Vivek Narayan Sharma v. Union of India | Legal Reasoning for CLAT PDF Download

Facts

• On 8th November 2016 Prime Minister Narendra Modi announced that from midnight of the same day, all Rs. 500 and Rs. 1000 banknotes of the Mahatma Gandhi series would not be legal tender.
• The issuance of new Rs. 500 and Rs. 1000 banknotes in exchange for demonetized banknotes were also announced.
• The Prime Minister claimed that the move will eliminate fake currencies and will also stop corruption and terror funding.

Issues Raised

On 16 December 2016 three Judges bench of the Hon'ble Supreme Court framed 9 questions but the Constitutional bench reframed the questions into the following 6 issues:

1. Can the central government's powers under section 26(2) of the RBI Act be limited in the sense that it can be exercised only over "one" or "some" series of banknotes rather than "all"? Are series related to the word "all" appearing before the word "series" in that subsection, especially specifically so, when on earlier two occasions, the demonetisation exercise was done through the plenary legislation
2. If the power under section 26(2) of the RBI Act is to be interpreted to mean that they can be exercised against "any" series of banknotes, whether or not the above subsection implies an over-delegation of powers, should they, therefore, be revoked?
3. As to whether the impugned Notification dated 8th November 2016 is liable to be struck down on the ground that the decision-making process is flawed in law?
4. Can the impugned notification dated 8th November 2016 be struck down by applying the test of proportionality?
5. Can it be said that the time provided under the impugned notification dated 8th November 2016 for the exchange of the notes was unreasonable?
6. As to whether the RBI has an independent power under Section 4(2) of the 2017 Act in isolation of provisions of Section 3 and Section 4(1) thereof to accept the demonetized notes beyond the period specified in notifications issued under Section 4(1)?

Legal Provisions

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

Contentions

Argument from the Petitioner’s Side:

• While arguing on behalf of the petitioners, Shri P. Chidambaram learned Senior Counsel submitted that the correct interpretation of subsection (2) of section 26 of the RBI Act would not allow demonetizing "all series" of notes of a particular denomination. And the word 'any' before the word 'series' in section 26(2) of the RBI Act denotes that the power to demonetize can only be used for a particular denomination series.
• While giving reference to the earlier two occasions of demonetization (1946 and 1978) the learned counsel submitted that whenever it was required to demonetize "all series" of a particular denomination, it was done by way of separate enactment of the legislature.
• The learned counsel also submitted that there was a flaw in the decision-making process and therefore is liable to the scrutiny of judicial review by the Hon'ble Court.
• It was also argued that the reverse mechanism was followed in the present case as it was the central government only who initiated the proposal for demonetization and then the meeting of the central board was held and then the recommendation was sent to the Central Government.

Argument from the Respondent’s Side:

• Shri R Venkataramani learned Attorney General argued that since the notification stands ratified by the 2017 Act. Any challenge to the same would not survive.
• The learned Attorney General also submitted that the word “any” appearing before the words “series of bank notes” in section 26(2) of the RBI Act will have to be construed as “all”. And the argument that it would not mean “all” is a fallacious one.
• He also argued that the comparison of the demonetization of 2016 with the 1946 and 1978 demonetization is totally misconceived.
• Shri Jaideep Gupta, learned Senior Counsel appearing on behalf of the RBI submitted that section 26(2) of the RBI Act itself provides that the power by the Central Government has to be exercised on the recommendation of the Central Board and thereof, there is an inbuilt safeguard in the provision itself.
• Shri Gupta also submitted that the court does not have the power to scrutinize the pros and cons of the policy except only when it is found to be arbitrary or violative of any constitutional provision or statutory provision of law.

Rationale

The court held that under Section 26(2) of the RBI Act, the Central Government can exercise its power for all series of bank notes. And just because of the fact that on the earlier two occasions, it was done through the plenary legislation, it does not mean that such power would not be available to Central Government under section 26(2).

The fact that power has to be exercised on the recommendation of the Central Board is itself a safeguard hence section 26(2) of the RBI Act does not provide for excessive delegation.

The notification also satisfies the test of proportionality and, therefore, it cannot be struck down on the said ground. The period provided for the exchange of the notes cannot be said to be unreasonable. The Reserve Bank of India does not possess independent power under section 4(2) of the 2017 Act to accept the demonetized notes beyond the period specified in notifications issued under section 4(1) of the 2017 Act.

Dissenting Opinion

The dissenting opinion was given by Justice B.V. Nagarathna and it has been laid down as follows:

The Central Government has the power to demonetize all series of bank notes of all denominations but the Central Board of the RBI under section 26(2) of the RBI Act cannot recommend all series of bank notes of all denominations.

Section 26(2) of the RBI Act is applicable only when the recommendation is initiated by the Central Board by way of a recommendation being made to the Central Government.

After getting the recommendation from the Central Board the Central Government may choose to do it or not to do it. If the Government accepts the recommendation, it may issue a notification in the Gazette in this regard.

The Central Government has the right of initiating demonetization but it can only be done by way of legislation and not by way of issuance of notification under section 26(2) of the RBI Act.

If the Central Board has the power to recommend demonetization of "all" series or "all" denominations of bank notes then this will amount to a case of excessive vesting of powers with the Bank.

Here in this case the demonetization was initiated by the Central Government itself and therefore, it cannot be done by way of issuance of notification under section 26(2) of the Act.

The decision-making process was tainted as the Central Board acted at the behest of the Central Government and didn't render an independent opinion to the Government.

Therefore, the notification issued under section 26(2) of the RBI Act is unlawful and the subsequent Ordinance of 2016 and Act of 2017 are also unlawful.

Conclusion

The Hon’ble Supreme Court upheld the decision of demonetization and declared it to be lawful with a 4:1 majority. The Apex Court held that the Central Government has the power to demonetize all series of banknotes of a particular denomination under Section 26(2) of the RBI Act provided that the recommendation has to be made by the Central Board. The process has to be initiated by the Central Board. The impugned notification satisfies the test of proportionality also and therefore, cannot be struck down on the said ground. The Court also laid down that there is an inbuilt safeguard in Section 26(2) of the RBI Act itself hence there is no excessive delegation of power. However, Justice B.V. Nagarathna disagreed with all of these and formed a dissenting opinion.