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Anwesha Ghosh

LL.M. Student, National University of Study and Research in Law, Ranchi, Jharkhand.

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 Anwesha Ghosh

Background:

8th of November 2016 denoted a momentous change in India’s economy. Prime Minister Narendra Modi declared that 500 and 1,000 rupee notes of the Mahatma Gandhi Series were not any more legal tender. Individuals were given 50 days to deposit them in bank accounts or to exchange them for new notes at banks. The Prime Minister stated that evacuation of black money was sole point behind this progressive procedure. Overnight, 86% of all Indian currency notes by value became illegal tender. Since 68% of all exchanges in India are money exchanges, radically confining the utilization of 86% of the cash has typically tossed the nation into a condition of tumult. Despite the executive’s endeavours to guarantee that banks can benefit the money needs of the general population, unlimited lines at banks, reports of stoppage of trade and business in the economy, and more than 50 revealed deaths have driven many to scrutinize the intelligence of this move and its practicability in accomplishing its targets opposite the expenses to the general population and abridgement of their rights.[2]

Introduction:

Demonetization of currency means discontinuity of the particular currency from circulation and replacing it with a new currency. In the current context it is the banning of the 500 and 1000 denomination currency notes as a legal tender. Demonetize, according to Oxford Dictionary means “Deprive (a coin or precious metal) of its status as money”.[3]

The government’s stated objective behind the demonetization policy are as follows; first, it is an attempt to make India corruption free. Second it is done to curb black money, third to control escalating price rise, fourth to stop funds flow to illegal activity, fifth to make people accountable for every rupee they possess and pay income tax return. Finally, it is an attempt to make a cashless society and create a Digital India.[4]

 

Legal Provision:

Legal provisions regarding powers of RBI in currency ban:

o   Section 26 (2) of RBI Act gives power to the Central Government to declare any series of bank notes of any denomination illegal. Section 26(2) of the RBI Act reads as follows:

“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:”[5]

Hence, the Central Government, in exercise of its powers under Section 26(2), notification declared the value of Rs. 500 and 1000 shall be cease to be legal tender with effect from 09.11.2016.

o   Section 21 of The Banking Regulation Act, 1949 gives power to Reserve Bank in policy making to control advances by banking companies in the public interest.

o   Also, Section 35-A of the Banking Regulation Act, 1949 empowers the RBI to issue directions to banks in public interest to ensure that the interests of depositors are not compromised.

Coming to the question of constitutional loopholes on the demonetisation, The Supreme Court is has faced questions on whether the Nov 8, 2016 notification is in violation of Articles 14, 19(1) (g), 73 and 300-A of Indian constitution.

o   The Indian constitution pledges a right to property. Article 300A states that no person shall be deprived of his property, save by authority of law, that is, by an Ordinance or an Act of Parliament. The administration’s failure to issue an Ordinance restrains the obligation owed to the general population. Hence, it has been alleged that the act of denying them the right to their property impermissibly damages Article 300A. It is rightly contended that limits on withdrawal of cash from bank accounts and exchange of the notes are contrary to the mandate of Article 300A. The act of refusing to let people withdraw their own money in cash serves as an unqualified restriction on their right to property, and, by placing limits on such an exchange, the government has extinguished the right entirely.

o   Coming to the context of Right to Equality, Article 14 guarantees equality before the law and an equal protection of the law. As per the notification, the non-holders of bank accounts cannot exchange more than Rs. 2000. This move has been criticized by many precisely on the ground that given the Indian scenario, a huge number of people, especially in the rural areas, do not have a bank account. It is certainly going to magnify the sufferings of the people living in villages who might even have to resort to a direct or an indirect way of black transaction in order to sustain. Thus, the notification discriminates between holders and non-holders of bank accounts and unfortunately, accelerates the channel for a de novo form of black transaction.

o   Freedom of trade and commerce is also another consideration in this matter. Article 19(1) (g) of the constitution of India provides for the freedom to practice any profession, or to carry on any occupation, trade or business. The haphazard manner of announcement and implementation of the notification has caused a high degree of suffering to the masses.

o   Right to life, livelihood and liberty is one of the most important fundamental right. Article 21 of the constitution of India provides that no person shall be deprived of his life and liberty except according to procedure established by law. The abrupt withdrawal of Rs. 500 and Rs. 1000 currency notes from the market has caused an acute failure of the right to livelihood for millions of people. Certain businesses which are solely dependent on hiring of daily/weekly wage earners have nowhere to go to in the wake of such a stern notification as a result of which considerably high rate of dissipation is being borne by many. The sufferings and death tolls have been only multiplying with no signs of relief. These alleged circumstances accounted for a gross curtailment of the fundamental rights enshrined under Article 21.

o   Another argument can be made with reference to Article 73 of the constitution of India. This Article vests the Union Government powers on those subjects that the Parliament has right to make laws on, as recorded in Schedule VII. The main impediment on this power is that it must be practiced as per law made by Parliament. In this manner, where Parliament has made a law, power must be practiced as per such law, and even where it has not, the official is without still to act.

In this case, there is no arrangement in any law that forbids the Central government from forcing limits on money withdrawals from banks or trade of money. There is likewise no arrangement that vests this power with another office, for example, the RBI. There is, hence, no impediment on this power and when the Central government has issued

notification no. 3407, it has done, as such, incompletely, not in consonance with the official power under Article 73.

 

Interpretation:

The RBI Act gives the RBI the sole authority to operate the country’s currency and credit system. It gives the RBI the exclusive right to issue banknotes[6] and gives power to the central government and the RBI to decide on the non-issuance of banknotes.[7] The November 8 circular issued by the Finance Ministry demonetizing 500 and 1000 rupee notes was based on Section 26 sub-section (2) of the Reserve Bank of India Act, 1934.

The plain language of Section 26(2) of the RBI Act shows that the government can demonetise through a notification, even if in the past, like in 1978, demonetisation was done through an ordinance. The core issue is whether the government can declare that ‘all’ banknotes of one or more denominations shall cease to be legal tender. This depends on how one interprets the word ‘series’ and ‘any’ in Section 26(2). Since the RBI Act does not define the word ‘series’, it is unclear whether ‘series’ in Section 26(2) refers to the broader category of the ‘Mahatma Gandhi series’ of banknotes that the RBI launched in 1996 and has since been replaced by the Mahatma Gandhi (new) series from November 9 or whether ‘series’ refers to the narrower category of different serial numbers with different inset letters printed on the banknotes. In case the ‘series’ refers to the broader category, then the government’s notification does not pose any problem because ‘any’ surely includes within its ambit ‘one’. However, if ‘series’ refers to the narrower category, then it means that till November 8, there were multiple series of banknotes and thus, the government’s notification would be legal only if ‘any’ in Section 26 (2), means ‘every’.

The context and the subject matter of the RBI Act give the RBI the sole authority to operate the country’s currency and credit system. It gives the RBI the sole right to issue banknotes[8] and gives power to the central government and the RBI to decide on the non-issuance of banknotes[9]. These powers extend to all banknotes and not just for some banknotes. Therefore, the power of the RBI and the central government to decide the legal tender status of banknotes should also extend to ‘every’ or ‘all’ series of banknotes and not just to ‘some’ or ‘one’ series. Consequently, demonetisation of all Rs 500 and Rs 1000 banknotes is consistent with Section 26(2), provided that the government is able to demonstrate that this was done based on a recommendation made by the RBI’s central board of directors.

Next if we take into consideration the restriction on cash withdrawal from bank, ordinarily we will observe that restrictions on cash withdrawals cannot be imposed. However, the situation when demonetisation happened was different. It was obvious that scrapping the legal status of 86% of the available cash will result in a cash crunch. If the government has the power to declare that banknotes shall cease to be legal tender under Section 26(2) of RBI Act, then it should also have the power to do other necessary things to make demonetisation work. Therefore, imposing these restrictions, in one way, is inseparable from the government’s action under Section 26(2). To argue otherwise would render the government’s power under Section 26(2) meaningless. These restrictions can also be justified under Section 35-A of the Banking Regulation Act, 1949, which empowers the RBI to issue directions to banks in public interest to ensure that the interests of depositors are not compromised. Given the cash crunch, these restrictions would ensure that all depositors are able to access some cash for their basic needs but the longer these restrictions continue the stronger will be the argument that they are unreasonable.

Cases:

To answer whether ‘any’ in Section 26(2) means ‘every’, it would be useful see how the Supreme Court has interpreted the word ‘any’ in other statutes. The Supreme Court in a number of cases has interpreted the word ‘any’ to mean ‘every’, based on the context and the subject matter of the statute. For example, the apex court in Shiekh Mohd v. Collector of Customs[10], interpreted ‘any prohibition’ in Section 111(d) of the Customs Act to mean ‘every prohibition’. Similarly, in Lucknow Development Authority v. M K Gupta[11], the apex court interpreted ‘service of any description’ in section 2(o) of the Consumer Protection Act 1986 to mean service of ‘every’ description.

In the case of Jayantilal Ratanchand Shah v. Reserve Bank of India & Ors[12], the Hon’ble Supreme Court of India negatived the contentions raised by the petitioner, where it was argued that ‘High Denomination Bank Notes (Demonetization) Act[13]’ of 1978 was violative of Article 19(1)(f) of the Constitution of India and with reference to Article 31 of the Constitution of India. The main contention of the petitioners’ was that the currency notes were the properties of the persons who are holding the same and demonetization of the same would amount to compulsory acquisition of the property of the individual. The Court negatived all contentions raised with reference to Article 19(1)(f) as well as Article 31 of the Constitution of India and dismissed the challenge made against the said Act. The court upheld the constitutionality of the High Denomination Bank Notes (Demonetization) Act, 1978 since the acquisition was for public purpose to resolve the problem of unaccounted money.  These views were supported by the Madras High Court in the recent matter of, M. Seeni Ahamed v. Union of India[14].

Critical Analysis:

Unlike the previous two examples of demonetisation in 1946 and 1978, on this event, demonetization has been done through the issuance of notices (Notification Nos. SO 3407[E] and 3408[E]) under Sub- Section 2 of Section 26 of the Reserve Bank of India Act, 1934. Under this segment, the Central Government has the power, in consultation with the Reserve Bank of India (RBI), to announce “any series” of notes of any denomination to not be legal tender again. It has been battled by a few solicitors like Kapil Sibal that the said control can’t be practiced to announce all series of a note to not be legal tender again. They indicate the way that the past demonetisation activities were brought out through mandates which later got to be laws passed by the competent lawmaking body, to battle that the present practice can’t be done just by the Central Government issuing warnings for this reason.[15]

The demonetization notice is unlawful in light of the fact that it goes past the extent of what is allowed under the Reserve Bank of India Act, 1934, (RBI Act). Nor is it spared by Section 35A of the Banking Regulation Act, 1935.

Summation:

In the context demonetization 2016, the policy was devised by Prime Minister Narendra Modi to confiscate the loot of the corrupt by means of a drastic overnight announcement. It has unquestionably given rise to various instances causing some serious displeasure to the public in general and has had its own share of rift between theory and practice.

Former finance minister P. Chidambaram observed that in the demonetisation move the RBI gained Rs 16,000 crore, but lost Rs 21,000 crore in printing new notes.[16] Former Reserve Bank of India governor Raghuram Rajan had said that he had cautioned the government about the short-term costs of demonetisation outweighing the long-term benefits, and suggested “alternatives” to achieve the goal of stamping out black money.[17] Kaushik Basu, India’s former chief economic adviser, has explained the government’s demonetisation move, calling it a “very big mistake”, which was a huge shock and led to the country’s pace of growth slowing down.[18]

Conclusion:

Demonetisation of INR 500 and INR 1,000 notes on November 8, 2016 has become a matter of intense debate. Production of high value notes have been discontinued by many countries because these are often used for money laundering and organized crime. The Indian demonetisation is considerably different from such scrapping of high value notes as in other countries scrapping typically involves stopping the production of high value notes and asking the banks to return such notes for destruction by the central bank. But in India’s case the high value notes continue to be legal tender.

The constitutional lacunas pointed out by many from the legal fraternity may also be contested. The contention that the demonetization drive is in contravention of the freedom of trade and commerce under Article 19 (1) (g) of the Indian constitution is a misguided notion for the precise reason that this freedom is subject to the restrictions on the freedoms that article 19 of the constitution of India entails. Any freedom guaranteed by article 19 may be confined for the larger public interest. Another constitutional provision which is alleged to have been violated is the right to property under Article 300-A and it is quite unambiguous that there is no deprivation of property as such but only of such property which has been illegally acquired. This can be recognized as an equitable restriction.

The main legal issue was with respect to the liability of the Centre and the Reserve Bank of India for exchanging the demonetized Rs. 500 and Rs. 1000 notes. This has finally been settled down with the passing of Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 which makes the possession of Rs. 500 and Rs. 1000 notes, beyond a cut-off, a criminal offence imposing a penalty up to Rs. 10,000.

 

 

3] Hornby A. S., Oxford Advanced Learner’s Dictionary, (8th ed., 2013).
[4] Demonetization of Currency – Merits and Demerits, CIVIL SERVICE INDIA (Oct. 23, 2017, 09:36 AM), https://www.civilserviceindia.com/current-affairs/articles/demonetization-of-currency.html.
[5] S. 26(2), The Reserve Bank of India Act, 1934.
[6] S. 22, The Reserve Bank of India Act, 1934.
[7] S. 24(2), The Reserve Bank of India Act, 1934.
[8] Supra note 9.
[9] Supra note 10.
[10] 1971 AIR 293, 1971 SCR (2)35 .
[11] 1994 AIR 787, 1994 SCC (1) 243 .
[12] 681 1996 SCALE (5)741.
[13] High Denomination Bank Notes (Demonetization) Act of 1978.
[14] (2017) 1MLJ1.
[15] Alok Prasanna Kumar, Demonetisation and the Rule of Law, 50 (7) Economic and Political Weekly 7 (2016).
[16] PTI, ‘Shame on RBI’: Chidambaram on Figures Post Demonetisation, THE WIRE (Oct. 27,  2017, 09:33 PM), https://thewire.in/172423/demonetisation-rbi-p-chidambaram/.
[17] Sidhartha and Surojit Gupta, Warned government about cost of demonetisation, former RBI governor Raghuram Rajan says, THE TIMES OF INDIA (Oct. 27,  2017, 09:39 PM), https://timesofindia.indiatimes.com/business/india-business/warned-government-about-cost-of-demonetisation-former-rbi-governor-raghuram-rajan-says/articleshow/60343662.cms.
[18]  Salil Panchal, Kaushik Basu slams India’s demonetisation programme but lauds GST, FORBES INDIA (Oct. 27,  2017, 09:46 PM), http://www.forbesindia.com/article/special/kaushik-basu-slams-indias-demonetisation-programme-but-lauds-gst/47789/1.


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