the currency and the credit system.

“That is why anything to do with currency must have emanated from the Reserve Bank of India,” he argued earlier, saying the government could have exercised the power to demonetise only on RBI’s recommendation.

The Indian Express earlier reported that the Government and the RBI affidavits to the court did not mention that the RBI’s recommendation for the noteban – a procedural requirement – came after the central bank critiqued many of the government’s justifications, such as the claim regarding a rise in the number of Rs 500 and Rs 1,000 notes in circulation, and that fake currency notes had a serious impact on the economy.

In its majority 4:1 judgment, it was held that the Centre’s notification dated November 8, 2016, was valid and satisfied the test of proportionality. “We find that the three purposes are proper purposes and there was a reasonable nexus between the objects and the means to achieve the objects. Action cannot be struck down on the basis of the doctrine of proportionality,” it said.

“The central government’s decision was after RBI board’s approval which shows in-built safeguard against centre’s powers. It cannot be said that there is excessive delegation of power under the RBI Act to the Centre which is answerable to the Parliament.” the court observed, as reported by LiveLaw.

“The Centre is required to take the action after the consultation with the Central Board and there is an inbuilt safeguard. There has to be great restraint in matters of economic policy. The court cannot supplant the wisdom of executive with its wisdom. Decision-making process cannot be faulted merely because the proposal emanated from the centre,” the judgment stated.

In her dissenting judgement, Justice B V Nagarathna said while the measure was “well-intentioned”, it was to be declared “unlawful purely on legal grounds”. “The record demonstrates there was no independent application of mind by the RBI. There was no time for the bank to such an independent application of mind,” she said in the court.

“As per Section 26(2), the proposal for demonetisation is to emanate from the central board of the RBI. Demonetisation of all series of notes at the instance of Central Government is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation than through executive notification,” Justice Nagarathna said.

Why was demonetisation challenged?

Taking up the batch of 58 petitions challenging various aspects of the government’s note ban decision, the Supreme Court had initially wondered if it had not become merely an “academic debate” given the passage of time. It later decided to go into the issue, with the petitioners contending that the procedure prescribed in Section 26(2) of RBI Act, 1934, was not followed.

Section 26(2) of the Act states that “on recommendation of the [RBI] Central Board, the Central Government may, by notification in the Gazette of India, declare that, with effect from such date… 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”.

Chidambaram argued that as per the particular section, the recommendation should have emanated from the RBI, but in this case, the government had advised the central bank, following which it made the recommendation. He said when earlier governments had demonetised currency — in 1946 and 1978, they had done so by way of a law made by Parliament.

He also accused the government of withholding documents related to the decision-making process from the court and raised doubts about whether the quorum as required for the RBI Central Board meeting was met.

How did the government and the RBI respond?

Senior Advocate Jaideep Gupta, representing the RBI, has said “the Section does not talk about the process of initiation. It only says that the process will not end without the last two steps outlined in it…” He also said, “We (RBI) gave the recommendation…”

On the argument about previous demonetisation decisions, Gupta said the RBI had not agreed to the proposals, following which the earlier governments made the law. He also denied any document being withheld from the court.

The central bank also pointed out that the quorum as determined by RBI General Regulations, 1949, was met for the Central Board meeting. Besides the RBI Governor and two Deputy Governors, five directors nominated under provisions of RBI Act were present, it said. So, the requirement that three of them should be nominated under the law “is met”, submitted Gupta.

In November this year, the government told the apex court that it began consultations with the Reserve Bank in February 2016. “However, the process of the consultation and the decision-making were kept confidential…The withdrawal… of a significant portion of total currency value was a well-considered decision,” the Centre said in the affidavit.