Supreme Court Constitution Bench Upholds Demonetisation Notification Under RBI Act, 1934

Five-Judge Bench Clarifies Scope of Central Government’s Power Under Section 26(2) of RBI Act and Rejects Challenge to 2016 Demonetisation; Separate Dissenting Opinion Calls Notification Unlawful

In a landmark judgment delivered on January 2, 2023, the Supreme Court of India’s Constitution Bench, comprising five judges led by Justice B.R. Gavai, delivered a decisive verdict upholding the validity of the notification dated November 8, 2016, issued by the Central Government demonetising Rs.500 and Rs.1000 banknotes. The notification, which rendered these notes no longer legal tender, was challenged on multiple grounds including the scope and validity of the power exercised under sub-section (2) of Section 26 of the Reserve Bank of India Act, 1934 (“RBI Act”), procedural flaws, proportionality, and reasonableness of the demonetisation process.

The Bench considered extensive arguments from senior counsels including Shri P. Chidambaram, Shri Shyam Divan, and the Attorney General Shri R. Venkataramani, along with detailed affidavits and records produced by the Union of India and the RBI. The Court was tasked with resolving fundamental questions about the interpretation of the RBI Act and the constitutional validity of the demonetisation exercise.

Key Observations and Findings:

1. Interpretation of Section 26(2) RBI Act: The Court held that the power under Section 26(2) cannot be restricted to demonetising “one” or “some” series of banknotes but extends to “all” series of banknotes of any denomination. The statutory word “any” was interpreted purposively, following precedents, as encompassing “all” where contextually appropriate. Prior demonetisation instances in 1946 and 1978, enacted through plenary legislations, do not limit this statutory power under the RBI Act.

2. Safeguards and Delegated Power: The Court ruled that the provision under Section 26(2) includes an inbuilt safeguard as the Central Government can exercise the power only on the recommendation of the Central Board of the RBI, an expert statutory body. This prevents excessive or arbitrary delegation and the provision does not suffer from constitutional infirmity on grounds of excessive delegation.

3. Decision-Making Process: After a detailed scrutiny of records including the communication from the Finance Ministry dated November 7, 2016, the RBI Central Board meeting minutes of November 8, 2016, and Cabinet notes, the Court found that the decision-making process was not flawed. The six months of prior consultations between the Central Government and RBI, the deliberations by the Central Board, and the Cabinet’s considered decision satisfied procedural and substantive fairness.

4. Proportionality Test: Applying the doctrine of proportionality, the Court held that the demonetisation notification was designated for a proper purpose — namely curbing fake currency, black money, and terror financing. There was a rational nexus between the measure and the objectives, no less intrusive alternative was apparent, and the social importance of the purpose outweighed the restrictions. Therefore, the notification did not violate constitutional rights.

5. Reasonableness of Exchange Period: The Court observed that the 52-day exchange period allowed under the notification was not unreasonable, especially when compared to prior demonetisation in 1978 which allowed only 3 days. The time frame provided adequate opportunity to the public to exchange demonetised notes.

6. RBI’s Power Under 2017 Act: The Court clarified that the RBI does not possess independent power under Section 4(2) of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 to accept demonetised notes beyond the time specified by the Central Government’s notifications. The provisions of Sections 3 and 4(1) of the 2017 Act must be read harmoniously as an integrated scheme.

Dissenting Opinion by Justice B.V. Nagarathna:

In a separate opinion, Justice Nagarathna dissented on the interpretation and legality of the November 8, 2016 notification. She held that:

- Section 26(2) of the RBI Act applies only when demonetisation is initiated by the Central Board of the RBI and recommends demonetisation of a specified series and denomination — not all series or denominations.

- The Central Government cannot initiate demonetisation by issuing a notification under Section 26(2). Such initiation must be through an ordinance or plenary legislation enacted by Parliament under Entry 36 of List I of the Seventh Schedule of the Constitution.

- The notification of November 8, 2016 issued by the Central Government was therefore unlawful, and the demonetisation of all Rs.500 and Rs.1,000 notes was vitiated.

- The subsequent Ordinance and Act of 2017 ratifying the notification were also unlawful.

- However, considering the practical difficulties arising from reversal, the declaration of illegality is prospective and does not affect actions already taken.

Significance:

The Constitution Bench’s ruling clarifies the ambit of the Central Government’s power under Section 26(2) of the RBI Act, confirms the validity of the demonetisation notification issued in 2016, and affirms the role of the RBI Central Board’s recommendation as a key safeguard. The judgment also reinforces the principle of judicial restraint in matters of economic and monetary policy, emphasizing deference to expert bodies and Parliament.

The dissenting opinion, while not the majority view, provides a critical legal perspective on the limits of executive power and underscores the importance of legislative process in far-reaching economic decisions.

This judgment settles numerous challenges pending across High Courts and the Supreme Court relating to demonetisation and will have a lasting impact on the exercise of executive powers concerning currency management in India.

Statutory provisions

Reserve Bank of India Act, 1934 Section 3, Section 7, Section 8, Section 17, Section 22, Section 23, Section 24, Section 25, Section 26(1), Section 26(2), Section 26A, Section 34; Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016; Specified Bank Notes (Cessation of Liabilities) Act, 2017 Sections 3, 4(1), 4(2), 4(3)

Vivek Narayan Sharma v. Union of India, (SC)(Constitution Bench) : Law Finder Doc Id # 2099553