Supreme Court upholds India's 2016 demonetisation exercise — Key highlights of the judgement

The Supreme Court on Monday, January 2, upheld the Narendra Modi government’s 2016 decision to demonetise currency notes of Rs 1,000 and Rs 500 denominations and rejected the petitions against it.

There were two separate judgements during the hearing on Monday, pronounced by Justices BR Gavai and BV Nagarathna. While Justice Gavai's judgment backed November 2016 demonetisation exercise, Justice Nagarathna opposed the move.

He was the only dissenting judge in the matter, while the other three, Justice AS Bopanna, Justice V Ramasubramanian amd Justice S Abdul Nazeer were in favour of Justice Gavai.

Delivering the majority option, Justice Gavai said, "The power available to the Centre can be exercised for all series of bank notes. There were no flaws in the decision-making process...it satisfies the test of proportionality".

He went on to say: "It has been held that there has to be a great deal of restraint before interfering in matters of economic significance...we cannot supplant such views with the judicial one."

"There was consultation between the Centre and the RBI for a period of 6 months. We hold that there was a reasonable nexus to bring such a measure, and we hold that demonetisation was not hit by the doctrine of proportionality," he was quoted by Bar and Bench as saying.

He concluded that the RBI has no independent power to bring in demonetisation. "Thus, power available to the Centre cannot mean that it is in relation to only a specific series of bank notes. It is for all series of banknotes... There is no excessive delegation as under Section 26(2) of the RBI Act and thus cannot be struck down. Notification is valid and satisfies the test of proportionality. period for the exchange of notes cannot be said to be unreasonable," he said.

Justice Nagarathna differed from the majority judgment on the point of the Centre’s powers under section 26(2) of the RBI Act. She said the judgment proposed by Justice Gavai does not take into consideration that only the Central Board of RBI can recommend demonetisation. The Supreme Court judge said the Centre's "objective may not have been achieved".

"Justice Gavai's judgment does not recognise the essential fact that Section 26(2) does not take into account the initiation of demonetization... examining Section 26(2) would not mean to sit over the merits of demonetisation and thus, it is well within the Lakshman Rekha as drawn by this court," she said.

She said, "When the proposal for demonetisation comes from the Centre, it has to come by way of legislation or at least ordinance. Without Parliament, democracy cannot survive."

"(There was) no application of mind by the RBI. No time was allowed for the RBI to apply its mind and the decision was taken in just 24 hours," Nagarathna said. She added, "Serious ramifications of the move are required for the issue to be laid before the RBI for consideration. She "wondered" if the RBI considered the social economic hardships of such an exercise.

She termed demonetisation "unlawful", but did not raise any doubts over the intention of the Centre's move. "The measure was well-intentioned. I'm not suggesting that it was driven by anything but noble objectives, but demonetisation was unlawful on legal grounds," she said.

The verdict was pronounced by five judges — Justice Abdul Nazeer, Justice BR Gavai, Justice AS Bopanna, Justice V Ramasubramanian, Justice BV Nagarathna.

Section 26(2) of the Reserve Bank of India (RBI) Act that allows the government to declare all series of a particular denomination as being no longer legal tender is too wide;

The decision-making process was deeply flawed;

The recommendation did not consider relevant factors;

The stated objectives of demonetisation were not achieved;

The move fails the test of proportionality;

The court has powers to mould and grant declaratory relief.

On December 7, the Supreme Court directed the Centre and the Reserve Bank of India (RBI) to put on record the relevant records relating to the government’s 2016 decision and reserved its verdict.

It heard the arguments of Attorney General R. Venkataramani, the RBI’s counsel and the petitioners’ lawyers, including senior advocates P. Chidambaram and Shyam Divan.

Calling the scrapping of the Rs 500 and Rs 1,000 currency notes deeply flawed, Chidambaram had argued that the government cannot on its own initiate any proposal relating to legal tender, which can only be done on the recommendation of the RBI’s central board.

Resisting the court’s attempt to revisit the 2016 demonetisation exercise, the government had said the court cannot decide a matter when no tangible relief can be granted by way of “putting the clock back" and “unscrambling a scrambled egg".