THE CENTRE’S decision six years ago to demonetise currency notes of Rs 500 and Rs 1,000 passed the Supreme Court’s test Monday in a majority 4-1 verdict with four judges on a five-judge Constitution Bench holding that the November 8, 2016, notification withdrawing the legal tender of these notes “does not suffer from any flaws in the decision-making process”.
While Justices S Abdul Nazeer, B R Gavai, A S Bopanna and V Ramasubramanian upheld the Government’s move, Justice B V Nagarathna disagreed with the “reasoning and conclusions” in the majority judgment.
Rejecting arguments against the Government’s decision-making process, Justice Gavai, writing for the Bench, said the court had “scrutinised the entire record, i.e., the communication dated 7th November 2016 addressed by the Secretary, Department of Economic Affairs, Ministry of Finance to the Governor, RBI, the Minutes of the Meeting of the Central Board dated 8th November 2016, the recommendations by the RBI dated 8th November 2016 and the Note for the Cabinet Meeting held on 8th November 2016”.
The majority ruling stated: “Upon perusal of the material on record, we are of the considered view that the Central Board had taken into consideration the relevant factors while recommending withdrawal of legal tender of bank notes in the denomination of Rs 500 and Rs 1,000 of existing and any older series in circulation. Similarly, all the relevant factors were placed for consideration before the Cabinet when it took the decision to demonetise.”
It said: “It is to be noted that a draft scheme to implement the proposal for demonetisation in a non-disruptive manner with as little inconvenience to the public and business entities as possible was also prepared by the RBI along with the recommendation for demonetisation. The same was also taken into consideration by the Cabinet. As such, we are of the considered view that the contention that the decision-making process suffers from non-consideration of relevant factors and eschewing of the irrelevant factors, is without substance.”
Referring to the communication on November 7, 2016, from the Department of Economic Affairs Secretary to the RBI Governor, the court said that “a perusal…would reveal that the Government of India has shared its concern with regard to infusion of Fake Indian Currency Notes (FICN) and generation of black money. It has been pointed out that FICN infusion is concentrated in the two highest denominations of Indian banknotes of Rs 500 and Rs 1000”.
It said that the “Minutes of the 561st Meeting of the Central Board of Directors of the RBI” on November 8, 2016, “show that the communication dated 7th November 2016 was placed before the Central Board by the Deputy Governor”. “There was an elaborate discussion on the said proposal. The Central Board has considered the pros and cons of the measure. The Central Board has also considered that the proposed step presents a big opportunity to take the process of financial inclusion further by incentivising the use of electronic modes of payment, so that people see the benefits of bank accounts and electronic means of payment over use of cash,” it said.
The Bench said: “The Central Board has taken into consideration that the matter had been under discussion between the Central Government and the RBI for the last six months during which most of the issues raised in the meeting were considered.”
The court rejected the petitioner’s contention that the November 8, 2016, meeting of the Central Board was not valid due to lack of quorum. It said that “a perusal of the Minutes of the Meeting of the Central Board would also show that eight Directors were present in the Meeting whereas the quorum for the meeting is four Directors…”
The majority ruling rejected the two main contentions of the petitioners — that the expression “any” in section 26(2) of the Reserve Bank of India Act, 1934, cannot be interpreted to mean “all” so as to give the Centre the power to demonetise currency notes of all series of any denomination; and that the proposal for demonetisation must emanate from the RBI Central Board and not the Centre.
The court said “the power available to the Central Government under section 26(2)… cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes”.
It added that “merely because on two earlier occasions (1946 and 1978), the demonetisation exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under…the RBI Act”.
The majority ruling said it is a “settled principle that the modern approach of interpretation is a pragmatic one, and not pedantic”. “An interpretation which advances the purpose of the Act and which ensures its smooth and harmonious working must be chosen and the other which leads to absurdity, or confusion, or friction, or contradiction and conflict between its various provisions, or undermines, or tends to defeat or destroy the basic scheme and purpose of the enactment must be eschewed… Ascertainment of legislative intent is the basic rule of statutory construction,” it said.
The court said that the legislative policy underlying the provisions of Section 26 of the RBI Act “is with regard to management and regulation of currency. Demonetisation of notes would certainly be a part of management and regulation of currency”.
The majority ruling said the Centre’s exercise of powers under the provision must have reasonable nexus with the object sought to be achieved. “…if the Central Government finds that fake notes of a particular denomination are widely in circulation or that they are being used to promote terrorism, can it be said, for instance, that out of 20 series of bank notes of a particular denomination, it can demonetise only 19 series of bank notes but not all 20 series? In our view, this will result in nothing else but absurdity and the very purpose for which the power is vested shall stand frustrated,” it stated.
The court also rejected the prayer to read down section sub-section (2) of the Act, saying it “does not provide for excessive delegation inasmuch as there is an inbuilt safeguard that such a power has to be exercised on the recommendation of the Central Board”.
The court held that the November 8, 2016, notification “satisfies the test of proportionality and, as such, cannot be struck down on the said ground”.
The Bench elaborated on the limitations of judicial intervention in matters of economic policy. “…it is not the function of this Court or of any other Court to sit in judgment over such matters of economic policy and they must necessarily be left to the Government of the day to decide since in such matters with regard to the prediction of ultimate results, even the experts can seriously err and doubtlessly differ. The Courts can certainly not be expected to decide them without even the aid of experts,” it said.
The court rejected another argument that the period provided for exchange of demonetised notes was unreasonable.
On the argument that the decision to demonetise was taken in a hasty manner, the court said, “We find that the ‘hasty’ argument would be destructive of the very purpose of demonetisation. Such measures undisputedly are required to be taken with utmost confidentiality and speed. If the news of such a measure is leaked out, it is difficult to imagine how disastrous the consequences would be.”
The petitioners had also argued that the step caused hardship to a number of citizens and the Government should have considered an alternate course of action. The court, however, said “what alternate measure could have been undertaken with a lesser degree of limitation is very difficult to define”.
