The legality of demonetization is being interrogated in legal and political circles. The larger effect of demonetisation on the Indian economy are debatable. There are however questions have been raised about the manner in which the demonetization was carried out by the government.

Since 8 November for the third time in modern history of India, the central government has declared notes of certain denomination to no longer be valid legal tender.

Is there a legal basis for Demonetisation?

The legal basis for demonetizing currency can be found in Section 26(2) of the Reserve Bank of India Act,1934 which says that on recommendation of the central board of RBI, the central government may, by notification in the Gazette of India, declare that with effect from a date specified in the notification, any series of bank notes of any denomination shall ceases to be legal tender. The power has been exercised by the Narendra Modi Government. Firstly it assails the very constitutionality of section 26(2),on the grounds of excessive delegation, fixing the date from which the demonetistion  would come into force is the substarction  of power u/s 26(2) and constitute an essential law making function which cannot be delegated to be fixed b the central government on its own determination, it is settled law that essential law making function cannot be delegated. Secondly the precedent of 1778-The High Denomination Bank Notes( Demonetistion) Act,1978 repealing the high Denomination Bank Notes( Demonetization) Ordinance 1978 and Section 26 A of the RBI Act, clearly suggests that demonetization on this scale can only be done by statue of parliament. Section 26A inserted in the RBI Act in 1956 by parliament make it clear that notwithstanding anything contained in Section 26, no bank note of the denominational value  of Rs 500, 1000,10000 issued before Jan 13, 1946, shall be legal tender in payment or on account.

Constitutionality of Demonetisation

The constitutional validity of this law was challenged before the Supreme Court of India in Jayantilal Ratanchad Shah v. Reserve Bank of India on the basis that it was the violation of the right to carry out trade and commerce, and in addition amounted to compulsory  acquisition of property and affecting right to life without compensation by government. Rejecting both these contentions, a Constitutional bench of the Supreme Court  held that the denomination was in public interest and it didn’t violates the right of petitioners.

Another argument that could be made against the demonetisation exercise is that it is a violation of the right to property protected under Article 300-A of the Constitution.

“I promise to pay the bearer the sum of ….”vows the RBI Governor on every Indian currency note, weather the government can withdraw, alter or restrict the promise made by the RBI governor on the bank note to the effect.

The recent demonetisation raises the question that, will removing 84% currency help curb Black Money? It is no doubt that there are vast differences in the economic scenario in India between 1978 and 2016. The value of high denomination notes in circulation 1978 was a mere Rs 130 crores-unlike the present situation where the value of high denomination note is Rs 14.18 lack crore or 84% of the value of notes in circulation.

Time to Rethink ?

The press release issued by the government talks only about cancelling the legal tender character of the high denomination notes, raising questions about whether they are drawing a fine distinction between delegalisation and demontisation. Following the decision of the Union Government to demontize the 500 and 1000 rupee notes in circulation, at least four PIL challenging this is filled in courts across India. The PIL filled in the Madras HC, Bombay HC, Karnataka HC was dismissed by the Court with the observation that demonetization was good for India. The principal reason being that this lies within the domain of executive wing of the government not within the judicial function.

Vikas Yadav, 4th Year, B.A.LL.B, Indore Institute of Law

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