Demonetisation And law

Since November 8 2016 the word that every average Indian must have heard the most should be demonetisation. This paper focuses on demonetisation and the legal aspects of it. It is the economic issues of demonetisation and the impact that it can have which is widely discussed. The legal implications are now under consideration by the Supreme Court of India. It is in this regard that an analysis of the legal implications carries importance. There are various issues related to the November 8 notification. Whether the Central Government has the power to withdraw particular denomination notes altogether? Whether restrictions upon withdrawal of money are justified under law? Whether devanagiri script of numerals can be used in currency notes? Whether the section 26(2) of Reserve Bank of India Act, 1934 is constitutional or not?

What is demonetisation? The word demonetisation is not defined under any law. Oxford dictionary defines the term ‘demonetise’ as depriving a coin or precious metal of its status as money. Applying that to the present situation we can understand that demonetisation of notes means depriving the notes of its status as money.

Power to withdraw Notes

The provision which deals with the power of central government is Sec. 26(2) of the Reserve Bank of India Act. Section 26 deals with the Legal tender character of notes. It says that on recommendation of the Central Board the Central 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. So the plain language of the section gives an understanding that any series of any denominations can be declared to have ceased to be a legal tender.

The word ‘series’ and how it is to be interpreted is the complicated part of the section. It arises because of the reason that ‘series’ is not defined in the Reserve Bank of India Act. There can be two ways of interpretation for it; one to interpret that ‘series’ denotes a series of denomination of notes like the Mahatma Gandhi series of notes launched by Reserve Bank Of India in 1996 and the Mahatma Gandhi (new) series of notes launched on November 9 2016, second, series is to be interpreted as a series of notes of a particular denomination. If we go by the first interpretation, then there is no problem in what the Central Government has done and it’s perfectly legal. But if we go by the second interpretation then what the Central Government has done is beyond their authority.

Another aspect that we have to look into is sec. 24 of the Reserve Bank of India Act. It deals with the denomination of notes and the power of Reserve Bank of India and Central Government with respect to deciding the denomination of notes. Sec. 24(2) says that the Central Government may, on the recommendation of the Central Board, direct the non-issue or the discontinuance of issue of bank notes of such denominational values as it may specify. It is clear from the section that Central government. has the power only to discontinue the issuance of bank notes of a particular denomination but it cannot declare that the existing notes will cease to be legal tender. Thus sec. 24 (2) is not dealing with the matter in question. Discontinuance of issue of bank notes of particular denomination and declaring that existing bank notes will cease to be legal tender are two different issues.

Excessive delegation

Sec. 26(2) gives central government the power to declare that a series of bank notes shall cease to legal tender. A petition in the Supreme Court has now challenged the constitutionality of the section on the ground of excessive delegation of legislative power. The petition argues that specifying a date for demonetisation to come into force is an “essential law making function”, which is legislative function, and so it cannot be delegated to executive which is the central government. If the Supreme Court considers it as excessive delegation then the said section becomes unconstitutional.

Restrictions upon withdrawal from account

Along the notification of demonetisation there was another notification issued by Reserve Bank of India stating that there will be restrictions upon withdrawals from the bank accounts. Account holders are only allowed to withdraw up to an amount of Rs. 24000 per week and Rs. 2000 daily (which was subsequently increased to Rs. 2500) through ATMs. There is no legal justification at all under any law in force to restrict account holders from withdrawing their own money. For this what the government is saying is that restrictions are only for cash withdrawals and that there is no restriction upon online transactions. In reality such restrictions were brought in to deal with the dearth of currency notes in banks because of demonetising 500 and 100 rupee notes which accounted for 86% of the total currency circulated in India.

Use of Devanagiri numerals in new 500 and 2000 notes

It is for the first time that Devanagiri numerals are used in currency notes. This is also a legal issue since Art. 343 of the constitution say that the form of numerals to be used for the official purposes of the Union shall be the international form of Indian numerals. In that regard whether the use of devanagiri numerals are valid or not is another question to be answered which has now been challenged in the Madras High Court and the court has issued a notice to the Central government to give reply.