Vivek Narayan Sharma v. Union of India

Introduction  

The Supreme Court of India heard multiple writ petitions challenging the Government of India's demonetization notification dated November 8, 2016, which declared bank notes of ₹500 and ₹1000 denominations as no longer legal tender effective 9th November, 2016. The notification was issued under Section 26(2) of the Reserve Bank of India Act, 1934, and the matter was referred to a Five-Judge Constitution Bench due to its constitutional significance and far-reaching implications. The case primarily addressed nine fundamental questions including whether the demonetization notification was ultra vires the RBI Act and Constitution, violated fundamental rights, and suffered from excessive delegation of legislative power.  

Facts of the case 

• On 8th November 2016, the Central Government issued Notification No. 3407(E) under Section 26(2) of the Reserve Bank of India Act, 1934, declaring that bank notes of denominations of Rs. 500 and Rs. 1000 of existing series shall cease to be legal tender with effect from 9th November 2016. 
• The notification required banking companies and government treasuries to submit returns of Specified Bank Notes (SBNs) held by them by 13:00 hours on 10th November 2016, while individual persons could exchange SBNs at specified banks up to 30th December 2016 with an initial limit of Rs. 4,000. 
• The notification provided that there was no limit on SBNs that could be credited to KYC compliant bank accounts, but fixed an outer limit of Rs. 50,000 for non-KYC compliant accounts. 
• Various relaxations were granted allowing SBNs to be used for payments at government hospitals, pharmacies, railway booking centers, and other essential services, initially valid till 11th November 2016, with further extensions granted through subsequent notifications. 
• On 30th December 2016, the Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 was promulgated, which was later replaced by the Specified Bank Notes (Cessation of Liabilities) Act, 2017 that received Presidential assent on 27th February 2017. 
• The 2017 Act provided that SBNs would cease to be liabilities of the RBI and lose the Central Government's guarantee, while granting grace periods for certain classes of persons including citizens who were outside India during the specified period. 
• Multiple writ petitions were filed before the Supreme Court and various High Courts challenging the demonetization policy, leading to transfer petitions by the Union seeking consolidation of all matters before the Supreme Court. 
• A three-judge bench of the Supreme Court on 16th December 2016 identified nine critical legal issues for consideration and referred the matter to a Five-Judge Constitution Bench for final determination, while staying proceedings in all High Courts on this matter. 

Issues Raised 

• Whether the notification dated 8th November 2016 is ultra vires Section 26(2) and Sections 7, 17, 23, 24, 29 and 42 of the Reserve Bank of India Act, 1934 ? 
• Does the notification contravene the provisions of Article 300A of the Constitution (right to property) ? 
• Assuming valid issuance under RBI Act, whether it is ultra vires Articles 14 and 19 of the Constitution (equality before law and fundamental freedoms)? 
• Whether the limit on withdrawal of cash from deposited funds has no basis in law and violates Articles 14, 19 and 21 (right to life and personal liberty)? 
• Whether the implementation suffers from procedural and/or substantive unreasonableness and thereby violates Articles 14 and 19? 
• If Section 26(2) permits demonetization, does it suffer from excessive delegation of legislative power rendering it ultra vires the Constitution? 
• What is the scope of judicial review in matters relating to fiscal and economic policy of the Government? 
• Whether a petition by a political party on these issues is maintainable under Article 32? 
• Whether District Co-operative Banks have been discriminated against by excluding them from accepting deposits and exchanging demonetized notes? 

Court Observation  

• The Supreme Court held that Section 26(2) of the RBI Act applies only when the Central Board of RBI initiates a proposal for demonetization through recommendation to the Central Government. 
• The Court interpreted the expression "any series of bank notes of any denomination" to mean a specified or particular series of bank notes, not "all series" or "all denominations," as interpreting "any" to mean "all series" would vest unguided and unlimited powers making it unconstitutional due to excessive delegation.  
• The Court clarified that while the Central Government can propose demonetization under its plenary powers under Entry 36 of List I of the Seventh Schedule, such action must be undertaken through an Ordinance followed by Parliamentary legislation, not through a gazette notification under Section 26(2).  
• The Court concluded that the November 8, 2016 notification was unlawful because it demonetized all currency notes of ₹500 and ₹1000 denominations without following proper statutory procedure, and the subsequent Ordinance 2016 and Act 2017 were also declared unlawful as they incorporated terms of the invalid notification.  
• Despite declaring the demonetization unlawful, the Court applied its declaration prospectively under Article 142 of the Constitution, meaning it would not affect actions already taken pursuant to the November 8, 2016 notification.  
• The Court acknowledged that demonetization was a well-intentioned initiative aimed at addressing serious economic evils including black money hoarding, counterfeiting, terror funding, and money laundering, but ruled that while the objectives were laudable, the measure was unlawful purely on legalistic analysis of the RBI Act provisions. 

Conclusion  

The Supreme Court, while recognizing the intent behind the 2016 demonetization to combat black money and counterfeit currency, held the move unlawful due to procedural lapses under the RBI Act. However, using its powers under Article 142, the Court ensured that past actions taken under the notification would remain valid.