Demonetisation Not Illegal Merely Because Proposal Originated From Central Govt; No Breach Of Sec 26(2) RBI Act : Supreme Court

The Supreme Court (4:1) in its judgment upholding validity of demonetisation, observed that the word “recommendation” in Section 26(2) of RBI Act would mean a consultative process between the Central Board of Reserve Bank of India and the Central Government.

"Merely because the Central Government has advised the Central Board to consider recommending demonetization and that the Central Board, on the advice of the Central Government, has considered the proposal for demonetization and recommended it and, thereafter, the Central Government has taken a decision, in our view, cannot be a ground to hold that the procedure prescribed under Section 26 of the RBI Act was breached.", the majority comprising of Justices S. Abdul Nazeer, B R Gavai, A S Bopanna and V. Ramasubramanian observed.

Section 26(2) of the RBI Act reads thus: On recommendation of the Central Board, 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 save at such office or agency of the Bank and to such extent as may be specified in the notification.”

The contention raised by the petitioners was that the procedure prescribed under Section 26(2) is breached as the proposal has emanated from the Central Government whereas the requirement is that the proposal should emanate from the Central Board. 

The majority judgment observed that the two requirements of sub-section (2) of Section 26 of the RBI Act are (i) recommendation by the Central Board; and (ii) the decision by the Central Government.

“recommendation” would mean a consultative process

"The scheme mandates that before the Central Government takes a decision with regard to demonetization, it would be required to consider the recommendation of the Central Board. We find that, in the context in which it is used, the word “recommendation” would mean a consultative process between the Central Board and the Central Government"

It cannot be said that there was no conscious, effective, meaningful and purposeful consultation

As such, the enquiry would be limited to find out whether both the Central Board and the Central Government had made their respective points of view known to each other and discussed and examined the relative merits of their views. It will have to be considered whether each of the party had disclosed to the other all relevant facts and factors for due deliberation, or not. The limited enquiry would be whether the recommendation by the Central Board was made after complete consideration of the matter on the basis of all the relevant facts and material before it, or not.. As already discussed herein above, the record itself reveals that the RBI and the Central Government were in consultation with each other for a period of six months before the impugned notification was issued. The record would also reveal that all the relevant information was shared by both the Central Board as well as the Central Government with each other. As such, it cannot be said that there was no conscious, effective, meaningful and purposeful consultation.

Justice BV Nagarathna's dissent

RBI Act does not envisage initiation of demonetisation of bank notes by the Central Government.

Justice Nagarathna observed that the majority judgment does not recognise the essential fact that the Act does not envisage initiation of demonetisation of bank notes by the Central Government.  

"The essential ingredients of sub-section (2) of Section 26 of the Act can be epitomised as under: i) on the recommendation of the Central Board of the Bank; ii) the Central Government by notification in the Gazette of India; iii) may declare any series of bank notes of any denomination to cease to be legal tender; iv) with effect from such date as may be specified in the notification; v) to such extent as may be specified in the notification; Therefore, under sub-section (2) of Section 26 of the Act, the Central Government would act only on the recommendation made by the Central Board of the Bank, which is the initiator of demonetisation of bank notes.", the judge observed

Initiation on the strength of Entry 36 of List I of the Seventh Schedule of the Constitution

The judge agreed with the submission of Attorney General that the Central Government cannot be said to be without powers in initiating demonetisation of bank notes.

"This is on the strength of Entry 36 of List I of the Seventh Schedule of the Constitution. The Central Government is not just concerned with the financial health of the country as well as its economy, but it is also concerned with the sovereignty and integrity of India; the security of the State; the defence of the country; its friendly relations with foreign countries; internal and external security and various other aspects of governance. On the other hand, the Bank is only concerned with the regulation of currency notes, monetary policy framework, maintaining price stability and allied matters. Therefore, if the Central Government is of the considered opinion that in order to meet certain objectives such as the ones stated in the impugned notification, namely, to eradicate black money, fake currency, terror funding etc., it is necessary to demonetise the currency notes in circulation, then the Central Government may initiate a proposal for demonetisation."

Justice Nagarathna added that demonetisation of the entire series of currency notes cannot be done by the Central Government by issuing a notification under Section 26(2) of the RBI Act, as it gives power only to cancel a specified series of notes. The dissenting judge also opined that the RBI did not independently apply its mind regarding the Centre's proposal for demonetisation and that the entire exercise was done in 24 hours.

Case details 

Vivek Narayan Sharma vs Union of India | 2023 LiveLaw (SC) 1 | WP(C) 906 OF 2016 | 2 January 2023 | Justices S. Abdul Nazeer, B R Gavai, A S Bopanna, V Ramasubramanian and Justice B V Nagarathna (dissenting)

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