Government should have enacted legislation; RBI did not apply its mind: dissenting judge

The Government’s demonetisation initiative reflected a concern to address “disparate (economic) evils,” demonstrated “foresight,” and was motivated by “the best intentions and noble purposes.” Still, the manner in which it was carried out violated the law and revealed that the central bank lacked an independent mind. To execute the note ban, the Government should have introduced an ordinance or a bill in Parliament rather than relying on the Reserve Bank of India to make a proposal and issue a notification.

This is the major point of Justice B V Nagarathna’s dissenting opinion, which essentially contends that the government’s actions undermine the RBI’s institutional supremacy.

Justice B V Nagarathna disagreed with the majority opinion that maintained the demonetisation process and ruled that the action “was not lawful.”

“Demonetisation was…targeted to confront different problems afflicting the nation’s economy, such as ‘black’ money and counterfeiting, which permit even greater evils…,” she elaborated.

terror funding, narcotics trafficking…

Havala reflects concern for the nation’s economic health and security and demonstrates foresight. At no time has it been suggested that the measure was motivated by anything other than the highest of ideals and the development of the nation.”

However, Justice Nagarathna emphasised that a review of the documents submitted by the Centre and RBI revealed “no independent application of mind by the Bank” over the centre’s proposal to revoke the legal tender status of the currency notes.

“….After reviewing the documents, I’ve determined that the usage of terms such as “as requested by the central government,” “government had recommended the withdrawal of legal tender of existing Rs 500 and Rs 1000 notes,” “recommendation has been acquired,” etc. are self-explanatory. This demonstrates that there was no independent application of mind by the Bank, nor was there any time for the Bank to apply its mind to a matter of such gravity, as stated by Justice Nagarathna.

Justice Nagarathna elaborated on her finding that there was a lack of mental effort on the part of the RBI by noting that the entire process of demonetisation was completed in less than 24 hours.

In addition, she disagreed with the majority’s interpretation of Section 26 (2) of the RBI Act. This provision reads, “On the recommendation of the (RBI’s) Central Board, the Central Government may, by notification in the Gazette of India, declare that…any series of bank notes of any denomination shall cease to be legal tender except at such office or agency of the Bank and to such extent as may be specified in the notification.”

The overwhelming opinion held that “any” in Section 26(2) should be interpreted as “all” and not “some.” But Justice Nagarathna disagreed: “…the phrase any as contained in Section 26(2) cannot be taken to mean all, as such a construction would grant the Central Board of the Bank unrestrained and wide power.”

She stated that the “plan of the central government…with significant economic ramifications must be presented to the Bank for its professional view on the scheme’s viability.” The Bank, as an expert organisation, may offer guidance on such a proposal, and in some instances, may even support it. However, even such approval for suggestion emanating from the Central government is not equivalent to an original recommendation of the Central Board of the Bank under Section 26(2) of the Act.”

She stated that “the opinion of the Central Board of a Bank ought to be an independent and frank opinion after a meaningful discussion by the Central Board, which ought to be given its due weightage in light of the ramifications it can have on the Indian economy and Indian citizens, even though it may not be binding on the central government.”

Justice Nagarathna also referred to the petitioner’s arguments that “around 98% of the value of the demonetised currency have been exchanged for bank notes which continue to be legal tender” and that a new series of Rs.2,000/- bank notes was issued, stating that “this would suggest that the measure itself may not have proven to be as effective as hoped” but added that the effectiveness of a law cannot be the basis for determining its legality.

The decision accepted that the Centre may have been compelled to initiate demonetisation for multiple reasons, and that “it might do so even in the absence of a recommendation under Section 26(2) of the Act.” Noting that the RBI board may or may not support the government proposal, the ruling stated: “In either case, the central government may proceed to demonetise the bank notes, but only through a legislative process, either through an ordinance followed by a legislation if the Parliament is not in session or via a plenary legislation before the Parliament, and depending on the passage of the Bill as an Act, implement its proposal…”

It noted that “depending on the urgency of the circumstances and perhaps to maintain confidentiality, the Central Government always has the option of issuing an ordinance by the President of India and then passing a legislation by summoning Parliament.”

The judgement stated, “A Parliament is frequently referred to as a “miniature nation”; it is the foundation of democracy. A country’s Parliament represents the people and gives them a voice. A democracy cannot flourish without a Parliament; every democratic nation need a Parliament for the efficient operation of its government and to give democracy its full meaning. The Parliament, which is at the heart of our democracy, cannot remain indifferent to a topic of such significance. Its comments on demonetisation are crucial and of the utmost importance.”

Referring to the petitioner’s allegation that around 86 percent of the volume of currency notes in circulation was demonetized and that people were subjected to undue hardship, the judgement questioned if the RBI’s governing Board had “anticipated the ensuing effects.”

Justice Nagarathna stressed that her conclusion that the policy was “illegal” was based “exclusively on a strictly technical interpretation of the pertinent provisions of the Act and not on the objectives of demonetisation.”