Decision To Withdraw 86% Currency Taken Within 24 Hours, Demonetisation Contrary To RBI Act : P Chidambaram To Supreme Court

A Constitution Bench of the Supreme Court on Wednesday decided to examine the legal arguments raised by the petitioners against the 2016 demonetisation of Rs 500 and Rs 1000 currency notes, refusing to accept the arguments of the Centre that the issue is now merely "academic".

The five-judge Bench - comprising Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian, and B.V. Nagarathna- changed its initial view that the issue has become academic and allowed the petitioners to commence arguments.

Hasty decision taken without application of mind : Chidambaram

The substantive portion of the deliberations was opened by Senior Advocate and Rajya Sabha MP P. Chidambaram, who has earlier served as the Union Minister of Finance. He prefaced his submissions by giving a brief conspectus of the series of events that ultimately led to the banknote demonetisation. He recounted –

"There are only three events to our knowledge, and none of the documents pertaining to those three events have been produced. According to what is available in the public domain and the counter-affidavit, on November 7, the Government wrote a letter to the Reserve Bank seeking its recommendation on whether Rs 500 and Rs 1000 notes may be demonetised. On November 8, less than 24 hours after the letter came, the RBI which has its headquarters in Mumbai, has its entire research staff there, does not meet in Mumbai, but meets in Delhi. The RBI Board ought to consist of 10 independent directors under Section 7(1)(c) but seven slots were vacant on that day. Only three were in place. The RBI Board effectively consisted of the Governor, the four Deputy Governors, four officers nominated by the Central Government and one nominated Government official. They are believed to have met in Delhi and passed a resolution recommending that notes of these denominations may be demonetised. That resolution or recommendation is transmitted to the Cabinet, which, is already meeting and waiting in the Cabinet room. This recommendation is accepted and within minutes of receipt, the notification is issued. Then, the Hon'ble Prime Minister goes on television at about 8 PM to announce demonetisation while his Cabinet colleagues are waiting in the Cabinet room. They were requested to wait there."

Then the senior counsel asked rhetorically –

"Is this the procedure contemplated in Section 26(of Reserve Bank Act), assuming you are exercising your power bona fide under the section?. A matter so serious and so important as demonetisation, which will effectively take away 86.4% of the currency…Can it be decided in a matter of 24 hours between November 7 when the letter was received by the RBI and November 8 evening, when demonetisation is announced? Where is the application of mind? If this the procedure under the law?"

The senior counsel submitted that there was a "perverse reversal of procedure" as the suggestion should have originated from the RBI, instead of the Government. He contended that the decision-making process was "deeply flawed". The suggestion as per Section 26 of the RBI Act should have emanated from the Reserve Bank after the Board deliberated on it. Such deliberation should have employed empirical data and have resulted in a detailed recommendation. Chidambaram said –

"The Government should have reflected on it in the course of a day or two before passing such an order. All this was done in 24 hours. 86.4% of currency was withdrawn. And they have not placed in the public domain the relevant records. Is this the way a decision can be taken? Is this a reasonable, prudent decision-making process?"

Demonetisation has no nexus with the objects sought to be achieved

Chidambaram outlined the objectives of the 2016 demonetisation, drawing a stark contrast with what he said were the actual economic purposes of a policy to demonetise currency –

"The objects of demonetisation are to take out currency notes not in use and extinguish liability, or to replace worthless currency notes in cases of hyperinflation with new currency of worth. The objectives they have pointed out are fake currency, black money, and fake currency used for terror funding. They added corruption later, but the RBI notification spoke about these three reasons. RBI's annual report says only 0.0027 per cent of individual currency notes were found to be fake notes. Now insofar as black money is concerned, within days and weeks of this notification, the Income Tax Department, Directorate of Revenue Intelligence seized unaccounted money in the new Rs 2000 notes. On terror funding, within weeks in Bandipur, on bodies of two terrorists who were killed, they found fake Rs 2000 notes."

The senior counsel added –

"Technology is neutral. If the Government can get the technology, the counterfeiter can also get the technology."

He also compared the actual outcome of the policy against its projected outcome –

"A fraction more than one per cent did not return. The then Attorney-General told Chief Justice Thakur's Bench that they expected 3 lakh crores will not be returned, and that will be extinguished from the liability side of the RBI's balance sheet. It will be taken as RBI's profit and the Government will get a dividend on the profit. Later, the figure was increased to 4 lakh crores, and it was said that the Government will get a bonanza of 4 lakh crores".

Chidambaram referred to the reports of the RBI itself which stated that over 99% of the banned notes returned. "Effectively, every note was exchanged", he said.

The senior counsel asserted that none of the objectives outlined by the Central Government was achieved –

"According to us, none of the objectives were achieved. But that may be outside the purview of judicial review. But the point is, in order to achieve these objectives, was this the method? Did the Government examine alternative methods? According to my information, it was not disclosed to the Board that by demonetising Rs 500 and Rs 1000 notes, 86.4% of the currency will be withdrawn. No prudent Cabinet Minister or Board member will ever agree."

Second, Chidambaram assailed the resolution passed by the RBI Board on the ground that they had failed to consider relevant factors. He explained –

"ATMs were not calibrated to receive or dispense Rs 2000 notes. Recalibration took months...Given the capacity of the press, there was, apart from the legal limit of exchange, a practical limit of exchange for Rs 500 notes. There were not enough currency notes. Remonetisation took several months. Further, what was the geographical distribution of bank branches and ATMs in different parts of the country? The point is, did the Government apply its mind when implementing this policy? Were these factors considered? Then, where is the record?"

Notably, Chidambaram contended that Section 26(2) should be read down. It could not be construed as conferring on the Central Government the power to demonetise all series of banknotes of any denomination by issuing a notification in the Official Gazette. The question of whether such power was available would turn on the interpretation of the word 'any' in the section. Chidambaram said that the word should not be interpreted to mean 'all'. In other words, the Government could only demonetise any particular series of banknotes of any denomination. Anything in excess of this would require parliamentary sanction. He pointed out –

"If Section 26 gave the Government this power, then why were separate acts enacted during the earlier demonetisations in 1946 and 1978? If the power was there, why did the 1946 and 1978 Acts start with the words 'notwithstanding anything contained in Section 26'. The Parliament felt that this kind of power was not there. Can the Government exercise this power without a parliamentary enactment or a debate?"

To drive the point home, Chidambaram posed a hypothetical example –

"Let us take the extreme case. Does the Government have the power to declare 100 per cent of currency in circulation as illegal tender? Should the Parliament not build some guidelines or principles? So, this provision ought to be read down to mean 'any series'. This is how it was understood in 1946 and 1978."

The senior counsel conceded that the Court may disagree with the interpretation of the term 'any' proposed by him. However, the effect of this would be to recognise the power of the Central Government to demonetise all series of banknotes of any denomination in one fell swoop. This, the senior counsel contended, was "unguided and uncanalised power" and would be subject to the discipline of Part III of the Constitution for violating Articles 14 and 19. He presented two options before the Bench –

"Either read down Section 26(2) or strike it down"

Then, the senior counsel accused the Government of setting up "false objectives" that "could never be achieved" to justify this controversial policy decision. He asked the Court to examine whether, "within the limited scope of judicial review", a government can set up false objectives and issue such a notification. Next, drawing the attention of the Bench to the "horrendous consequences" of demonetisation, Chidambaram argued that the policy failed the test of proportionality. Justice Nagarathna interjected at this juncture –

"Proportionality has to be tested on the basis of the justification for the policy, not on its own."

Concurring, Chidambaram responded –

"Yes, but none of the objectives were actually achieved."

Where is the prejudice if the money was allowed to be exchanged? Bench asks

The bench asked if there was any prejudice caused if the notes were allowed to be exchanged. Chidambaram replied that there were both monetary and non-monetary hardships caused due to the decision. 

"2300 crore discreet notes amounting to 15.44 lakh crores by value equal to 86.4% of all currency was withdrawn overnight, leading to horrendous consequences...Many families were simply without money. 11 crore people stood in queues every day to change their money. District cooperative banks were not allowed to receive deposits or exchange notes. Entire farming community was entirely at a loss. It was sowing season. People did not have money to buy fertiliser, seeds, or hire labour. Wholesale markets were shut down. Prices crashed. Weekly fairs in villages stopped. Reports indicate a calamitous drop in sales. Industrial hubs halted. Wages were not paid. Casual labour, 33% of all employed persons amounting to 15 crores, were without work or without income"

He referred to certain reports regarding a sudden and drastic fall in the wholesale prices of goods after November 8, 2016. He added that over several people died while waiting in queues to exchange notes.

"Is it a proportional measure to achieve even the objectives that you set out for yourself?", he asked.

After Chidambaram highlighted the monetary and non-monetary hardships faced by the common people, Justice Nagarathna asked –

"Any law will have an impact on a section of the common people. While it is true that demonetisation caused hardships, can such hardships have a bearing on a constitutional issue?"

Chidambaram supplied a rejoinder –

"Yes, it will have a bearing on the doctrine of proportionality."

Finally, Chidambaram explained that the Supreme Court had wide powers to "grant declaratory reliefs, lay down the law, and mould the reliefs".

Seeking time to prepare a comprehensive counter-affidavit in response to the submissions made on behalf of the petitioners, the Attorney-General explained the reason for their reluctance –

"Whatever we have placed before this Court is only with a certain amount of concern that opening a matter like this has large implications. However, it is not that we are disinclined to assist the court. But there are concerns that have unfolded over a period of time."

The Bench instructed the Union of India and the Reserve Bank to file "comprehensive affidavits". Chidambaram, during the course of his submissions, had emphasised the reluctance of the Central Government to produce crucial documents such as their letter to the Reserve Bank on November 7, the agenda of the Board meeting of the Reserve Bank conducted on the very next day, and the resolution passed by the Board of Directors. He reiterated his demand –

"If necessary, we will file an application to summon these documents. But, in a matter of this nature, the Government should fairly place these documents before the Court. The Government may be directed to place these three documents on record."

The Attorney-General quickly interjected –

"If and when necessary. Whether they will advance the course of all these arguments…"

Justice Nazeer, however, unequivocally stated that the documents in question must be produced before the Court. He said –

"We want to see them…You cannot keep them away from us. Also file a comprehensive affidavit".

Justice Nazeer also pointed out that the petitioners were questioning the power of Central Government to invoke Section 26 of the Reserve Bank of India Act to demonetise currency notes

Taking note of the arguments, Justice Nazeer told the AG :

"The sheet anchor is Section 26(2)…"On the recommendation of the Central Government". Show us where the recommendation of the Central Government is. Thereafter, where is the consideration by the Reserve Bank and what was your reply? These are the three things you must answer, on facts. Secondly, how to interpret the word 'any' in the provision. Chidambaram says read it down or in the alternative, quash it. You must address these in your pleadings."

The hearing will continue on November 9.

Case Title

Vivek Narayan Sharma v. Union Of India [WP (C) No. 906/2016] and other connected matters

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