Majority verdict finds no flaw in 2016 demonetisation process

Justice Nagarathna dissents, says act of demonetisation without Parliament's consent and just by a gazette notification was unlawful

January 02, 2023 11:03 am | Updated 08:57 pm IST

File picture of people queueing outside a bank in Coimbatore to exchange demonetised currency on November 10, 2016.

File picture of people queueing outside a bank in Coimbatore to exchange demonetised currency on November 10, 2016. | Photo Credit: M. Periasamy

A majority of four judges on a Constitution Bench of the Supreme Court on Monday found no flaw in the government’s process to demonetise ₹500 and ₹1000 banknotes through a gazette notification issued on November 8, 2016.

The sole woman judge, Justice B.V. Nagarathna, on the five-member Bench however disagreed with the majority, saying the government’s notification issued under Section 26(2) of the Reserve Bank of India (RBI) Act was unlawful.

Also read | BJP hails Supreme Court verdict on demonetisation

But Justice B.R. Gavai, delivering the judgment for the majority which included Justices S. Abdul Nazeer, AS Bopanna, V. Ramasubramanian, said the statutory procedure under Section 26(2) was not violated merely because the Centre had taken the initiative to “advise” the Central Board to consider recommending demonetisation. The government was empowered under the provision to demonetise “all series” of banknotes.

Differing, Justice Nagarathna said the government could have issued a notification under Section 26(2) only if the Central Board of the RBI had initiated the proposal to demonetise a specified series of banknotes by way of a recommendation. Here, in 2016, the government had initiated the demonetisation, not the Central Board.

In cases in which the government initiates demonetisation, Justice Nagarathna said, it should take the opinion of the Central Board. The opinion of the Board should be “independent and frank”. If the Board’s opinion was in the negative, the Centre could still go forward with the demonetisation exercise, but only by promulgating an ordinance or by enacting a parliamentary legislation. Describing the Parliament as the “nation in miniature”, she said “without the Parliament, democracy will not thrive”.

Justice Nagarathna further concluded there was no “meaningful application of mind” by the Central Board to the government’s initiative for withdrawing ₹500 and ₹1000 notes, which formed 86% of the currency in circulation at the time causing severe financial crunch and socio-economic despair. She said the Central Board had “hardly 24 hours to consider the proposal” of the Centre to demonetise the notes. Justice Nagarathna said the objectives of demonetisation were “noble and well-intentioned”, but the process undertaken was bad in law. Nothing however can be done to restore the situation to status quo ante, but the judgment could act prospectively, she said.

Justice Nagarathna said official records show the Central Board had “hardly any time to apply its mind independently to the proposal” and acted merely on “assurances” given by the government that “embarking on the process of demonetisation and that it would result in reducing banknotes in the economy and a switch over to the digitalisation of the economy”.

The petitioners, led by senior advocate P. Chidamabarm, had argued that the proposal for demonetisation was initiated by the government on November 7, 2016, the Central Board had met the next day at 5 p.m and Prime Minister Narendra Modi had announced the decision on national television at 8 p.m., just three hours later. He had contended that the decision-making process was “rushed” and “fatally flawed”.

Justice Gavai however said the RBI and the Centre had been in consultation with each other for six months prior to the November 8 notification issued under Section 26(2) of the RBI Act.

Also read: Wrong, misleading to say Supreme Court has upheld demonetisation: Congress

“The record would also reveal that all the relevant information was shared by both the Central Board as well as the government with each other. As such, it cannot be said that there was no conscious, effective, meaningful and purposeful consultation,” he wrote.

The judge rubbished the petitioners’ argument that a hasty decision was taken to demonetise, noting that “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”.

Also read | The debacle of demonetisation

Justice Gavai said demonetisation was done for the “proper purposes” of eliminating fake currency, black money and terror financing. He said there was a “reasonable nexus” between the measure of demonetisation and its objectives.

“The central government is the best judge since it has all the inputs with regard to fake currency, black money, terror financing and drug trafficking. As such, what measure is required to be taken to curb the menaces would be best left to the discretion of the government in consultation with the RBI,” the majority opinion said.

Also read | Is the economy still reeling from demonetisation?

The majority said arguments that demonetisation violated citizens’ right to property by taking away their money were “without substance”. There were reasonable restrictions to the right. Besides, unlike the demonetisation of 1978 when only a total of five days were given to the public to exchange their old notes for new, the 2016 one gave citizens 52 days. On whether demonetisation met its desired objectives was best left to the government.

Referring to individual applications to direct the RBI to extend the time to exchange the old notes, the court said RBI does not have any independent power under the Specified Bank Notes (Cessation of Liabilities) Act of 2017 to accept the demonetised notes.

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