Legal issues

Legal challenges

Print edition : December 23, 2016

Economic Affairs Secretary Shaktikanta Das addressing the media on the demonetisation issue in New Delhi on November 22. Photo: Shirish Shete/PTI

When the government declared high-denomination currency notes as not being legal tender in 1978, it did so through an Ordinance. In contrast, the November 8 and subsequent notifications came without any legislative support.

IT is not without significance that none of the Central government’s notifications since November 8 relating to the old currency notes of Rs.500 and Rs.1,000 ceasing to be legal tender has used the word “demonetisation” to describe it. The reason perhaps is that calling it so would make it imperative for the government to explain why it did not follow the legal obligations associated with it.

In 1978, when the government declared high-denomination currency notes as not being legal tender, it did so through an Ordinance. The Ordinance, and the Act that replaced it (the High Denomination Bank Notes (Demonetisation) Act, 1978), described it as “demonetisation”. In contrast, the November 8 and subsequent notifications were devoid of legislative support. The absence of legislative backing meant that the government could not declare illegal the transfer and receipt of these high-value currency notes to all entities or persons other than banks as had been prohibited by the 1978 Act. Legally, such a prohibition would require legislative backing in the form of Ordinances or Acts passed by Parliament.

No doubt, the many exceptions the government provided were aimed at easing the inconvenience caused to the public. But the exceptions, according to many reports, also helped legitimise the unaccounted-for money. The 1978 Act had penal provisions, with prison terms extending up to three years or a fine or both, to punish those depositing unaccounted-for currencies by making false declarations. As imposition of prison terms would again require legislative backing, the recent notifications merely impose penalties. The non-recourse to the legislative route to “demonetise”, therefore, raises disturbing questions about the government’s intentions.

Fundamental right

Article 19(1)(g) of the Constitution guarantees one the fundamental right to practise any profession or to carry on any occupation, trade or business. The restrictions on cash withdrawals of one’s own savings from the banks, insofar as they infringe one’s right to practise any profession involving cash transactions, are violative of this fundamental right. It is not that this fundamental right cannot be restricted. But such restrictions must pass the test of reasonableness and be in the interest of the general public as laid down in Article 19(6). The November 8 notification justifies the declaration of high-value currency notes ceasing to be legal tender on specified grounds.

First, it says it has been found that fake currency notes of the specified banknotes have been largely in circulation, and it has been found to be difficult to easily identify genuine banknotes from the fake ones, and that the use of fake currency notes is causing adverse effects to the economy of the country. Secondly, it claims that high-denomination banknotes are used for storage of unaccounted-for wealth as has been evident from the large cash recoveries law enforcement agencies have made. Thirdly, it claims that fake currency is being used to finance subversive activities such as drug trafficking and terrorism, which cause damage to the economy and threaten the security of the country.

No doubt, these may sound like reasonable grounds of restrictions on the exercise of the fundamental right to practise any profession or carry on any occupation. However, unless the government can demonstrate that the notification has a reasonable nexus with the objects sought to be achieved, its claims will be suspect. Ironically, it announced the issue of Rs.2,000 currency notes through another notification on November 8, which seems to defeat the very objects sought to be achieved by declaring that high-value currency notes are no longer legal tender. Among other grounds of challenge, the Supreme Court will examine the allegation that the Reserve Bank of India, as required by the RBI Act, 1934, did not give a valid recommendation independently after detailed consideration of all the issues. This allegation has been made in a writ petition filed in the Supreme Court by Adil Alvi through the advocate V.K. Biju. Although the November 8 notification claims that the RBI did recommend the steps the government announced, the question whether the RBI could make such a recommendation unilaterally without consulting the public at large has to be gone into, the petition has submitted. Besides, the petition asks the court to examine whether the RBI considered all the relevant material and the likely consequences independently without being influenced by the government before it submitted its recommendation, as required by the RBI Act. The Central government, however, has claimed in its affidavit that the RBI is under its management and control. This is contrary to the general understanding that the RBI enjoys functional autonomy from the government.

Right to property

Article 300A guarantees the right to property. It reads: “No person shall be deprived of his property save by authority of law.” Although it is not a fundamental right (the 44th Amendment of the Constitution deleted the fundamental right to property in 1978), it cannot be restricted without invoking a legal provision. Access to one’s savings in bank accounts through cash withdrawals forms part of the right to access one’s property.

The November 8 notification cites Section 26(2) of the RBI Act. This provision states: “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 banknotes 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).” It is silent on whether any restrictions can be imposed on a customer’s right to withdraw cash from his or her bank account. The government has not considered the infringement of the right to property of those without bank accounts who have discarded currency notes that they legally acquired but that they could not exchange within the stipulated deadlines. Those who are heavily dependent on cash for their livelihood but are not part of the formal banking system, therefore, are likely to suffer the most from the restrictions on the exchange of discarded currencies. If the return to normalcy takes longer than what was initially foreseen, these restrictions will be seen as unreasonable.

The Supreme Court has held that the word “law” mentioned in Article 300A refers to an explicit law, whereas the November 8 notification appears to claim implicit powers to restrict access to bank accounts. On the face of it, it appears to be an open-and-shut case that the government is likely to lose in the Supreme Court.

The legal commentator Usha Ramanathan has voiced another concern over the “demonetisation” move. According to her, the move, insofar as it encourages a cashless and paperless economy, will, in time, make banks redundant. Her concern is that this would make monetising and compromising the citizens’ personal data on a mass scale easier.

As the Supreme Court begins hearing the challenges to the constitutionality of “demonetisation” from December 5, its irreversibility may appear to be a serious hurdle in striking it down, even if the court finds the arguments against demonetisation valid. According to one petitioner before the court, the effort, therefore, would be to seek the court’s directions to the government to take specific steps to significantly alleviate the suffering of the people as a result of restrictions on cash withdrawal from their bank accounts and the unreasonable deadlines imposed on those without bank accounts to exchange their discarded currency notes with valid ones.