Summary
A Constitution Bench, by a 4:1 majority led by Gavai J., upheld the 8 November 2016 notification that withdrew legal tender status from all Rs.500 and Rs.1,000 notes. Under Section 26(2) of the RBI Act, 'any' series can mean 'all' series. The provision is not an excessive delegation, because the Central Board of the RBI must recommend first. The six-month consultation between Government and RBI satisfied that requirement. The measure passed the proportionality test, and the 52-day exchange window was reasonable. Nagarathna J. dissented: a demonetisation initiated by the Government needs legislation, so the notification was unlawful, with that declaration to operate only prospectively.
Issues
- Whether the power under Section 26(2) of the RBI Act to declare that 'any series' of bank notes of any denomination ceases to be legal tender is confined to one or some series, given that the 1946 and 1978 demonetisations were effected by plenary legislation.
- Whether Section 26(2), if it extends to all series, suffers from excessive delegation.
- Whether the notification dated 8 November 2016 is vitiated by a flawed decision-making process, including because the proposal emanated from the Central Government rather than the Central Board.
- Whether the notification fails the test of proportionality, and whether the period allowed for exchange of notes was unreasonable.
- Whether the RBI has an independent power under Section 4(2) of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 to accept demonetised notes beyond the notified grace periods.
Provisions considered
- Section 26(2), read with Sections 3, 22, 24 and 25, Reserve Bank of India Act, 1934Construed purposively in light of the RBI's primary role in currency management; 'any' was read as including 'all', and the requirement of a recommendation by the Central Board was treated as an inbuilt safeguard meaning an effective consultative process. (¶¶ 105, 108, 127, 143, 147, 149, 151, 158, 203, 242)
- Articles 14, 19 and 300A, Constitution of IndiaApplying the four-part proportionality test from Modern Dental College, the majority held that the measure had proper purposes, a rational nexus with them, lay within expert discretion as to alternatives, and did not take away the value of notes, which could be deposited in KYC-compliant accounts. (¶¶ 266, 272, 273, 274, 276, 277, 278, 281)
- Sections 3 and 4, Specified Bank Notes (Cessation of Liabilities) Act, 2017Section 4 was read as an integrated scheme under which the RBI's power in sub-section (2) operates only for persons covered by the Central Government's grace-period notifications under sub-section (1). (¶¶ 290, 294, 299, 303)
Held
- Following Chief Inspector of Mines v. Karam Chand Thapar, 'any' takes its meaning from context, scheme and object; since the Central Government acts on the recommendation of the Central Board, which is entrusted with management of currency, the legislature could not have intended a restricted power, and reading 'any' as 'some' would produce absurdity, such as being able to demonetise 19 of 20 series but not all; the earlier use of legislation in 1946 and 1978, when the RBI opposed the measure, does not narrow the provision. (¶¶ 127, 143, 149, 150, 151, 154, 157, 158)
- Section 26(2) does not suffer from excessive delegation: as in Harakchand Banthia, where consultation with the RBI saved the power to fix gold prices, the requirement of the Central Board's recommendation is an inbuilt safeguard; guidance is found in the preamble, scheme and subject-matter of the RBI Act; and the delegate is the Central Government, answerable to Parliament. (¶¶ 193, 203, 204, 205, 206, 207, 210, 211)
- On the records produced, including the letter of 7 November 2016, the minutes of the Central Board's 561st meeting attended by eight Directors with the required quorum, the recommendation and the Cabinet note, relevant factors were considered and the Government and RBI had consulted for six months; that the Government advised the Board to consider recommending the measure does not breach Section 26(2), and confidentiality and speed justified the haste. (¶¶ 228, 231, 232, 234, 236, 239, 240, 242, 245, 259, 262)
- Whether demonetisation achieved its objects is a matter for experts; courts defer on economic policy and interfere only for palpable arbitrariness, and hardship to citizens does not invalidate a measure having a nexus with its objectives of curbing fake currency, black money and terror financing. (¶¶ 247, 249, 252, 255, 257)
- Compared with the three days upheld in Jayantilal Ratanchand Shah for the 1978 demonetisation, the 52 days given for exchange and deposit was not unreasonable; and the Court would not frame a fresh window for genuine cases, which remains within the Central Government's discretion under Section 4(1)(ii) of the 2017 Act. (¶¶ 285, 286, 287, 288, 301, 302, 303)
- Nagarathna J., dissenting, held that Section 26(2) applies only where the Central Board initiates a recommendation, and then only for a specified series of a specified denomination. In her view, a demonetisation proposed by the Central Government is an exercise of power under Entry 36 of List I, which must go through an Ordinance or a parliamentary enactment after taking the RBI's independent opinion. Here the proposal originated with the Government and the Board's 'recommendation' was obtained within about 24 hours on assurances, so the notification and the 2016 Ordinance and 2017 Act were unlawful. Her declaration was to operate prospectively under Article 142 without disturbing past actions, and she accepted that the measure was well-intentioned.
Result
Reference answered by majority (B.R. Gavai J. for himself and S. Abdul Nazeer, A.S. Bopanna and V. Ramasubramanian JJ.; B.V. Nagarathna J. dissenting): Section 26(2) of the RBI Act upheld and the notification S.O. 3407(E) dated 08.11.2016 held valid; Writ Petition (Civil) No. 906 of 2016 and connected matters directed to be placed before the Chief Justice of India for listing before appropriate Benches, other contentions being kept open.