Legitimate, legally correct: Supreme Court on Demonetisation

Supreme Court verdict on Demonetisation: “कोस-कोस पर बदले पानी, चार कोस पर वाणी और पेट काट के पैसे जोड़े घर घर की नारी” is a classical illustration of the ‘true picture’ of India. The lines depict the state of affairs of every household in the nation, where the female folks have enormous saving potential. However, the ‘saving potential’ hit the limelight on the eve of November 8, 2016 when owing to demonetisation, the unrecognized caliber of the traditional household received due recognition. On the contrary, the economic policy brought about significant changes in status quo and was challenged before the Apex Court.

Legality of Demonetisation: Vivek Narayan Sharma vs. Union of India

The legality of the Centre’s November-2016 policy has been challenged through a flurry of 58 petitions in the Supreme Court. Thereby, looking into the legal and technical aspects, the Supreme Court upheld the validity of the government’s demonetisation policy in a 4:1 split verdict. The Constitutional Bench pointed out six issues in the lawsuit challenging the government’s decision, which was addressed by both the majority opinion as well as the dissent.

Factual Backdrop

On November 8th, 2016 the Modi-led Centre had issued a notification to put an embargo on the validity and circulation of all 500 and 1000 rupee notes. The alleged move was intended at curtailing the flow of black money. The aim of the government was to bring unaccounted income under the fold of the executive scrutiny. The Central government invoked Section 26 of the Reserve Bank of India Act, 1934 that provides the Union with the power to declare the currency notes in circulation as illegal tender.

The constitutionality of the scheme and the manner of its application of the executive policy was challenged before the Supreme Court on November 9th, 2016. The case was taken up by a 3-Judge Bench comprising Chief Justice T.S. Thakur, Justices A.M. Khanwilkar and D.Y. Chandrachud. The 3-member bench stayed subsequent litigation on the matter and ordered the matter to be referred to a 5-Judge Constitution Bench.

Dictum of the Constitutional Bench

A five-judge Constitution bench headed by Justice S A Nazeer dismissed the batch of petitions challenging the demonetisation policy. The majority was of the view that demonetisation was an Executive’s economic policy and cannot be reversed.

The majority held that there was consultation between the Centre and the RBI before demonetisation and that there was a reasonable nexus to bring about the decision. The Supreme court further added that the doctrine of proportionality did not hit demonetisation policy.

Earlier, His Lordship Justice Gavai reframed the questions referred to the Constitution Bench and culled out six questions. The questions were answered in the erudite judgment pronounced by Justice Gavai for the majority and Justice BV Nagarathna in her dissent. However, the Hon’ble Judges disagreed on three prominent issues.

Power available to the Central Government under Section 26 (2) of the RBI Act

Justice B.R. Gavai, for the majority, held that ‘the power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for one or some series of bank notes and not to all series of bank notes.’

Further, the majority held that ‘merely because on two earlier occasions, the demonetisation exercise had been done by plenary legislation, it cannot be held that such a power could not be available under sub-section (2) of Section 26 of the RBI Act.’

On the contrary Justice BV Nagarathna in her dissent observed that ‘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.’

Moreover, she held that ‘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, the Hon’ble Justice was of the view that ‘with recommendation, the exercise can be carried out only by enacting a plenary legislation and not through issuance of a Notification under subsection (2) of Section 26 of the Act, as the provision does not bestow Central Government.to initiate the proposal for demonetisation.’

Whether the power vested with the Central Government would amount to conferring excessive delegation and liable to be struck down?

Justice Gavai for the majority was of the view that ‘the power vested with the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be struck down on the ground of conferring excessive delegation.’

However, in her dissent, Justice BV Nagarathna held that ‘if the Central Board of the Bank is vested with the power to recommend demonetisation of “all” series or “all” denominations of banknotes, the same would amount to a case of excessive vesting of powers with the Bank.’

Whether policy can be struck down owing to flawed decision making process?

The majority observed that “the impugned notification does not suffer from any flaws in the decision making process.” However, the dissent opined that ‘the measure of demonetisation ought to have been carried out by the Central Government by way of enacting an Act or plenary legislation.’

Further, Justice BV Nagarathna, had serious reservations against the ‘proposal of demonetisation’ that arose from the Central Government. Thus, she held that the decision making process was also tainted with elements of “non-exercise of discretion” by the Central Board of the Bank. The Central Board of the bank acted at the behest of the Central Government and did not render an independent opinion to the Central Government. However, on other three issues, Justice BV Nagarathna agreed with the reasoning of the majority.

Thus, the majority view of the Bench, further highlights that the impugned notification dated 8th November 2016 satisfies the test of proportionality and, as such, cannot be struck down on the said ground. Further, the Bench was of the view that the period provided for exchange of notes cannot be said to be unreasonable. In addition, the Bench held that the RBI does not possess independent power under sub-section (2) of Section 4, to accept the demonetised notes beyond the period specified in notification.

The Supreme Court in the end upheld the demonetisation of Rs. 1,000 and Rs. 500 currency notes by a split verdict of 4:1, with Justice BV Nagarathna dissenting from the four other judges that ruled in favor of the Centre’s 2016 executive exercise.