In Detail: What Are The Majority And Minority Opinions Of The SC On The ‘Legality’ Of DeMo?

A five-judge constitution bench of the Supreme Court by a 4:1 majority upheld the demonetisation exercise carried out by the Central Government in 2016. 

It was Justice B V Nagarathna who, in her dissent opinion, termed the demonetisation exercise as 'unlawful’ and stated that that the scrapping of the whole series of Rs. 500 and Rs 1,000 currency notes had to be done through a legislation and not through a gazette notification as Parliament cannot be left aloof in a matter of such critical importance.

The whole debate around the legality of demonetisation revolves around Section 26(2) of the RBI Act. As per provision, on recommendation of the Central Board of RBI the Central Government may through a notification issued to that effect declare that from a particular date, “any” series of bank notes of any denomination shall cease to be legal tender.

Let us discuss each of the important issues in the matter separately:

1. The first issue relates to whether the power available to the Central Government under Section 26(2) of the RBI Act can be restricted to mean that it can only be exercised only for “one” or “some” series of bank notes and not “all” series, as “any” appears before the ‘series’ in Section 26(2).

Justice Nagarathna in her minority opinion, said that the Central Government does possess the power to carry out demonetisation of all series of bank notes; however, all series of bank notes cannot be recommended to be demonetised by the Central Board under Section 26(2) of the Act. 

Rather than answering the said question directly, she holds that the Central Board cannot recommend for demonetisation of all series of bank notes, which would effectively mean that the Central Government does not have the power to carry out demonetisation of all series of bank notes under Section 26(2) of the RBI Act. 

After accepting the arguments of the Attorney General that the Central Government has powers to initiate a demonetisation exercise, the minority opinion went on a different tangent to hold that in absence of a recommendation by the Central Board, the Central Government can carry out demonetisation but only by way of a legislation and the same was not done in the present case as only a notification was issued by the Central Government. 

The majority opinion on the issue was to the point. It stated that the power available to the Central Government under Section 26(2) of the Act cannot be restricted to mean that it can only be exercised for one or some series of bank notes and the same can be exercised for all series of bank notes as the word “any” has the widest import and therefore it has to be construed accordingly. Relying on precedents of the Supreme Court, the majority interpreted “any” to hold that in affirmative sentences “any” would mean “all”. Interpreting the provision, the majority opinion clarified that if the aforesaid provision is construed to mean that only some series of bank notes can be demonetised while others are not, it would lead to a chaotic situation and the whole purpose of the provision would get frustrated. 

Additionally, it was argued that on the earlier two occasions, that is in 1946 and 1978, a demonetisation exercise was carried out by the Central Government for “all” series of bank notes, by issuance of an ordinance, which was later transformed into an Act of Parliament. However, the court clarified in clear terms that merely because on the earlier two occasions the demonetisation was carried out through a legislation, it cannot be a ground to give a restricted meaning to the word “any” under Section 26(2) of the Act. 

Considering the overall scheme of the RBI Act, and the context in which powers of demonetisation have to be exercised, the court held that it could not have been the legislative intent to give a restricted meaning to the word “any”.

2. The second issue concerns that if the power under Section 26(2) is construed to mean “all”, whether Section 26(2) will have to be held invalid on the ground that it confers excessive delegation upon the Central Government.

The aforesaid question was not answered by Justice Nagarathna as she held that power under Section 26(2) cannot be construed to mean all series of notes. However, she stated that if the Central Board of the RBI is vested with the power to recommend demonetisation of “all” series of bank notes, the same would amount to a case of excessive vesting of powers with the Central Bank. 

The majority held that the power vested with the Central Government under Section 26(2) is not excessive delegation and therefore the same cannot be struck down. Examining the issue rightly, the majority opinion held that RBI has the role in management and issuance of currency notes, thereby evolving the monetary policy of the country. It said that there is no excessive delegation under Section 26(2) as the decisions of the Central Government are based on the recommendations of the RBI and sufficient guidance has been provided under the Act. The court categorically made clear that insofar as the economic, monetary or fiscal policies are concerned, the RBI as well as the Central Government are the bodies having a contingent of experts in the field and it would not be proper for the court to enter into an area which should be best left to the experts. Moreover, the court highlighted that in the present case the powers are delegated to the Central Government which is the highest executive authority in the country and if they act unreasonably there exists a democratic method of bringing them to book. 

3. Whether the notification dated 8th November, 2016 is liable to be struck down on the ground that the decision making process is flawed?

Justice Nagarathna held that the measure of demonetisation should have been carried out by the Central Government by way of enacting an Act. As the proposal for demonetisation arose from the Central Government the same could not be given effect by way of a notification under Section 26(2) of the RBI Act. Differing from the majority, she stated that when the proposal for demonetisation originates from the Central Govt, it is not under Section 26(2), and it is to be a way of legislation, and if secrecy is needed, then by way of an Ordinance. 

Hence she opined that the decision-making process of the Central Government was tainted with elements of non-exercise of discretion by the Central Board   of   the   Bank  and the bank acted  at the behest   of   the   Central Government   and   did   not render   an   independent opinion   to   the   Central Government. Therefore, the said notification is unlawful. 

Looking from a different angle, she stated that the proposal for demonetisation was initiated by the Central Government as the first move was made by it and therefore the elements of Section 26(2) are not satisfied. Since in this case it was the Centre that wrote a letter to RBI on 7th of November 2016 advising for such a recommendation, it cannot be construed as a “recommendation” under the Act.

The official version of events though is this: the Central Government through a letter dated 7th November, 2016 advised the Central Board of RBI to convene a meeting and sought a recommendation, and the board recommended for demonetisation on the 8th of November, 2016, subsequent to which demonetisation was announced by the PM. 

Going by the provision as laid down under Section 26(2), it is amply clear that two requirements are to be satisfied: first a recommendation has to be made by the Central Board and then the Central Government is required to act upon the same. 

As both of the aforesaid requirements were fulfilled, the notification does not suffer from the vice of illegality. Moreover, it should be kept in mind that confidentiality was of utmost importance for the Central Government while carrying out the demonetisation exercise. 

Analysing the said issue, the majority rightly opined that scope of judicial review is very limited in the present case and only if it is established that the Central Government carried on the said exercise without any authority vested in it, would the court come to the rescue. The court perused the minutes of meeting of the Central Board of the RBI and the Cabinet Meeting dated 8th of November, and opined that all relevant factors were taken into consideration while recommending for withdrawal of legal tender of bank notes in denomination of Rs. 500/- and 1000/-. 

The court recognized that speed and confidentiality was important while carrying out the demonetisation exercise and therefore the argument that the decision was taken in a hasty manner does not hold good. 

Additionally, with respect to the point that the proposal for demonetisation emanated from the Central Government whereas as per Section 26(2), it should emanate from the Central Board, the majority opinion held that it cannot be expected that the RBI and the Central Government will act as two isolated bodies in such important matters. 

It said that the matter was in active consideration between the Central Government and the RBI for not less than six months and just because the Central Government advised the Central Board for recommending demonetisation it cannot be said that procedure as laid down under Section 26(2) is breached. There was an active consultative process between the Central Board and the Central Government. 

Also, with respect to the contention that the demonetisation exercise failed its objective, the court categorically made clear that the court is not competent to go into that question and it should best remain in the domain of field experts.

With respect to the other issues, not relevant for this discussion, the majority made it clear that the test of proportionality was satisfied while carrying out the demonetisation exercise. Also, with respect to the contention that the period of exchange as provided under the notification was unreasonable, the court first highlighted that if the time for exchange is not limited then demonetised bank notes could be circulated and transferred from one person to another and anyone could walk into the bank demanding exchange of notes. This would vitiate the overall objective of the exercise. 

A period of 52 days was provided for exchanging the notes and during the 1978 demonetisation a mere three-day period was given for exchanging notes and the same was held to be reasonable by the Supreme Court. Therefore, the court laid down that the period for exchange was sufficient and not unjust or unreasonable.  

What is problematic with the minority opinion is that it revolves around the point that the recommendation for demonetisation should emanate from the Central Board and in the present case the Central Government advised for demonetisation, subsequent to which the Central Board recommended it and then the same was announced by the Central Government. The minority opinion gives a strict interpretation to Section 26(2) and implies that the Central Board of the RBI should one day recommend for demonetisation to the Central Government without any prior consultation with the Government, subsequent to which the same should be carried out. If in any way the Central Government is in consultation with the Central Board of the RBI, the same would vitiate the provision and any demonetisation exercise in pursuance of such consultation between the two bodies would be de hors the law. 

Merely because on the earlier two occasions the demonetisation exercise was carried on by the Central Government through a legislation, Justice Nagarathna was of the opinion that in the present case also the Central Government should have acted through a legislation, and then the provisions of Section 26(2) would not come into picture. 

Moreover, the heavy worded opinion of the minority does not achieve fruition as Justice Nagarathna in end herself notes down that the notification dated 8th of November has been acted upon and therefore the decision would not have any impact on the actions taken by the Central Government and hence no relief could be granted. 

However, it has to be kept in mind that Justice Nagarathna was vigilant enough to categorically mention that, “demonetisation was, beyond a pale of doubt, well-intentioned. Best intentions and noble objects are not under question. The measure has been regarded as unlawful only on a purely legal analysis, and not on the objects of demonetisation”. She also mentioned that it was well thought of and targeted evils such as black money, terror funding and counterfeiting.