Why Did the Supreme Court Hold “Demonetisation” As Valid?

Six years ago the Prime Minister declared the currency notes of Rs 500 and Rs 1000 null and void overnight leading to nationwide chaos and confusion.  The lawfulness of this decision has since been contested before different Courts of India. Finally, on 2nd January, through a 4:1 split verdict, the Constitutional Bench of the Supreme Court upheld the legal validity of the central government’s decision “demonetisation”. Let’s understand what the apex court said. 

What is demonetisation?

In India, bank notes and coins are the only legitimate forms of legal tender. The Reserve Bank of India Act, 1934 (RBI Act) gives the Central Government the power to declare any bank note as not being legal tender by issuing a notification. The government can do so upon receiving either a recommendation from the Central Board of Banks or through parliamentary legislation. This is called demonetisation. 

What was the challenge before the Supreme Court?

Many citizens challenged the demonetisation decision before various courts of law in India. A Division Bench of the Supreme Court heard these challenges for the first time in 2016. It identified some of the key questions of law in these petitions and referred them to a larger Constitutional Bench. 

The questions of law before the Supreme Court were as follows:

1. Is the Central Government authorised to demonetise all currency notes of a particular denomination or only a particular series of such denomination under the RBI Act?
2. Can the power to decide on demonetisation be delegated to the Central Government?
3. Was the decision making process of demonetisation flawed?
4. Does the decision to demonetise fail the legal test of proportionality?
5. Was the window of exchange provided to the citizens during the course of demonetisation unreasonable?
6. Can the RBI independently facilitate the exchange of notes even after the permitted period has elapsed?

What did the Supreme Court decide?

The court upheld the legal validity of demonetisation on the following grounds: 

• Judicial precedents as well as common usage of the word “any” is construed to mean “everyone”. So the RBI Act indeed authorises the government to notify any bank note as ceasing to be a legal tender and cannot be withheld by a restricted reading of the term “any.”
• The RBI Act provides an inbuilt safeguard so that the Central Government cannot act without the recommendation of the expert body. Further, as the highest executive authority of the country to take a fiscal decision, the Central government cannot be said to be guilty of “excessive delegation.”
• The Court observed that since the experts from RBI were consulted and the decision was subsequently ratified by the Specified Bank Notes (Cessation of Liabilities) Act, 2017, the decision making process cannot be deemed flawed. The Court also acknowledged that while it caused hardship to the citizens, the long term objectives of the Act makes it a valuable social legislation. 
• The Court also observed that the decision of demonetisation satisfied the four pronged test of proportionality because: 
  • it was implemented for a proper purpose of arresting the flow of black money in the economy.  
  • the limitations imposed were reasonable because any prior notification could provide escape routes for smuggling of black money, 
  • the measures were necessary and least disruptive and no appropriate alternative measures could have been concurrently defined
  • there was adequate balance between the purpose and the limitations imposed because citizens were given relaxations from time to time. 
• Under the 2017 Act, RBI may exchange old notes in specific cases after determining their genuineness. So, the Court felt there was no need for a separate scheme as proposed by the petitioners under Section 4(1) of the RBI Act. 

On what grounds did Justice Nagarathna dissent?

Justice Nagarathna dissented with the majority view, observing that the object of demonetisation may have been “sound, just and proper” but the manner and procedure followed to achieve such objective was unlawful. She held that the decision of demonetisation and its implementation violated the legal principles of valid procedure and discretion. 

What lies ahead?

The bench has now referred the current petitions back to other appropriate benches for considering the individual contentions in them. So effectively, the legal validity of demonetisation has been upheld, but the road to redress grievances related to demonetisation remains open to the citizens.