MC Explains | What did the Supreme Court uphold in the demonetisation judgment?

The Supreme Court of India

A Constitution Bench led by Justice Abdul Nazeer has upheld the Centre's November 2016 decision to demonetise Rs 500 and Rs 1,000 currency notes by a 4:1 majority.

Justice BV Nagarathna wrote a dissenting opinion, holding the notification effecting demonetisation and the subsequent Ordinance of 2016 and the Act of 2017 incorporating the terms of the notification as unlawful.

Moneycontrol highlights key points upheld by the majority and explains how demonetisation passed muster before the Constitution Bench.

1. The Centre has the power, under the RBI Act, to demonetise all series of bank notes:
The petitions challenging demonetisation had contended that the Union Government's powers to demonetise bank notes under Section 26(2) of the Reserve Bank Of India Act, 1934, are restricted only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes.

The court, in its judgment, has noted that the policy of the provisions of Section 26 is to enable the Union Government, on the recommendation of the Central Board, to effect demonetisation.

The court furthermore considered that the legislative policy pertains to management and regulation of currency. The same can be done in respect of any series of bank notes of any denomination. The Act has thus empowered the Union Government to exercise this power, when it finds it necessary to do so.

The Court has also noted that such factors must have a reasonable nexus with the object sought to be achieved. If the Union Government finds that fake notes of a particular denomination are widely in circulation, it cannot demonetise just a specific series of banknotes to achieve its objectives. Thus it has been held that the power to demonetise can be exercised for any series of banknotes. The Court has further concluded that merely because on two earlier occasions, a demonetisation exercise was carried out by passing a legislation, it cannot be held that such a power would not be available to the Union Government.

2. Section 26(2) of the RBI Act not to be struck down:
The petitioners contended that under Section 26(2) of the RBI Act, the power vested with the Union Government would amount to conferring excessive delegation, since it can demonetise any series of notes. The court noted that a mere possibility or eventuality of abuse of delegated powers in the absence of any evidence cannot be a ground for striking down such a provision.

The Court thus concluded that Section 26(2) of the RBI Act does not provide for excessive delegation, as there is an inbuilt safeguard. The power vested on the Union Government has to be exercised on the recommendation of the RBI’s Central Board. On the above reasoning, the court refused to strike down the provision.3. The demonetisation notification does not suffer from any flaws in the decision- making process:
The court took the records filed by the Union Government and RBI into consideration and noted that it reveals that they were in consultation with each other for six months before demonetisation. The judgment also states that the record reveals all the relevant information was shared by both parties with each other. Thus, it cannot be said that there was no conscious, effective, meaningful, and purposeful consultation.

The court thus concludes that the demonetisation notification does not suffer from any flaws in the decision-making process. The court also noted that the notification has been validated by the 2016 Ordinance and then the 2017 Act. The Union Government is answerable to Parliament and Parliament, in turn, represents the will of the citizens of the country. The court has noted that measures such as demonetisation are to be taken with utmost confidentiality and speed.

4. Relevance of attaining the objectives of demonetisation:
On the relevance of attaining the objectives for which demonetisation was introduced, the court noted that it does not possess the expertise to go into that question. The bench observed: “Mere errors of judgment by the government seen in retrospect are not subject to judicial review.”

The court noted that to adjudicate the illegality of the notification, it would have to examine whether its objectives were in nexus with the decision or not. “If the impugned Notification had a nexus with the objectives to be achieved, then, merely because some citizens have suffered through hardships would not be a ground to hold the impugned Notification to be bad in law,” it observed.

5. Notification does not violate test of proportionality:
Constitutional courts use the test of proportionality to determine if a government action is drastic. To satisfy the test of proportionality, the court notes that

* Elimination of fake currency, black money and terror financing is a legitimate purpose to demonetise currency.

* There is a reasonable nexus between demonetisation and the purposes of addressing issues of fake currency banknotes, black money, drug trafficking and terror financing.

* The nature of measures to be undertaken to meet the purpose is left to the discretion of the Union Government, in consultation with the RBI. Unless the power has been exercised in an unreasonable manner, the court cannot interfere in it.

* Even if there are reasonable restrictions imposed on the fundamental rights of citizens, they were in the public interest of curbing the evils of fake currency, black money, drug trafficking and terror financing.

Thus, the court concluded that the demonetisation notification does not violate the principle of proportionality and cannot be struck down.

6. Time provided for exchange of demonetised notes reasonable:
The court referred to the judgment of a Constitution Bench in Jayantilal Ratanchand Shah Vs RBI (1996), which upheld the validity of 1978’s Demonetisation Act. The 1996 judgment notes that “if the time for such exchange was not limited, the high denomination bank notes could be circulated and transferred from one person to another and any such transferee could walk into the Bank on any day thereafter and demand exchange of his notes.”

The Bench also took into consideration that in the 2016 demonetisation, the period for exchanging any amount of specified banknotes and depositing the same in the KYC compliant bank account without any limit or hindrance was 52 days. However, in the 1978 demonetisation, the time for bank transfers was just three days. On application of the judgment, the court held that the time for exchange of notes was reasonable.

The Court has also concluded that the RBI does not have an independent power to accept demonetised currency notes beyond the period specified by the notification.