What is Section 26(2) of RBI Act & how it divided SC judges in demonetisation case
Judiciary

What is Section 26(2) of RBI Act & how it divided SC judges in demonetisation case

Section 26(2) of Reserve Bank of India Act allows central govt to declare any series of bank notes of any denomination illegal tender after a recommendation from central board of RBI.

   
Rs 1,000 notes that were banned after demonetisation | Photo: Flickr | Gopal Vijayaraghavan

Rs 1,000 notes that were banned after demonetisation | Photo: Flickr | Gopal Vijayaraghavan

New Delhi: In the judgment upholding the Narendra Modi government’s November 2016 decision to ban Rs 500 and Rs 1,000 currency notes by a 4:1 majority, the Supreme Court bench’s majority verdict differed from the minority judgment on their interpretation of a provision of the Reserve Bank of India Act, 1934.

The five-judge bench comprised Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian, and B.V. Nagarathna. The majority judgment was authored by Gavai, while Nagarathna differed from the majority view.

The court was hearing a batch of 58 petitions challenging the central government’s 2016 notification to ban Rs 500 and Rs 1,000 currency notes. These petitions were referred to a Constitution bench of the Supreme Court in December 2016. Individual petitioners who were unable to deposit the money within the stipulated time frame were also asked to file applications before this Constitution bench.

The main point of difference between the majority and minority judgments was the interpretation of Section 26(2) of the RBI Act, 1934, which allows the central government to declare that “any series of bank notes of any denomination shall cease to be legal tender” after a recommendation from the central board of RBI.

What does Section 26(2) of the RBI Act say? And how did the majority and minority judgments interpret it differently? ThePrint explains.


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What does the law say?

Section 26 of the RBI Act talks about “legal tender character of notes”. Section 26(1) characterises all bank notes as legal tender — which means a coin or a banknote which can be legally tendered or given for discharging any debt or meeting any financial obligation.

Section 26(2) says, “On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, 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.”

The notification issued by the central government on 8 November 2016, demonetising the notes, was issued under Section 26(2) of the Act.

With regard to this provision, the bench was considering whether the power available to the central government under Section 26(2) means that it can be exercised only for “one” or “some” series of bank notes and not “all” series of bank notes.

The court was also facing questions on the legality of the decision making process while issuing the demonetisation notification.

What the majority judgment said

The majority judgment held that the power available to the central government under Section 26(2) of the RBI Act can be exercised for all series of bank notes.

“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 for “all” series of bank notes,” it said.

This contention was considered because the petitioners had argued that all series of bank notes of Rs 500 and Rs 1,000 could not have been demonetised by a stroke of a pen. They had said that the expression “any” in Section 26(2) of the Act means, “a particular” series of “a particular denomination” of a bank note, and not “all” series of “all” denominations.

The majority verdict advocated for a “purposive interpretation” for the provision. This means that an interpretation which advances the purpose of the Act and which ensures its smooth and harmonious working must be chosen, and not the interpretation which leads to absurdity, confusion, or contradiction between its various provisions.

“For example, if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetise 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation,” it explained.

On the validity of Section 26(2), the petitioners had also submitted that if the word “any” is not given a restricted meaning, then the provision should be struck down as it gives “uncanalised, unguided and arbitrary powers” to the central government. However, the majority verdict upheld the provision, observing that it does not amount to conferring “excessive delegation” of powers on the Centre.

The majority verdict also pointed out that the two requirements under Section 26(2) of the RBI Act are (i) recommendation by the Central Board; and (ii) the decision by the Central Government. It then asserted that the RBI, while making the recommendation, and the central government, while taking the decision, “have taken into consideration all the relevant factors.”

It also interpreted the word “recommendation” in Section 26(2), to mean “a consultative process between the Central Board and the Central Government.” It then noted that the RBI and the central government were in consultation with each other for a period of six months before the notification was issued and, therefore, “it cannot be said that there was no conscious, effective, meaningful and purposeful consultation”.


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What the minority verdict said

Justice Nagarathna began by observing that the majority verdict authored by Justice Gavai does not recognise the fact that the RBI Act does not envisage initiation of demonetisation of bank notes by the central government.

She asserted that Section 26(2) only contemplates demonetisation of bank notes at the instance of the Central Board of the RBI. However, since in this case the proposal was not initiated by the RBI, the demonetisation exercise could have been undertaken by the central government only through an ordinance or a parliamentary law.

As against the majority verdict, Nagarathna also favoured giving the provision plain, grammatical meaning, and not “a broad meaning”. She said that if the word “any” is not given a plain grammatical meaning and interpreted to mean “all series of bank notes” of “all denominations”, it would vest with the Central Board of the Bank unguided and unlimited powers.

This, it said, would be arbitrary and unconstitutional as this would amount to excessive vesting of powers with the Bank. Therefore, in order to save the provision from being declared unconstitutional, she read down the meaning of the provision, to say that the RBI can initiate a proposal for demonetisation under Section 26(2) only for a “particular series of bank notes of any denomination.”

With the same understanding, she also ruled that when the RBI recommends demonetisation, it is only for a particular series of bank notes of a particular denomination.

“The word ‘any’ in sub-section (2) of Section 26 cannot be read to mean ‘all’. If read as ‘specified’ or ‘particular’ as against all, in my view, it would not suffer from arbitrariness or suffer from unguided discretion being given to the Central Board of the Bank,” she explained.

She further said that the “recommendation” under Section 26(2), in this case, did not originate from the RBI but was “obtained” from the bank and, therefore, it “could not be considered to be a recommendation as required by the Central Government in order to proceed under sub-section (2) of Section 26 of the Act”. She said that such a concurrence to a proposal originating from the central government is not akin to an original recommendation from the RBI under Section 26(2).

(Edited by Anumeha Saxena)


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