Demonetisation—Strictly, the PM didn’t go by the law

While much has been written and said about the demonetisation move by the government, the question of its legality has received scant attention. The issue however is not the desirability or the economic viability of the decision and the undoubted public and national interest it serves. The goal of eliminating black money from circulation is undoubtedly in public interest. While I unambiguously support the policy of removing black—untaxed—money from the hands of those who have it, I question the legality of the manner in which it has been done.

To begin with, let us examine what is the status of the currency we hold in our hands. Section 26 of the Reserve bank of India Act 1934 (“RBI Act”) states as follows:

(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in 4 [India] in payment or on account for the amount expressed therein, and shall be guaranteed by the 5 [Central Government].

This means that the money you and I hold in hand or in the bank is a debt guaranteed by the government to us. Currency thus represents a ‘public debt’ owed by the government to the holders of the bank notes, you and me.

The notification issued by the Central Government on 8 November 2016 has been purportedly issued under Section 26(2) of the RBI Act.

Section 26(2) reads as under:

[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 7 [save at such office or agency of the Bank and to such extent as may be specified in the notification].

The first legal question which arises is what is the meaning to be ascribed to the term “any series” in the above sub section. ‘Series’ in plain language can only refer to the series number on the denomination of a bank note. Going by this meaning, the government under this power can only scrap the legal tender of a series of a bank note of any denomination.

Traders association at Delhi’s Azadpur Mandi protest scrapping of Rs 500 and Rs 1,000 notes by the central government, on November 17, 2016

Photo by Sanchit Khanna/Hindustan Times

If the Legislature had intended that the government was to be invested with the power to withdraw the legal status of all bank notes of a particular denomination, as has been done in this case, the use of the words “any series” would be entirely superfluous, and redundant. Hence I conclude that Section 26(2) was never intended to be used as measure of dealing with the withdrawal of black money form the economy, nor was it meant to withdraw legal tender from all bank notes of a particular denomination.

That may have been the reason why previous attempts at demonetisation have been undertaken by the Ordinance route, followed by a Legislation. Demonetisation of 500 and 1,000 rupee notes by a executive fiat appears to a first of its kind procedure and raises fundamental questions on the authority and jurisdiction of the Executive to do what the Legislature has not permitted.

The matter can be looked at from another angle. Article 300A states that “No person can be deprived of his property except by authority of law.” Thus a person cannot be deprived of his/her moveable and immoveable property except with the authority of law.

The Notification dated 8 November 2016 thus appears to be entirely outside the law laid down by the Supreme Court. It is completely without authority of any law.

Demonetisation amounts to extinguishment of the public debt owed by the Government to the holder of the demonetised note. A currency note is movable property in the hands of the holder. The Supreme Court has held in a series of judgements that deprivation of property by State jurisprudentially speaking could have three dimensions (a) a ‘taking’ of property by the Government as in the case of land acquisition, (b) it could be in the form of an ‘extinguishment’ of right in the property as happened during land reforms where the tiller became the owner, (c) in certain situations even modification of property rights could amount to deprivation of property.

Interestingly the Supreme Court in Jayantilal Shah Vs RBI AIR 1997 SC 370, while upholding the validity of the High Denomination Bank Notes (Demonetisation) Act, 1978, held that demonetisation results in extinguishment of a public debt which amounts to deprivation of property and therefore could be done only by law.

The Notification dated 8 November 2016 thus appears to be entirely outside the law laid down by the Supreme Court. It is completely without authority of any law.

Further, the restrictions imposed by the Notification for withdrawal of legal currency are again completely without authority of law. Section 26(2) of the RBI Act by any stretch of imagination does not permit the Executive to restrict the rights of citizens to withdraw their own tax paid money from banks. The restrictions imposed by the Notification on a person’s right to withdraw from the bank are therefore seemingly without any authority of law.

This is precisely why in 1978, an Ordinance followed by a law was enacted. Why this was not done in this case is not at all clear. Parliament was not in session and this was a classic case where an Ordinance would be justified. The element of surprise could be maintained even by an Ordinance, which would have the force of law. But this was not done perhaps for the reason that the Ordinance would have to be replaced by a law and that would require debate in Parliament and a vote on the law.

But if the measure was in national interest, what explains the reluctance of the Government to take the issue to the Cabinet and to the President for an Ordnance? Why the desire to avoid a debate in Parliament? Or was it a case of bad legal advice? The answer to these questions my friends, at this stage, is blowing in the wind.

What explains the reluctance of the Government to take the issue to the Cabinet and to the President for an Ordinance? Why the desire to avoid a debate in Parliament? Or was it a case of bad legal advice?

While we all learn to tighten our belts and live within our withdrawal limits, Janardhan Reddys of the world have by their ostentatious display of wealth raised eyebrows on the seriousness of the Government to crack on members of the ruling establishment, friends and allies.

While I have argued that the demonetisation of 8 November 2016 is without authority of law from a legal stand point, it is for economists to say whether the measure will or will not achieve its desired result.

I once again make it clear that the goal of withdrawing black money from the market is something that I wholeheartedly support, but that is not the point. It must be done under authority of law. In our country today, it is the ‘rule of law’ which is an endangered species, and that worries me.