On January 2, after having heard 58 petitions filed against the move, the Supreme Court held that the Union government’s 2016 decision to demonetise currency notes of Rs 1,000 and Rs 500 denominations was valid.
Four judges on the bench of five – Justices S.A. Nazeer, B.R. Gavai, A.S. Bopanna and V. Ramasubramanian – held the majority view that the government was within its powers in bringing the countrywide rule. One judge, Justice B.V. Nagarathna, delivered a dissenting opinion.
Justice B.V. Nagarathna’s opinion – over 21,000 words in length – takes apart the semantics of Section 26(2) of the RBI Act, which deals with demonetisation of currency notes. She delves into the nature of the RBI’s role and why an agreement to a proposal forwarded by the Union government cannot be considered a ‘recommendation’ on the RBI’s part.
Below are a few key excerpts from Justice Navarathna’s dissenting opinion.
On the RBI Act and the Union government
By way of a preface, I state that the judgment proposed by His Lordship, Gavai, does not recognise the essential fact that the Act does not envisage initiation of demonetisation of bank notes by the Central Government. Subsection (2) of Section 26 of the Act, contemplates demonetisation of bank notes at the instance of the Central Board of the Reserve Bank of India.
Hence, if demonetisation is to be initiated by the Central Government, such power is derived from Entry 36 of List I of the Seventh Schedule to the Constitution which speaks of currency, coinage and legal tender; foreign exchange.
On the nature of the RBI
“RBI is not just any other statutory authority. It is not like a stream which cannot be greater than the source.
“The RBI Act, 1934 is a preconstitutional legislation, which survived the Constitution by virtue of Article 372(1) of the Constitution. The difference between other statutory creatures and RBI is that what the statutory creatures can do, could as well be done by the executive. The power conferred upon the delegate in other statutes can be tinkered with, amended or even withdrawn.
“But the power conferred upon RBI under Section 3(1) of the RBI Act, 1934 to take over the management of the currency from the Central Government, cannot be taken away. The sole right to issue Bank notes in India, conferred by Section 22(1) cannot also be taken away and conferred upon any other Bank or authority. RBI by virtue of its authority, is a member of the Bank of International Settlements, which position cannot be taken over by the Central Government and conferred upon any other authority.
“Therefore, to say that it is just like any other statutory authority whose decisions cannot invite due deference, is to do violence to the scheme of the Act.”
On proportionality
“When the consistent stand of RBI is that they have not banned VCs and when the Government of India is unable to take a call despite several committees coming up with several proposals including two draft Bills, both of which advocated exactly opposite positions, it is not possible for us to hold that the impugned measure is proportionate.”
On the Attorney General’s submissions
“I find considerable force in the contention of the learned Attorney General inasmuch as the Central Government cannot be said to be without powers in initiating demonetisation of bank notes. This is on the strength of Entry 36 of List I of the Seventh Schedule of the The Central Government is not just concerned with the financial health of the country as well as its economy, but it is also concerned with the sovereignty and integrity of India; the security of the State; the defence of the country; its friendly relations with foreign countries; internal and external security and various other aspects of governance.
“On the other hand, the Bank is only concerned with the regulation of currency notes, monetary policy framework, maintaining price stability and allied matters. Therefore, if the Central Government is of the considered opinion that in order to meet certain objectives such as the ones stated in the impugned notification, namely, to eradicate black money, fake currency, terror funding etc., it is necessary to demonetise the currency notes in circulation, then the Central Government may initiate a proposal for demonetisation.
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On the Union government’s powers
“…[I]n my view, the Central Government has the power to demonetise all series of bank notes of all denominations, if the need for such a measure arises. It cannot be restricted in such powers in such manner as the Central Board of the Bank is, under the above provision.
“This is because such power is not exercised under subsection (2) of Section 26 of the Act but is exercised notwithstanding the said provision by the Central Government. Therefore, demonetisation of bank notes at the behest of the Central Government is a far more serious issue having wider ramifications on the economy and on the citizens, as compared to demonetisation of bank notes of a given series of a given denomination on the recommendation of the Central Board of the Bank by issuance of a gazette notification by the Central Government.”
On the need for legislative process
“…[I]n my considered view, the powers of the Central Government being vast, the same have to be exercised only through a plenary legislation or a legislative process rather than by an executive act by the issuance of a notification in the Gazette of India.
“It is necessary that the Parliament which consists of the representatives of the People of this country, discusses the matter and thereafter approves and supports the implementation of the scheme of demonetisation.”
Parliamentarians in the Rajya Sabha during the ongoing Winter Session of Parliament, in New Delhi, December 19, 2022. Photo: Sansad TV screengrab via PTI
On taking parliament into account
“…[t]he Parliament which is the fulcrum in our democratic system of governance, must be taken into This is because it is the representative of the people of the Country. It is the pivot of any democratic country and in it rest the interests of the citizens of the Country. The Parliament enables its citizens to participate in the decisionmaking process of the government.
“A Parliament is often referred to as a “nation in miniature”; it is the basis for democracy. A Parliament provides representation to the people of a country and makes their voices heard. Without a Parliament, a democracy cannot thrive; every democratic country needs a Parliament for the smooth conduct of its governance and to give meaning to democracy in the true sense.
“The Parliament which is at the centre of our democracy cannot be left aloof in a matter of such importance. Its views on the subject of demonetisation are critical and of utmost importance.”
On the need for meaningful debate
“It is in the above context that it is observed that on a matter as critical as demonetisation, having a bearing on nearly 86% of the total currency in circulation, the same could not have been carried out by way of issuance of an executive notification. A meaningful discussion and debate in the Parliament on the proposed measure, would have lent legitimacy to the exercise.”
On necessary safeguards
“When the process of demonetisation is carried out through a Parliamentary enactment and after being the subject of scrutiny by the Members of Parliament, any opinion sought by the Central Government from the Central Board of the Bank before initiating the promulgation of the Ordinance or placing the Bill before the Parliament may also be additional material which could be considered by the Parliament.
“When the Central Government initiates the proposal for demonetisation and thereafter consults the Bank on such proposal, then it could be said that the necessary safeguards were taken, as the Central Government would be fortified in its proposal for demonetisation having taken the advice of not only an expert body but the highest financial authority in the country, which handles not only the monetary policy but is also the sole authority vested with the power of issuance of bank notes or currency notes in India.
“When the Central Government proposes to demonetise the currency notes, not only the view of the Central Board of the Bank is relevant and important but also that of the representatives of the people in the Parliament. The Members of the Parliament hold the sovereign powers of “We, the People of India” in trust.”
On who initiated the proposal
“…[T]here would be no difficulty if the proposal for demonetisation is initiated by the Central Board of the Bank by making a recommendation under subsection (2) of Section 26 of the Act, which the Central Government in its wisdom may consider and either act upon the recommendation or for good reason, decline to act on it. That is a matter left to the wisdom of the Central Government.
“However, as noted above such recommendation by the Bank cannot relate to “all” series of a denomination or “all” series of “all” denominations of bank notes. That is a prerogative of only the Central Government.”
The Reserve Bank of India seal is pictured on a gate outside the RBI headquarters in Mumbai, India, February 2, 2016. Photo: Reuters/Danish Siddiqui
On where the exercise of power ‘originates’ from
“Under subsection (2) of Section 26 of the Act, the initiation of the process of demonetisation and the exercise of power originates from the Central Board of the Bank which has to recommend to the Central Government and the latter may accept the recommendation and in such event it would issue a gazette notification.
“In case the Central Government does not accept the recommendation, there will be no further action on the recommendation of the Central Board of the Bank.
“Thus, subsection (2) of the Section 26 of the Act has inherently a very restricted operation, and is limited only to the initiation of demonetisation by the Central Board of the Bank and making a recommendation in that regard.”
On exercise of executive power
“…[W]hen the proposal to demonetise any currency note is initiated by the Central Government with or without the concurrence of the Central Board of the Bank, it is not an exercise of the executive power of the Central Government under subsection (2) of Section 26 of the Act. In such a situation, as already held, the Central Government would have to resort to the legislative process by initiating a plenary legislation in the Parliament.”
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On objectives
“The Central Government would view the entire scheme of demonetisation in a larger perspective, having several objects in mind and in the interest of the sovereignty and integrity of India, the security of the State, the financial health of the economy, etc. The Central Board of the Bank may not be in a position to visualize such objectives.
“Under such circumstances the Central Government must consult the Bank but need not mandatorily obtain the imprimatur of the Central Board of the Bank to its proposal. What if the Central Board of the Bank, when consulted by the Central Government, gives a negative opinion? Would it mean that the Central Government would then not resort to demonetisation in deference to the opinion of the Central Board of the Bank?
“It may do so if it finds that the opinion tendered by the Bank is just and proper, but the Central Government may have its own reasons for not accepting the opinion of the Central Board of the Bank and therefore, in such a situation the Central Government will have to resort to initiate the proposal for demonetisation through a plenary legislation, by way of introduction of a Bill in the Parliament resulting in an Act of Parliament.”
People gather at the entry gate of a bank to exchange and deposit their old high denomination banknotes in Jammu, November 15, 2016. Photo: Reuters/Mukesh Gupta
On the vastness of Union government’s power
“The reason why power is vested only with the Central Board of the Bank under subsection (2) of Section 26 of the Act to recommend to the Central Government to declare specified series of specific denomination of bank notes as having ceased to be legal tender, becomes clear when the plain meaning of the words of the said provision is recognised.
“When interpreted as such, no power to demonetise currency notes at the behest of the Central Government is envisaged under the said provision. This is because the power of the Central Government to do so is vast and has a wider spectrum. Such a power is not traceable to subsection (2) of Section 26 of the Act which operates in a narrower compass. Hence, to save subsection (2) of Section 26 from the vice of unconstitutionality, it must be given an interpretation appropriate to the object for which the provision is In this context, the following principles become relevant.”
On ‘any’ versus ‘all’
“On a plain reading of the provision, it is observed that the Central Government can issue a notification in the Gazette of India to demonetise any series of bank notes of any denomination but only on the recommendation of the Central Board of the Bank. In my view subsection (2) of Section 26 is not vitiated by unconstitutionality. This is for two reasons: firstly, the plain meaning of the words “any” series of bank notes of “any denomination” would not imply “all series” of bank notes of “all denominations”.
“The word “any” means specified or particular and not “all” as contended by the respondents. If the contention of the Union of India is accepted and the word “any” is to be read as “all”, it would lead to disastrous consequences as the Central Board of the Bank cannot be vested with the power to recommend demonetisation of “all series of currency of all denominations”.”
On independent application of mind by the bank
“The use of the words/phrases such as, “as desired” by the Central Government; Government had “recommended” the withdrawal of the legal tender of existing Rs.500/ and Rs.1,000/ notes; recommendation has been “obtained”; etc., are selfexplanatory. This demonstrates that there was no independent application of mind by the Bank.
“Neither was there any time for the Bank to apply its mind to such a serious issue. This observation is being made having regard to the fact that the entire exercise of demonetisation of all series of bank notes of Rs.500/ and Rs.1,000/ was carried out in twenty four hours.”
On the move having been ‘unlawful’
In my view, if the Central Board of the Bank is vested with the power to recommend demonetisation of “all” series or “all” denominations of bank notes, the same would amount to a case of excessive vesting of powers with the Bank.
That the measure of demonetisation ought to have been carried out by the Central Government by way of enacting an Act or plenary
legislation.
“The proposal for demonetisation arose from the Central Government and therefore, could not be given effect to by way of issuance of a Notification as contemplated under subsection (2) of Section 26 of the Act, as, such provision would not apply in cases where the
proposal for demonetisation has originated from the Central Government, such as the instant case.
“That the decisionmaking process was also tainted with elements of “nonexercise of discretion” by the Central Board of the Bank in
rendering its advise on the impugned measure. That the Bank acted at the behest of the Central Government and did not render an independent opinion to the Central Government.
“Therefore, the impugned Notification dated 8th November, 2016 issued under subsection (2) of Section 26 of the Act is unlawful.
“Further, the subsequent Ordinance of 2016 and Act of 2017 incorporating the terms of the impugned Notification are also unlawful.”