New Delhi: The central government is empowered under section 26 (2) of the Reserve Bank of India (RBI) Act to initiate demonetisation exercise through an executive order for all series of bank notes, the Supreme Court held Monday. Individual interests, it said, must “yield to the larger public interest sought to be achieved” by the government’s November 2016 move.
The restrictions imposed through demonetisation were reasonable, in the public interest, and aimed at curbing evils of fake currency, black money, drug trafficking, and terror financing. Therefore, the notification also satisfied the “doctrine of proportionality” — action shouldn’t be more drastic than it ought to be — as the measures undertaken were strongly linked to the objective it sought to achieve, the court held.
This ruling by a 4:1 majority was handed down by a five-judge constitution bench, upholding the Narendra Modi government’s November 2016 notification following which currency notes of Rs 500 and Rs 1000 denomination ceased to be legal tender. It rejected the contention raised in 58 petitions that faulted the decision-making process leading to demonetisation, terming it flawed, and one that caused hardships to citizens.
Adding that official records disclosed the matter was under “active consideration for a period of six months between the RBI and the Central Government”, the court said the government made the decision only after getting a recommendation from the central bank.
The court further stated that it did not “wish to go into the question as to whether the object with which demonetisation was effected is served or not or as to whether it has resulted in huge direct and indirect benefits or not”, saying it did not possess the expertise to determine the same.
Rendering a “purposive interpretation” — acknowledging that a statute may have varying interpretations — to section 26 (2) of the RBI Act, the bench led by Justice S.A. Nazeer held that the central government’s power under this section cannot be restricted to demonetise just one or a few series of bank notes, but enables it to bar circulation of all series of currency notes.
Section 26 defines “legal tender character of notes” and sub-section 2 of this provision underlines a mechanism to be followed to demonetise any series of bank notes.
Also, merely because on two earlier occasions the demonetisation exercise was done by an act of Parliament does not mean the government is bereft of the power under section 26(2) to issue a notification on demonetisation, it held while commenting that the petitioners’ argument that right to property was sought to be taken away was without “substance”.
Without conceding with the petitioners that allowing the government to demonetise all series of bank notes would amount to conferring excessive delegation, the bench held that the RBI Act had an inbuilt safeguard to prevent possible misuse of the law.
Based on the arguments advanced by the petitioners, the central government, and the RBI, the court framed six issues and answered all of them in favour of the government. ThePrint breaks down these six issues to explain how the judges reached the said conclusions.
Also Read: Justice Nagarathna’s dissent in demonetisation case — ‘well-intentioned but unlawful’
‘Any’ in section 26 (2) of RBI Act
The first question before the court’s consideration revolved around the central government’s power under section 26(2) of the RBI Act, and whether it was limited to just one or some series of currency notes.
Section 26 of the RBI Act offers the definition of legal tender.
Sub-section 2 of this provision — Section 26 (2) — says the central government may, on recommendation of the RBI’s Central Board, issue a notification in the Gazette of India declaring that “any series of bank notes of any denomination” shall cease to be legal tender with effect from such date as may be specified in the notification.
The petitioners had argued that the word “any” before “series” will have to be restricted to mean “some”, adding that if it is not read in such a manner, the very power available to the government under this sub-section would have to be held as invalid on the ground of excessive delegation — delegating more legislative power than enshrined in scope of law.
In its counter, the Modi government argued that the word “any” cannot be interpreted in such a narrow manner.
On this point, the bench agreed with the government, taking into account multiple previous SC judgments, and said the interpretation of a statute must be meaningful and construed having regard to the meaningful legislative intent. “A construction which leads to manifest absurdity must not be preferred to a construction which would fulfil the object and purport of the legislative intent,” it said.
In the context of the RBI Act, the scheme, and its object, the word “any” would mean all, the court held. It enunciated the perks of “purposive interpretation” in such disputes and said the settled principle is that the legislation should be given a pragmatic interpretation, not a pedantic one.
In doing so, the court may even depart from the rule that plain words should be interpreted according to their plain meaning.
The court described the RBI Act as a special law, vesting all the powers and functions with regard to monetary policy and all matters pertaining to management and regulation of currency with the central bank. And, since under section 26 (2), the government is required to take a decision on demonetisation on the recommendation of the central bank, it could be seen that the law vests power with the central government, the court said.
“When the legislature itself has provided that the Central Government would take a decision after considering the recommendation of the Central Board of the RBI, which has been assigned a primary role in matters with regard to monetary policy and management and regulation of currency, we are of the view that the legislature could not have intended to give a restricted power under sub-section (2) of Section 26 of the RBI Act,” the bench held.
Delving further into the legislative intent of the law, the court said the policy speaks of management and regulation of currency, and demonetisation of notes would certainly be a part of it. The legislature, it stated, empowered the government to exercise such a power, for which the latter may take recourse when it finds it necessary to do so, taking into consideration myriad factors that must have a reasonable nexus to the objective of the law.
‘Excessive delegation’
According to the petitioners, if the central government’s power under the law is construed to mean that it can be exercised in all series of bank notes, it would amount to excessive delegation and, hence, should be struck down.
The court, however, rejected this argument and held that in view of the multifarious activities of a welfare state, the legislature can delegate its powers to different bodies. But it must “necessarily delegate the working out of details to the Executive or any other agency”.
The bench did not rule out the possibility of abuse of such delegated powers, but in the same breadth added that the claim of eventual abuse of such powers, in the absence of any evidence to support it, cannot be a ground for striking down a provision.
In the present case, the court brushed aside the petitioners’ apprehension of misuse and noted the delegation under the RBI Act is to the central government, which is answerable to Parliament.
The mechanism drawn out in the law on demonetisation, it said, has an inbuilt safeguard as it does not permit the central government to take a decision on this exercise without the RBI’s recommendation.
The court scrutinised the law further to conclude that it allows the RBI, which has a contingent of experts in the field of economics, to provide “sufficient guidance” to the “delegate” that is Parliament, which is not a body of experts or specialists in the said area.
Flaw in decision-making process
The petitioners had sought for the notification to be struck down on the ground that the decision was taken without considering relevant factors and eschewing irrelevant ones. Citing the scheme of section 26(2) of RBI Act, they argued that the procedure for demonetisation should emanate from the RBI and not the government, as was done in the present case.
The RBI convened a meeting hurriedly on 8 November, 2016, a day after the central government sent its proposal, they said, adding that PM Modi announced the decision within hours of the RBI Central Board’s meeting and consequent recommendation.
In the court’s opinion, the two requirements under the law — recommendation of the central bank and decision of the central government — were satisfied.
Limiting its scope of enquiry to ascertain if there was a flaw in the decision-making process, the court clarified that it did not sit in “judgment over matters” of economic policy, which, in its view, must be left to the executive.
On scrutiny of the entire record related to the demonetisation exercise, the court opined that the secretary of the department of economic affairs, Ministry of Finance, in the 7 November, 2016 communication addressed to the RBI governor voiced concern with regard to the infusion of fake Indian currency notes (FICN) and generation of black money.
During the meeting on 8 November, 2016 detailed discussions took place on said proposal and after such deliberations, the central bank resolved to recommend the withdrawal. Upon perusal of material on record, the court concluded, the RBI had taken into account relevant factors before recommending the withdrawal of Rs 500 and Rs 1000 currency notes.
Moreover, the court said, the records revealed that the matter was under active consideration for a period of six months between the RBI and the central government. Merely because the government had advised the central bank to consider the proposal for demonetisation does not mean that the law was breached, it added.
“As such, we are of the considered view that the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors, is without substance,” said the court, rejecting the petitioners’ claim there was no quorum for the 8 November meeting of the RBI’s Central Board.
Also Read: Rs 2000 notes mean ‘black money’, phase them out gradually — BJP MP’s plea to Modi govt
Warranted in larger public interest?
The court disagreed with the petitioners that there could have been an alternative course of action to curtail the circulation of black money, instead of such a drastic measure that caused enormous hardship to citizens.
The demonetisation exercise was a reasonable restriction, warranted in the larger public interest, it held. The bench ascertained the same after applying the four-pronged test laid down in an earlier SC judgment.
According to the bench, demonetisation was done to counter the large circulation of fake currency notes, circulation of black money, and the use of fake currency for financing subversive activities such as drug trafficking and terrorism, which harm the country’s economy and security.
Therefore, the court held that the purpose of demonetisation had a reasonable nexus with the purpose sought to be achieved.
On the issue of an alternate measure, the court said it was difficult to define what “alternate measure could have been undertaken”, adding that it was of the view that the central government is the best judge to decide on such matters since it has all the “inputs with regard to fake currency, black money, terror financing & drug trafficking”.
“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,” the court held.
According to the bench, the only restriction imposed through demonetisation was with regard to the exchange of old notes with new notes, and the move did not entail a limit on the deposit of demonetised notes.
Dismissing the petitioners’ argument, the court ruled that the right to property in bank notes was not taken away as a result of demonetisation and that there was no restriction on non-cash transactions like debit card, credit card, and online transactions.
52-day exchange window & RBI’s liability
According to the judgment, the 52-day window to exchange the demonetised notes was reasonable.
It recalled that the SC had in 1978 upheld the law that demonetised all high-denomination bank notes and gave three days’ time to citizens to exchange the currency — a window which could be extended to five days.
“We fail to understand as to how the said period of 52 days could be construed to be unreasonable, unjust, and violative of petitioners’ fundamental rights,” the court said.
It finally concluded that the Specified Bank Notes (Cessation of Liabilities) Act, 2017 doesn’t give any independent power to RBI to accept demonetised notes beyond the stipulated deadline, as was argued by the petitioners. In terms of this act, demonetised notes have ceased to be legal tender and, hence, are no longer liabilities of the RBI.
However, the law provides a grace period to genuine cases who could not exchange the demonetised currency prior to 30 December 2016. But it required RBI to satisfy itself as to whether reasons for not depositing the demonetised notes before the deadline expired are genuine or not.
The court did not find it appropriate to accept the petitioners’ suggestion that a scheme must be framed to enable citizens with genuine reasons to exchange the notes, saying it would amount to encroaching upon areas reserved for experts. However, it noted that if the central government finds there exists any such class of persons and if there are any reasons for extending the benefit, then it is within its discretion to do so.
(Edited by Amrtansh Arora)
Also Read: Value of notes in use more than doubled in 6 yrs post demonetisation, Sitharaman tells Parliament