Won’t go into whether note ban objectives were met: Supreme Court

Updated on Nov 25, 2022 09:12 AM IST

The Supreme Court on Thursday indicated that it would only look at whether the Centre’s demonetisation move of 2016 was in keeping with its powers under the RBI Act.

Won’t go into whether note ban objectives were met: SC
Won’t go into whether note ban objectives were met: SC
ByAbraham Thomas

The Supreme Court on Thursday indicated that it would not be considering whether or not the objectives of the demonetisation exercise of 2016 were met, and would only look at whether the Centre’s move was in keeping with its powers under the RBI Act, and if due process was followed.

The five-judge Constitution bench hearing a bunch of petitions challenging the demonetization notification of November 8, 2016 said: “What can be done now? It is over. We can only consider whether (under) Section 26(2) of RBI Act, (the) power (to carry out the exercise) was available to Centre and (if) the procedure was followed.”

This section gives the Union government the power to declare, based on a recommendation of RBI’s board, that “any series of bank notes of any denomination shall cease to be legal tender...”. The issue is whether the Centre’s move to invalidate all 500 and 1000 denomination currency notes, comes under the definition of “any series”.

Also Read | Govt, RBI defend demonetisation in affidavits filed before Supreme Court

The apex court’s approach is in keeping with what it said at the beginning of the hearing, when it was pointed out that the demonetisation exercise goes back six years and that the clock cannot be turned back. At the time, the court said it would look at the government’s “decision-making” process.

The court’s reiteration of this on Thursday came after senior advocate P Chidambaram, representing one of the petitioners, argued that the government “miserably failed” in achieving any of the objectives listed for undertaking demonetization. The November 2016 notification of the government stated that demonetization would curb circulation of fake currency, crack down on unaccounted wealth, and prevent black money being used for subversive activities such as drug trafficking and terrorism.

The bench headed by Justice S Abdul Nazeer said: “If we say, the procedure was followed but objective not achieved, may not be relevant.” The bench, also comprising justices BR Gavai, AS Bopanna, V Ramasubramanian and BV Nagarathna added: “The impact of a governmental action may not have any effect on its validity...It is better to concentrate on Section 26(2) argument than dwell on objectives.”

Chidambaram said, “This is the worst decision-making process that is deeply flawed and which makes a mockery of rule of law.” He said that by the 2016 notification, 86.4% of currency in circulation was taken out of circulation.

Also Read | Mindful of ‘Lakshman Rekha’ but will examine demonetisation: Supreme Court

Chidambaram told the court that demonetization is carried out either to weed out unusable notes such as high value currency notes that are not easily exchangeable or when there is hyper-inflation . It was done on two occasions in 1946 and 1978, but the demonetized currency was only 11.5% by value of the currency in circulation in 1946 and 0.6% in 1978 which did not impact an overwhelming majority of people, he added.

However, after the 2016 demonetization exercise, just over 2 lakh crore of currency was available to sustain the needs of 1.32 billion population as the new currency notes were not immediately available, the lawyer argued. Asking the court to decide on the validity of this decision, Chidambaram added: “This Court should hold that this process was flawed so that no government ventures into this misadventure again.”

The petitioners have also sought to challenge the November 2016 decision on matters of law, arguing that Section 26(2) of RBI Act allows the government to declare “any series” of bank notes of any denomination to be illegal tender, and that demonetising all series of bank notes belonging to a particular denomination requires a separate law.

He told the court about the string of events that preceded the decision. The RBI Board was intimated of a meeting on November 7, a meeting took place on November 8 at 5.30 pm, the recommendation reached the Union Cabinet within an hour, and at 8 pm Prime Minister went live on television announcing the decision.

“What is the deliberation or reflection made. RBI has not produced the minutes or the agenda paper of the meeting. If this is the decision-making process to be upheld, it will cause chaos,” the senior lawyer said.

Last week, the Centre and RBI defended the demonetisation exercise on the ground that it was done in national interest. The Centre said that this move brought benefits in checking counterfeit currency, increase in digital transactions and boosted compliance with income tax law. The government further stated that the impact on economy was “transient” as the real growth rate was 8.2% in FY 2016-17 and 6.8% in 2017-18 which was more than the decadal growth rate of 6.6% in the pre-pandemic years.

Chidambaram questioned the logic behind curbing of corruption and fake currency when 99.3% of the demonetized notes returned to banks.

The bench is hearing nearly three dozen petitions on the issue of demonetisation including the restriction imposed by RBI against cooperative banks from depositing the returned demonetized notes. Several individuals who lost their money have also challenged the government notification claiming it to be arbitrary and violative of the RBI Act.

On October 12, the Centre argued that the matter was infructuous but the top court directed it and RBI to file their response terming it a “serious matter” , directing them to explain the decision-making process leading to the decision. The arguments in the case will continue on Friday.

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