Demonetization Satisfies Test Of Proportionality, Is Not Flawed In Law: SC Upholds Validity By 4:1 Majority [Read Judgment]

A Constitution Bench of the Supreme Court has upheld the validity of demonetization. It was a 4:1 majority held by Justice S Abdul Nazeer, Justice BR Gavai, Justice AS Bopanna and Justice V Ramasubramanian. Justice BV Nagarathna wrote a dissenting judgment. 

Senior Counsel P Chidambaram, Senior Counsel Shyam Divan and Counsel Prashant Bhushan appeared in favour of the petitions. Attorney General R Venkataramani appeared for the Union of India, and Senior Counsel Jaideep Gupta appeared for the RBI.

Majority judgment: 

After hearing the submissions advanced, the Bench framed six key questions and answered them in the following manner:

(i) Whether the power available to the Central Government under sub-section (2) of Section 26 of the RBI Act can be restricted to mean that it can be exercised only for “one” or “some” series of bank notes and not “all” series in view of the word “any” appearing before the word “series” in the said subsection, specifically so, when on earlier two occasions, the demonetization exercise was done through the plenary legislations?

"The power available to the Central Government under sub-section (2) of Section 26 of the RBI Act 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. Merely because on two earlier occasions, the demonetization exercise was by plenary legislation, it cannot be held that such a power would not be available to the Central Government under sub-section (2) of Section 26 of the RBI Act."

(ii) In the event it is held that the power under subsection (2) of Section 26 of the RBI Act is construed to mean that it can be exercised in respect of “all” series of bank notes, whether the power vested with the Central Government under the said sub-section would amount to conferring excessive delegation and as such, liable to be struck down?

"Sub-section (2) of Section 26 of the RBI Act 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. As such, sub-section (2) of Section 26 of the RBI Act is not liable to be struck down on the said ground."

(iii) As to whether the impugned Notification dated 8th November 2016 is liable to be struck down on the ground that the decision making process is flawed in law? 

"The impugned Notification dated 8th November 2016 does not suffer from any flaws in the decision-making process."

(iv) As to whether the impugned notification dated 8th November 2016 is liable to be struck down applying the test of proportionality?

"The impugned Notification dated 8th November 2016 satisfies the test of proportionality and, as such, cannot be struck down on the said ground."

(v) As to whether the period provided for exchange of notes vide the impugned notification dated 8th November 2016 can be said to be unreasonable?

"The period provided for exchange of notes vide the impugned Notification dated 8th November 2016 cannot be said to unreasonable."

(vi) As to whether the RBI has an independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of provisions of Section 3 and Section 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under subsection (1) of Section 4?

"The RBI does not possess independent power under sub-section (2) of Section 4 of the 2017 Act in isolation of the provisions of Sections 3 and 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under sub-section (1) of Section 4 of the 2017 Act."

Dissenting Judgment:

In the dissenting judgment, Justice BV Nagarathna emphasised that "The Central Government cannot demonetise bank notes by issuance of a gazette notification as if it is exercising power under sub-section (2) of Section 26 of the Act. In such circumstances when the Central Government is initiating the process of demonetisation, it would not be acting under subsection (2) of Section 26 of the Act but notwithstanding the said provision through a legislative process."

She opined that when the Central Government proposes the demonetization of any bank note, it must seek the opinion of the Central Board of the Bank having regard to the fact that the Bank is the sole authority to regulate circulation of bank notes and secure monetary stability and generally to operate the currency and credit system of the country and to maintain price stability.

In that context, she further said that "The opinion of the Central Board of the Bank ought to be an independent and frank opinion after a meaningful discussion by the Central Board of the Bank which ought to be given its due weightage having regard to the ramifications it may have on the Indian economy and the citizens of India although it may not be binding on the Central Government. On receipt of a negative opinion from the Central Board of the Bank, the Central Government which has initiated the demonetisation process may still intend to go ahead with the said process after weighing the pros and cons only by means of an Ordinance and/or Parliamentary legislation but not by issuance of a gazette notification. In other words, the Central Government in such circumstances cannot resort to exercise of power under sub-section (2) of Section 26 of the Act by issuing a notification in the Gazette of India as if it were exercising executive powers. Even if the Central Board of the Bank concurs with the proposal of the Central Government, the Central Government would have to undertake a legislative process and not carry out the measure by simply issuing a gazette notification."

Cause Title: Vivek Narayan Sharma vs Union Of India 

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