'Consultation between RBI, Centre for 6 months', SC affirms 2016 DeMo decision

The Supreme Court on Monday upheld the validity of Centre's November 2016 decision to demonetise Rs 500 and Rs 1000 currency notes, saying that from the record, it appears that there was consultation between the RBI and the Central government for a period of six months.

A five-judge constitution bench headed by Justice S.A. Nazeer and comprising Justices B.R. Gavai, A.S. Bopanna, V. Ramasubramanian, and B.V. Nagarathna pronounced the judgment on a clutch of petitions challenging the Centre's 2016 decision to demonetise currency notes of Rs 1,000 and Rs 500 denominations. Justice Nagarathna differed from the majority judgment on the point of powers of the Central government under Section 26(2) RBI Act.

Justice Gavai, pronouncing the majority judgment, said the court has scrutinised the records and after examining the records, found that the decision-making process cannot be flawed merely because the procedure has emanated from the central government.

"We have construed the term recommendation has to be construed in terms of the statutory scheme and what is contemplated is a consultative process...from the record, it appears that there was consultation between the RBI and the Central government for a period of six months," said Justice Gavai.

During the demonetisation period Urjit R. Patel was the RBI's governor and before him it was Raghuram Rajan, whose tenure lasted from September 4, 2013 to September 4, 2016.

Citing the apex court judgments, Justice Gavai said it has been held that there has to be great deal of restraint, while interfering with the matters pertaining to economic policy is concerned and the court cannot substitute its judgment for that of the legislature or the executive.

"It does not supplant the field of experts with its own views...," said the majority judgment. It further added that the window provided for exchange of demonetised currency notes with legal tenders is not unreasonable and cannot be extended now, and also during the 1978 demonetisation, the window for exchange of demonetised bank notes was three days, which was extended by an additional five days.

Justice Gavai said the notification dated November 8, 2016 was valid and satisfies the test of proportionality and this notification cannot be struck down on the ground of decision making process.

Justice Nagarathna said 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. The detailed judgment in the matter will be uploaded later in the day.

During the hearing, the Centre had told the Supreme Court that the November 2016 decision to withdraw legal tender of Rs 500 and 1,000 currency notes was one of the critical steps in the series of transformational economic policy steps and this decision was taken after extensive consultation with the RBI and advance preparations.

The Ministry of Finance, in an affidavit, said: "The withdrawal of legal tender character of a significant portion of total currency value was a well-considered decision. It was taken after extensive consultation with the RBI and advance preparations."

It further added that demonetisation was also a part of a larger strategy for combating the menace of fake money, terror financing, black money and tax evasion. "The notification issued on 08.11.2016 was a major step to fight the menace of fake currency notes, storage of unaccounted wealth and financing of subversive activities," it said.