Demonetisation #3: Sr. Adv. P. Chidambaram Argues that Union Was Not Authorised to Carry Out Demonetisation

Challenge to Union’s 2016 Demonetisation Scheme

Judges: Abdul Nazeer J, V. Ramasubramanian J, B.R. Gavai J, A.S. Bopanna J, B.V. Nagarathna J

Joyston D'Souza | 24th Nov 2022

A Constitution Bench led by Justice Abdul Nazeer continued hearing arguments in the challenge to the Union’s 2016 Demonetisation scheme. 

Senior Advocate and politician P. Chidambaram commenced today’s hearings by taking the Bench through the Reserve Bank of India Act—specifically the compositions of the RBI’s Central Board and its powers to regulate currency.

Background

On November 8th, 2016 the Union government issued a notification declaring that all ₹500 and ₹1000 notes were no longer legal and valid currency, and discontinued their circulation. This measure was called ‘demonetisation’. The Union claimed that this would curb the circulation of black money—undeclared and illegally obtained income—and begin the shift to a ‘cashless’ society. Section 26 of the Reserve Bank of India Act, 1934 (RBI Act) gives the Union the power to declare that specific currency notes are no longer legal.

On November 9th, 2016, the day after the demonetisation announcement, advocate Vivek Narayan Sharma challenged the constitutionality of the scheme and the manner of its application at the Supreme Court. The case was heard by a 3-Judge Bench comprising Chief Justice T.S. Thakur, and Justices A.M. Khanwilkar and D.Y. Chandrachud.

On December 16th, 2016 the Bench ordered a stay on all High Court challenges to the demonetisation scheme and transferred the cases to the Supreme Court. In the same Order, they referred the challenges to the scheme to a 5-Judge Constitution Bench.

The Bench laid out a series of issues for the Constitution Bench to deal with:

  1. Does the demonetisation scheme abide by the provisions of the Reserve Bank of India Act, 1934?
  2. Do the limits on withdrawing cash violate the Rights to Equality and Livelihood?
  3. Was the scheme implemented in an unreasonable manner that violated the Rights to Equality and Livelihood?
  4. To what extent can the SC review a scheme relating to the fiscal and economic policy of the government?

Issues In Focus Today

  • Does the Union have the power to demonetise all notes of a denomination?
  • Were the objectives of the demonetisation scheme lawful?
  • Did the RBI and the Union follow proper procedure before announcing demonetisation?

Mr. Chidambaram contended that the RBI had the sole right to issue currency notes and initiate a proposal for the demonetisation of currency notes. Any power conferred on the Union will only be on the recommendation of the RBI’s Central Board. He pointed out that on the date of demonetisation, 7 out of 10 posts in the Central Board were vacant. 

He then addressed the demonetisation of 2016 wherein 86% of currency in circulation was in the form of the demonetised notes of Rs. 500 and Rs. 1000 denominations worth Rs. 17.67 lakh crores. Resultantly, only Rs. 2 lakh crores were left in circulation for a population 125 crore people. 

When Can Demonetisation Be Carried Out?

Mr. Chidambaram contextualised the grounds for demonetisation in history by pointing out the last two times such an exercise was carried out in 1946 and 1978 wherein only a small proportion of the then valid currency notes were taken out of circulation.

According to him, demonetisation can be carried out only on 2 grounds: 

  1. When a note is practically unusable. Eg. Rs.5000 note
  2. When hyperinflation reduces the value of a currency to practically nothing.

He highlighted that the Union claimed to have the power to demonetise currency under S.26(2) of the RBI Act. However, the provision allows only a specified series of a currency to be demonetised. The 2016 notification demonetised all series of Rs. 500 and Rs. 1000 currency notes. Further, he argued that such a move which can potentially have such drastic consequences on the country must first be recommended by the RBI Central Board and deliberated by the Parliament—both unfulfilled criteria in this instance.

He highlighted that the Central Board and the Cabinet are required to duly apply their minds before carrying out such an exercise. The Central Board was neither given adequate notice to consider the move nor given adequate time to apply their minds. The Cabinet also appeared to be uninformed despite the demonetisation move being premeditated—the Union had priorly booked all media outlets to carry out the Prime Minister’s broadcast announcing the scheme. 

He buttressed his arguments by pointing out that the Union and the RBI had not provided crucial information to the Court regarding their deliberations, agenda or decision prior to announcing the demonetisation. He inferred that the Central Board did not sufficiently apply its mind, the Cabinet was not fully informed, nor did the Parliament get a chance to deliberate the demonetisation proposal. Resultantly, the procedure followed was ‘deeply flawed’.

What Were the Union’s Objectives Behind Demonetisation?

Mr. Chidambaram continued his arguments by listing out the Union’s three stated objectives for the demonetisation scheme:

  1. To curb circulation of fake currency notes
  2. To seize unaccounted wealth or black money
  3. To curb activities related to narcotics and terrorism

He claimed that all 3 of these objectives were false, and could not have been and continues to not be achieved by demonetisation. He supported his arguments with examples and illustrations.

First, that more elaborately counterfeited currency continued to be seized by law enforcement agencies.

Second, since over 99% of all demonetised currency was received by the RBI, it effectively became a money laundering scheme for black money. Further, black money is not stored in cash but in unliquidated assets. He also pointed out that immediately releasing Rs. 2000 denominations after demonetisation made it easier to hoard black money in cash.

Third, drugs and terrorist activities continued in the same manner they did in the past despite demonetisation. He even highlighted instances where terrorists were found with counterfeit Rs. 2000 notes. Further, terrorism can be funded with legitimate currency. He argued that demonetisation resulted in the loss of livelihoods for millions and cost hundreds of lives.

Was a Valid Process Followed To Carry Out Demonetisation?

Instead, there were other better ways of achieving the 3 objectives listed by the Union. The Union’s actions were arbitrary and failed the test of proportionality. He argued that such arbitrary Executive action must be subject to judicial review and the test of proportionality.

The Bench questioned Mr. Chidambaram on what action the Court could take. Mr. Chidambaram responded that prospectively overruling the scheme would caution future governments against exercising wide, uncontrolled and arbitrary powers.

He also highlighted the record of deliberations by the RBI’s Central Board and the Cabinet. First, the Govt ‘candidly admitted’ that the proposal initiated by them and not the Central Board.

Second, the Finance Ministry submitted the draft scheme to the RBI at 5:30 PM on November 8th, 2016. Prime Minister Narendra Modi made the demonetisation announcement at 8 PM on the same day.

This left the Central Board with merely 2.5 hours to conduct their deliberations and communicate their decision to the Cabinet. He highlighted the Union’s claim that they had been discussing the demonetisation scheme for 6-months before the announcement was made. However, the Union’s affidavit to the SC made no such claims.

He refuted further claims in the memorandum submitted by the RBI that they were ‘assured’ that ‘mitigated usage of cash will be accepted’ and that only ‘old banknotes’ would be demonetised. Both claims, according to him, indicated ‘a complete non-application of mind’.

He summarised arguments with the following:

  1. S.26(2) did not grant the power to allow Union to act in the manner they did. In case it does, the law must be struck down.
  2. The process followed to carry out demonetisation was deepy flawed 
  3. A drastic scheme like demonetisation must be subject to rigorous standards

The Bench will resume hearing the challenges against demonetisation tomorrow (November 25th, 2022).