Vivek Narayan Sharma v Union of India 2023

Facts:

On November 8, 2016, Prime Minister Narendra Modi announced that Rs. 500 and Rs. 1000 notes would no longer be used. (Rehan, 2023)
New Rs. 500 and Rs. 2000 notes would be given out to replace the old ones.
The prime minister said this would stop fake money and cut off funds for terrorism.

Legal issues :

The Constitutional bench of the Supreme Court changed the nine questions posed by three judges on December 16, 2016, into these six issues:

Government Authority: Can the central government’s power under RBI Act section 26(2) be limited to only some series of banknotes instead of all of them? Does the word “all” before “series” mean every series, especially since past demonetizations used full legislation?

Power Limitation: Should the power given by section 26(2) of the RBI Act be removed if it can target any series of banknotes, indicating an excessive delegation of power?

Notification Validity: Can the November 8, 2016, notification be cancelled because the decision-making process was flawed?

Proportionality Test: Can the November 8, 2016, notification be invalidated using the proportionality test?

Exchange Time: Was the time given for exchanging notes under the November 8, 2016, notification too short?

RBI Authority: Can the RBI accept demonetized notes after the given timeframe in the notifications under Section 4(1), regardless of Sections 3 and 4(1), as per Section 4(2) of the 2017 Act?

Legal Provisions: –

Section 26(2) of the Reserve Bank of Indian (‘RBI’) Act, 1934
Section 4(2) of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 (2017 Act’)

Contentions of Petitioner: –

Petitioner argued that the RBI Act’s section 26(2) does not allow demonetizing all series of notes of a specific denomination. He said the law only permits targeting a specific series by using the word “any” before “series.”
He mentioned that in the past, when all series of a specific denomination needed to be demonetized, it was done through a separate law, as seen in 1946 and 1978.
He also claimed that the decision-making process was flawed, allowing the court to review it.
He argued that this time, the process was reversed, with the central government proposing demonetization first, followed by a central board meeting and then sending the recommendation back to the government.

Contention of Respondent:-

Respondent stated that the demonetization notification is valid because it is supported by the 2017 Act, and any challenge to it would fail.
He argued that the word “any” in section 26(2) of the RBI Act should be interpreted as “all” series of banknotes, and the claim that it doesn’t mean “all” is incorrect.
He also said it is wrong to compare the 2016 demonetization with those in 1946 and 1978.
Representing the RBI, Senior Counsel explained that section 26(2) of the RBI Act clearly gives the central government the authority to demonetize.
He added that the central government must follow the recommendations of the Central Board, which acts as a safeguard.
Senior Counsel also argued that the court cannot judge the pros and cons of the policy unless it violates any laws or constitutional provisions.

Rationale:

The court decided that the Central Government can use its authority over any series of banknotes under Section 26(2) of the RBI Act. Even though previous demonetizations used full legislation, this does not stop the government from using Section 26(2) for the 2016 demonetization.
The court also said that Section 26(2) includes a built-in safeguard because the Central Government has to follow the Central Board’s recommendations. This means there’s no problem with excessive power being given.
The court confirmed that the demonetization passed the proportionality test, so it can’t be rejected for being unreasonable.
Lastly, according to Section 4(2) of the 2017 Act, the Reserve Bank of India cannot accept the old demonetized notes after the exchange period specified in Section 4(1) of the 2017 Act.

Decision :-

The Supreme Court decided that the 2016 demonetization was legal, with a 4:1 vote in favour. Here’s what they said:

Government’s Power: The Central Government can demonetize all series of banknotes of a particular denomination under Section 26(2) of the RBI Act, but this must start with a recommendation from the Central Board.
Proportionality Test: The Court found that the demonetization process met the proportionality test, so it was not unreasonable.
Safeguards: The Court said that Section 26(2) of the RBI Act has built-in safeguards, so there was no excessive delegation of power.

In short, the Supreme Court upheld the legality of demonetization, but Justice B.V. Nagarathna disagreed with this decision.

Dissenting Opinion:

Justice B.V. Nagarathna disagreed with the majority opinion and said the following:

Central Government’s Power: The Central Government can demonetize all series of banknotes of any denomination, but the RBI’s Central Board cannot recommend demonetizing all series or all denominations of notes.
Role of the Central Board: Section 26(2) of the RBI Act only allows the Central Board to make recommendations for demonetization. The Central Government then decides whether to accept these recommendations and issue a notification.
Legislative Process: The Central Government can start the process of demonetization, but it must be done through new legislation, not just by issuing a notification under Section 26(2) of the RBI Act.
Excessive Power: If the Central Board had the power to recommend demonetizing all series or denominations of banknotes, it would mean giving the Bank too much power.
Improper Process: In this case, the Central Government started the demonetization process, which should have been done through legislation, not just a notification under Section 26(2).
Flawed Decision-Making: The decision-making process was flawed because the Central Board acted only at the direction of the Central Government and did not give an independent opinion.

Unlawful Actions: Therefore, the notification issued under Section 26(2) of the RBI Act was unlawful, and the Ordinance of 2016 and the Act of 2017 that followed are also unlawful.