Supreme Court’s Note Ban Judgement: Does it Matter?

In a judgement delivered on 2 January 2023, the Supreme Court upheld the constitutionality of the demonetization exercise undertaken by the Government of India in November 2016. The judgement was delivered by a five-judge constitution bench, with one judge dissenting on all the questions decided by the majority. The lapse of six years since the demonetization exercise led to questions regarding the purpose of the constitutional challenge. Many believed (and continue to believe) that the constitutional challenge was an academic exercise and a wastage of an already overburdened Court’s time. Indeed, it was argued before the Court that the outcome of the constitutional challenge is redundant because the demonetization measure cannot be reversed. These arguments underestimate the social impact of court judgements in two respects. First, the judgements of higher courts, in this case no less than a five-judge bench of the Supreme Court, set a precedent for future conduct. Second, the judgements of higher courts, in particular the Supreme Court, have tremendous signaling value in society. Finally, a court conscious of civil liberties and property rights can devise creative ways to sanction the state for excesses (example), including imposing liability for losses caused by its actions.

In this post, I break down the implications of the demonetization judgement for three stakeholders in Indian society: the common person; the law makers; the experts such as the members of the board of the Reserve Bank of India (RBI). The aim is not to discuss the propriety of the judgement, for that truly is an academic endeavor that deserves its own space, but to illustrate the future implications of a seemingly academic exercise.

Implication for the Common Person

The Central Government can, by a notification, ban all currency notes of any denomination in the future.

This is the first and the harshest implication of the judgement for the common person. The first question to be decided by the Court was whether the Central Government can demonetize all the currency notes of the denominations of Rs. 500 and Rs. 1000 under section 26(2) of the Reserve Bank of India Act, 1934 (RBI Act), or whether such a measure required a parliamentary law. Section 26(2) of the RBI Act, under which the demonetization exercise was undertaken, states as follows:

“(2) 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 save at such office or agency of the Bank and to such extent as may be specified in the notification.” [emphasis supplied]

The petitioners argued that the word “any” means that only a specific series of a specific denomination of currency notes could be banned by the Central Government under section 26(2). The demonetization of all the series of a currency note of a given denomination would need a Parliamentary law. The majority rejected this argument and held that the words “any” in section 26(2) of the RBI Act could be read as “all”. In the words of the majority:

“The power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes.” (Para 304(i))

For the common person, the majority’s interpretation of the word “any” implies that in future the Central Government can demonetize all the series of bank notes of all or any of the denominations. A demonetization exercise, irrespective of its scope and scale, needs no approval or guidance of the Parliament.

This interpretation of the majority ruling creates tremendous uncertainty and fosters an inherent distrust of currency notes issued and guaranteed by the Government. Effectively, it empowers the Central Government to disrupt the daily lives of thousands of people by withdrawing this guarantee at any time, with or without an opportunity to exchange the currency notes with banks, and with or without the approval or guidance of the Parliament.

Implication for Lawmakers

Consultation with experts can save the Government’s actions from the vice of excessive delegation.

In a democracy, the citizens entrust their elected representatives to make laws that will govern them. Given the complexity of social and economic life, since the 20^th century, there is an increasing tendency to delegate to executive agencies the power to draft the details of the law. To ensure that the legislature does not, in the guise of delegation, abdicate its duty and power to make laws, the court may strike down a law that involves excessive delegation of the lawmaking power to any entity (whether elected such as the Government, or unelected such as the RBI). In this context, the provisions of section 26(2) of the RBI Act (reproduced above) were challenged on the ground of excessive delegation by the legislature to the Central Government. Rejecting this argument, the majority held:

“[S]ub-section (2) of Section 26 of the RBI Act does not provide for excessive delegation inasmuch as there is an inbuilt safeguard that such a power has to be exercised on the recommendation of the Central Board” (Para 304(ii)) [emphasis supplied]

The majority believe that the consultation with the Central Board of the Reserve Bank of India is an adequate safeguard to save a law from being struck down on the ground of excessive delegation. Implicit in this safeguard are two assumptions: first, that the members of the RBI board exercise their independent judgement on a given question; and second, that the unelected members of the RBI will be more responsive to society than the elected members of the legislature. Ironically, it is perfectly acceptable for a law to not require a public consultation process for the issuance of delegated legislation, but the requirement of consultation with the experts will allow the law to pass the test of constitutionality.

This part of the majority’s ruling has profound implications for law drafters and the doctrine of excessive delegation. It implies that so long as they build in a safeguard in the form of a consultation process with the RBI, the Parliament may delegate away its powers to the Central Government (or for that matter, any other agency of the executive) without risking invalidation on the ground of excessive delegation. It places the views of the experts on a pedestal higher than those of the public and their elected representatives.

Implications for the RBI

The RBI need not publish the records of its Board meetings and communications between the Central Government and the RBI. Moreover, the RBI may recommend banning currency notes to the Central Government to advance the goal of financial inclusion.

A hallmark of the proceedings in this case is the RBI and the Central Government’s emphasis on the need for what seems like perpetual secrecy of the decision-making process that affected almost every citizen of the country. In pursuance of such secrecy, the RBI and the Central Government submitted several documents, to demonstrate the process followed in making the decision, in a sealed cover to the Court. Six years since this exercise, the RBI and the Central Government refused to publish the documents, submit it in open court, and the Court did not question this hesitation on the part of either public body.

The sealed cover submitted to the Court included the details of the RBI’s Central Board meeting held on the evening of 7 November 2016, at which the question of demonetization was discussed. From the record discussed in the judgement, it seems like the documents in the sealed cover contained details such as the persons present and the papers presented at the meeting, the minutes of the meeting, and the recommendation made by the Deputy Governor on behalf of the RBI to the Central Government. The Court relied on these documents to conclude that the process under section 26(2) of the RBI Act was followed prior to the announcement of the demonetization exercise. It neither found it necessary to make these documents public nor required the RBI to do so. Similarly, the communication exchanged between the RBI and the Central Government, seemingly important and in public interest, need not be made public, even with a lag. This reinforces the culture of secrecy inherent in central banks of the 20^th century and the Court’s willingness to entertain it.

Finally, the minority judgement of Justice Nagarathna gives us some glimpses of what transpired at the meeting of the RBI’s Central Board on the evening of 7 November 2016. Based on the documents submitted, Justice Nagarathna inferred that the consultations between the Central Government and the RBI began in February 2016, even as they were kept confidential from the Central Board. For instance, Justice Nagarathna records that at the meeting on 7 November, the RBI’s Central Board was “assured” that the matter had been the subject of discussion between the Central Government and the RBI for six months (Paras 17.5, 17.6 of Justice Nagarathna’s judgement). Most importantly, the RBI Central Board believed that the demonetization exercise presented “a big opportunity to advance the objects of financial inclusion and incentivising use of electronic modes payment” [emphasis supplied]. This implies that the RBI Central Board’s recommendation was grounded in a different set of considerations from those of the Central Government. While the RBI Board’s recommendation to the Central Government was motivated by financial inclusion, the Central Government was driven by the motivation to tackle black money, counterfeiting, and terrorism. The majority clearly did not find this important enough to denounce the process followed for demonetization. If anything, the judgement is an implicit validation for the RBI Board’s conduct of recommending banning currency notes to further the objective of financial inclusion.

Conclusion

While the constitutional challenge to a six-year-old exercise may have seemed moot and redundant to many, now that the judgement is out, its precedent value has profound future implications for the common person, Indian lawmakers and the RBI. To an optimist or a believer of the benevolent State, it may seem like the implications explained above are not likely to play out, that the State will not embark on a demonetization exercise again, that law making powers will not be delegated excessively, and that the RBI will be transparent about its proceedings in the future. While it is hard to speculate on the future conduct of the State and its agencies, the judgement does set a low bar for the current state of due process and governance in India.