NEW DELHI: On the 8th of November, 2016 at about 08:00 in the evening, the government, represented by the extremely popular Prime Minister “Modiji”, stunned the entire nation by declaring on TV that rupee notes of denomination of Rs. 500/- and Rs. 1000/- shall not continue to be legal tender from mid-night, the same night!.
That is within 3 – 4 hours from the time of making the announcement.
A lot of people sang songs in praise of “Modiji” (quite literally, with a radio station playing “love you Modiji!”, in the tune of “Love you Zingadi”). There are also people who are predicting the worst for the small – mid level businesses.
But the question that begs to be asked is, was the government legally empowered to issue this notification de-monetizing all notes of Rs. 500 and Rs. 1000?
The Notification (No. S.O. 3408(E)) indicates that the government is exercising its power under Section 26 of the Reserve Bank of India Act, 1934. Before we get to Section 26, for a moment consider the language used in Section 24(b) of the RBI Act.
The said section provides that the Central Government “may direct the non – issue or the discontinuance of issue of bank notes of such denominational value as it may specify”. Clearly the import of this section is to empower the Central Government to issue instructions that notes of any particular denomination may not be produced hereinafter.
Against this backdrop, one notes that the language used in Section 26 is more specific and distinct from that used in Section 24. Section 26 actually allows the Central Government to declare that “any series of bank notes of any denomination” would cease to be legal tender.
Therefore an argument could be made that the power of the Central Government, in terms of Section 26, is limited to demonetizing only certain series of notes of any denomination (here the reference to ‘series’ may be taken to mean the series mentioned at the bottom of note) and not all the notes of any particular denomination.
To test this argument further, we must remind ourselves that demonetization of currency has happened twice before in the past.
In 1956, when the Central Government undertook to take action towards demonetizing all notes of denominational value of Rupees five hundred, Rupees one thousand and Rupees ten thousand issued before January 13, 1946, a legislative amendment was made in terms of which Section 26A was inserted into the RBI Act especially to this effect.
This raises the important question that if Section 26 has been wide enough to cover the power of the Central Government to demonetize all notes of any particular denomination, then such insertion of Section 26A would not have been required in the first place. As such it could be argued that the understanding in 1956 was clearly that Section 26 gives the limited power to the Central Government to cease as legal tender only a particular series of bank notes of any denomination.
Another round of demonetization occurred in 1978 however even at this time, contrary to the present situation, the Central Government did not rely on Section 26 of the RBI Act. Instead a separate legislation was passed to achieve this objective, titled – “High Denomination Bank Note (Demonetisation) Act, 1978”.
The ambit and extent of powers of the Central Government in terms of Section 26 of the RBI Act seems to be yet to be examined and adjudicated by the courts, however there does seem to be a legal issue which may merit consideration.
Even otherwise, while one would presume, with a certain degree of confidence, that the government would have gone through extensive planning and brain-storming before putting the present plan in action, there are a number of conceptual questions and legal issues which remain hanging without a solution in sight.
One understands and lauds the objective behind such a move of the Government, to try and effectively curb black money, but surely the powers – that- be, realise that such action has been taken before and that black money has very much continued to be a harsh reality.
Professor Prabhat Patnaik in his article titled in The Citizen “Demonetization: Witless and Anti-People” (http://www.thecitizen.in/index.php/NewsDetail/index/1/9153/Demonetization-Witless-and-Anti-People) makes quite a strong argument that curbing black money needs a much larger focus and significant political will towards controlling “black activities” financed through foreign banks.
The action of the Central Government is also an experiment fraught with severe inconvenience caused to people due to lack of systems having been put in place.
There are long line in front of ATM kiosks. People are waiting for hours in front of banks and ATMs only to learn, after having wasted enough time, that there is no cash.
The issue is assuming greater and greater significance as people are realizing that there isn’t enough cash to go around and for people to be able to meet their day – to – day requirements. Bear in mind, this being the situation in large metropolitan cities, one can only wonder what the picture on the ground is in obscure and smaller places in our rather large country.
While pundits on both sides continue to opine, eventually only time will tell as to efficacy of the demonetization action of the government. In the meanwhile, the Government may need to look at the source of their power under the RBI Act very closely because chances are very soon these questions might be raised in a court of law.
The object of this study, to quote Gina Miller (one of the claimants in the Brexit challenge) is about the “process, not politics”. The legitimacy of any government action depend upon the conformity and compliance with the procedure laid down by law. The rule of law forms the very bedrock of any vibrant democracy and it is in tune with that that we must consider the present actions of the government.
(Tishampati Sen is an advocate in Delhi)