RBI Didn't Independently Apply Its Mind In Recommending Demonetisation, Entire Exercise Carried Out In 24 Hours : Justice BV Nagarathna

In her dissenting judgment in the pleas challenging demonetisation, Supreme Court judge Justice BV Nagarathna observed that there was no independent application of mind by the Reserve Bank of India in recommending the cancellation of entire Rs.500 and Rs.1000 notes as proposed by the Central Government.

Justice Nagarathna formed this opinion after referring to the records relating to the decision submitted by the Union Government and the Reserve Bank of India.

 "On looking at the records( submitted by RBI), I find the use of the words and phrases there "as desired by the Central Govt", "Govt has recommended the withdrawal of legal tender of 500 and 1000 notes", "recommendation has been obtained" etc., are self explanatory. This demonstrates that there was no independent application of mind by the (Reserve) Bank. Neither was there any time for the bank to apply its mind in 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 1000 was carried out in 24 hours", Justice Nagarathna observed.

Justice Nagarathna noted that the proposal originated from the Central Government by way of its letter dated 7 November 2016 addressed to the bank. The recommendation did not originate from the bank under Section 26(2) of the RBI Act but was obtained from the bank by the Central Government. A proposal originating from the Central Government is not akin to a proposal originating from the Central Board of the Bank.

Justice Nagarathna opined that the concurrence given by the RBI to such a proposal cannot be construed as a "recommendation" under Section 26(2) of the RBI Act.

Even assuming for argument sake that the RBI had such a power, Justice Nagarathna held that such a recommendation is void as the power under Section 26(2) can be only for a particular series of currency notes & not for the whole series of currency notes of a denomination. The judge opined that the word "any series" in Section 26(2) of the RBI Act cannot be interpreted to mean "all series" as held by the majority.

Demonetisation of all series of notes at the instance of Central Govt is a far more serious issue than the demonetisation of particular series by the bank. So, it has to be done through legislation than through executive notification, she held.

"Parliament is a miniature of the country.... Parliament which is the centre of democracy cannot be left aloof in a matter of such critical importance", Justice Nagarathna observed in the judgment.

Justice Nagarathna further observed:  "The problems associated with the measure of demonetisation would make one wonder whether the Central Board of the Bank visualised the consequences which would follow. Whether the central board of the bank had attempted to take note of the adverse effects of the demonetisation of such a large volume of bank notes in circulation. The objectives of the central board may have been sound, just and proper. But the manner in which the said objects were achieved and the procedure followed were not in accordance with law".

"It has also been brought on record that around 98% of the value of the demonetised currency notes have been exchanged for bank notes which continues to be a legal tender.  Also a new series of bank notes for Rs 2000 was released by the bank. This would suggest the measure itself was may not have been proved to be as effective as it was hoped to be. However, this court does not base its decision on the legality of a legislation qua the effectiveness in achieving the stated objectives. Therefore, it is clarified that any relief moulded in the present case is divorced from the consideration of the success of such measures", she said. 

"The opinion of the Central Bank ought to be a frank and independent opinion, after a meaningful discussion with the central board, which ought to be given its true weightage, having regard to the ramifications on the Indian economy and the citizens of India", the judge observed.

Even if the RBI recommends such an action, the Central Government cannot demonetise the entire series of currency notes through an executive notification. It has to be done through a legislative process- either through a law made by the Parliament or an ordinance.

Based on the above reasons, Justice Nagarathna declared the notification dated November 8, 2016 to be "contrary to law" and "unlawful".

"In the circumstances, the action of demonetisation of all currency notes of Rs 500 and Rs 1000 is vitiated. Further, the subsequent Ordinance of 2016 and the Act of 2017, incorporating the terms of the impugned notification, are unlawful. However, having regard to the fact that the impugned notification and the Act have been acted upon, the declaration of law will apply prospectively and will not affect any action taken by the Central Government or the RBI pursuant to the notification dated November 8, 2016. Hence, no relief is being granted in the individual petitions".

Justice Nagarathna however added that the measure was well-intentioned to target evils plaguing the nation's economy such as black money, terror funding and counterfeit currency.

"Before parting, I wish to observe that demonetisation was an initiative of the Central Government, targeted to address disparate evils, plaguing the Nation’s economy, including, practices of hoarding “black” money, counterfeiting, which in turn enable even greater evils, including terror funding, drug trafficking, emergence of a parallel economy, money laundering including Havala transactions. It is beyond the pale of doubt that the said measure, which was aimed at eliminating these depraved practices, was well-­intentioned. The measure is reflective of concern for the economic health and security of the country and demonstrates foresight. At no point has any suggestion been made that the measure was motivated by anything but the best intentions and noble objects for the betterment of the Nation. The measure has been regarded as unlawful only on a purely legalistic analysis of the relevant provisions of the Act and not on the objects of demonetisation". 

Also Read : Demonetisation Valid, Supreme Court Holds By 4:1 Majority; Justice Nagarathna Dissents

Whether Demonetisation Achieved Its Objects Is Not Relevant To Decide Its Legality : Supreme Court

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