The Legal Scheme Of Withdrawal Of Rs. 500 And Rs. 1000 Notes

In the context of declaration that certain bank notes shall be ceased to be legal tender i.e., bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees, this piece shall endeavour to briefly examine the legal scheme of these governmental measures and pose some questions. For the sake of ease and convenience, in this piece, such bank notes shall be referred to as “Invalid Notes”.

Say, at an international airport, arriving and departing passengers possess Invalid Notes, or, say, foreign tourists have Invalid Notes. In such circumstances, are the measures put in place by the Central Government adequate?

This piece shall examine the legal scheme of the measures put in place by the Central Government, and in that process, highlight as to how the measures put in place by the Central Government are adequate in relation to the aforesaid questions.

First things first, The Reserve Bank of India Act, 1934 (“RBI Act”) prescribes that The Reserve Bank of India (“RBI”) has three basic functions, namely:

1. Regulation of issue of Bank Notes.


2. Keeping reserves with a view to secure monetary stability in India.


3. Generally, to operate the currency and credit system of India, to its advantage.

In order to discharge the aforesaid functions, RBI performs the following roles, in terms of RBI Act:

1. Monetary authority


2. Regulatory and supervisor of the financial system


3. Manager of foreign exchange


4. Issuer of currency


5. Developmental role


6. Banker to the government


7. Banker to banks

As an issuer of currency, RBI issues and exchanges or destroys currency and coins, which are unfit for circulation. It does so to give the public adequate quantity of supplies of currency notes and coins, in good quality.

The precise provisions of RBI Act, in the context of the recent measures by the Central Government are Sections 24 and Section 26(2) of RBI Act.

Section 24(1) of RBI Act provides that on the recommendation of the Central Board of Directors of RBI, the Central Government may specify that bank notes shall be of the denominational value of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such denominational values, not exceeding ten thousand rupees. This is subject to Section 24(2), which mandates that the Central Government may, on the recommendation of the Central Board of Directors of RBI, direct the non-issue or the discontinuance of issue of bank notes of such denominational values as it may specify.

Section 26(2) of RBI Act stipulates that on recommendation of the Central Board of Directors of RBI, the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender, except at such office or agency of RBI and to such extent as may be specified in the notification.

In the context of the recent measures by the Central Government, not just one but three notifications dated 08.11.2016 assume significance, namely:

1. O. 3407(E).-This notification, in essence provides that Invalid Notes are no more legal tender. A lot has been written about this notification, in view of the same, this piece shall not deal with this notification. http://finmin.nic.in/172521.pdf


2. O. 3408(E).-This notification observes that it has become necessary to notify certain exemptions for the convenience of the members of public in carrying out certain emergent and urgent transactions using Invalid Notes. In exercise of the powers under Section 26(2) of RBI Act, the Central Government has declared that Invalid Notes shall be legal tender, with effect from 09.11.2016 to 11.11.2016, for the purpose of some transactions, which have been specified in this notification. Such transactions are as follows:

• To make payments in government hospitals for medical treatment and pharmacies in government hospitals for buying medicines with doctor’s prescription.


• At railway ticketing counters, ticket counters of government or PSU buses and airline ticketing counters at airports for purchase of tickets.


• To buy at consumer cooperative stores operated under authorisation of Central or State Governments.


• To buy at milk booths operating under authorisation of the Central or State Governments.


• To buy petrol, diesel and gas at the stations operating under the authorisation of PSU oil marketing companies.


• For payments at crematoria and burial grounds.


• At international airports, for arriving and departing passengers, who possess Invalid Notes, to the maximum extent of five thousand rupees, to exchange them for notes having legal tender character.


• For foreign tourists to exchange foreign currency or Invalid Notes, to the maximum extent of five thousand rupees to exchange them for notes having legal tender character.

As per this notification, all establishments in points (i) to (viii) are mandatorily required to maintain complete account of record of stock and sale of transactions made with Invalid Notes during the period between 09.11.2016 to 11.11.2016.

At international airports, arriving and departing passengers, who possess Invalid Notes, can exchange them for notes having legal tender character. However, this facility is to the maximum extent of five thousand rupees. Similarly, foreign tourists can exchange foreign currency or Invalid Notes, for notes having legal tender character. However, this facility is to the maximum extent of five thousand rupees.

This notification answers the questions posed at the beginning of this piece.

3. O. 3409(E) – By exercising the powers conferred by Section 24(2) of RBI Act and on the recommendations of the Central Board of Directors of RBI, by way of this notification, the Central Government has specified the denomination of bank notes of the value of two thousand rupees.

Arjun Natarajan is a commercial litigator with focus on the broadcasting sector. He is certified to be a mediator by Indian Institute of Corporate Affairs under the aegis of Ministry of Corporate Affairs.

This article has been made possible because of financial support from Independent and Public-Spirited Media Foundation.