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Vivek Narayan Sharma vs Union of India: Case Analysis

In 2016, Government of India took a decision to demonetize ₹500 and ₹1000 Specified Bank Notes (SBNs). This decision was made to wipe out fake currency notes from the economy, check on accumulation of unaccounted wealth, stop terror funding and halt subversive activities like drug trafficking.

New notes of ₹500 and ₹2000 were issued by Reserve Bank of India. In this period of transition, people, mostly those whose main mode of payment was cash, faced problems. They had to adapt to new methods, exchange notes and face economy's recession. This case voices out doubts regarding demonetization, which are duly answered by the Government. The legality of demonetization (initiation procedure and involvement in decision-making) is looked into in this case.

Vivek Narayan Sharma v Union of India
Writ Petition (Civil) No. 906 OF 2016
Judges- Justice Abdul Nazeer, Justice V Ramasubramanian, Justice BV Nagarathna. Justice BR Gavai, Justice AS Bopanna
Petitioner- Vivek Narayan Sharma
Respondent- Union of India

  • On 8th November, 2016, the Central Government announces that ₹500 and ₹1000 notes will cease to be legal tender from 9th November, 2016, exercising its power under sub-section (2) of section 26 of RBI Act, 1934.
  • Every banking business and Government treasury was instructed to inform about the amount of those particular notes they had by 13:00 hours of 10th November, 2016.
  • Individuals could use it for payment in selected places till 11th November, 2016. Or could exchange it till 30th December, 2016. Initial limit for exchange was set at ₹4000, later was increased to ₹50,000 for non-KYC accounts and no limit for KYC complied accounts.
  • On 30th December, 2016, an ordinance named Specified Bank Notes (Cessation of Liabilities), 2016 was promulgated by the Honourable President of India. And a notification was issued that residents of India could exchange till 31st March, 2017. NRIs could exchange till 30th June, 2017, the amount subjected to Foreign Exchange Management (Export and Import of currency) Regulations, 2015.
  • The promulgation was enacted as Specified Bank Notes (Cessation of Liabilities) Act, 2017 after receiving presidential assent on 27th February, 2017. Section 3 of 2017 Act freed the Government from all the liabilities and guarantees attached to SBNs. Section 4 provided for a grace period for some qualified people, like people outside India during the 52 days' exchange period. They could issue declarations/statements to RBI, who was to decide the validity of reasons, checked KYC compliance and decided whether to credit the amount or not. In case of refusal, they could represent to RBI's Central Board within 14 days.
  • Some people couldn't avail of the extended period as Section 4 is not applicable to people who were outside India but their SBNs were in India. This and other issues about the legality of the demonetisation resulted in this writ petition.

Questions submitted to a three-judges bench were reframed by a five-judges bench

  • Whether sub-section (2) of section 26 of RBI Act referred to all or particular series by the word "any"?
  • If all, then doesn't it amount to excessive delegation to the Central Government?
  • Whether the decision-making process of demonetisation was flawed?
  • Can the proportionality test be applied here?
  • Whether the exchange period was reasonable?
  • Does RBI have independent power to accept SBNs after the grace period?

Contentions (Petitioner)

  • Sub-section (2) of Section 26 of RBI Act gives power to demonetize only particular, not all, series. Unlike in 1946 and 1978 demonetisation where all series were demonetized by plenary legislation. If interpreted as "all," then it will give "unguided, un-canalized, and arbitrary power" to the executive, also violates article 14, 19, 21, and 300A.
  • Government acted on its own accord, there was a lack of independent directors, decision making was premeditated, rushed and no mind was applied.
  • Adverse effects on people and the economy - unemployment, non-payment of wages, ATMs needed to be recalibrated, halting economic activities, resulting in 1-2% decline in GDP.
  • Right to live with dignity hampered for people who were abroad and didn't have the SBNs with them. A window must be opened to aid them.
  • Right to property violated as notes are considered property.
  • Objectives failed, in fact, terrorists were found with new notes.

Contentions (Respondent)
  • Demonetization already ratified by 2017 Act.
  • "Any" to be construed as "all" citing precedents:
    • The Chief Inspector of Mines and another v. Lala Karam Chandra Thapar etc.
    • Banwarilal Agarwalla s The State of Bihar and others
    • Tej Kiran Jain and others v. N Sanjiva Reddy and others
    • Lucknow Development Authority v. M.K. Gupta
    • K.P. Mohammed Salim v. Commissioner of Income Tax
    • Raj Kumar Shivhare v. Assistant Director, Directorate of Enforcement and another
  • Any other meaning will defeat the purpose of the section and separate notifications will have to be issued for each series.
  • RBI is a liberal body and capable of delegating its power to the Central Government.
  • As there is no arbitrariness, the test of proportionality will not be applicable. Instead, the rational nexus test is more apt.
  • Looking at overall benefits, objectives have been achieved:
    • Reduction in fake currency
    • Increase in the number of taxpayers
    • Income-tax returns
    • New PAN numbers
    • GDP
    • Employees' State Insurance Corporation Registration
  • Opening a window for those who couldn't deposit will defeat the enactment and will act as a loophole for non-genuine SBNs holders.
  • The court shouldn't decide academic questions about policies and in the absence of effectual relief, shouldn't proceed with a formal judgment.
The court upheld demonetization as valid with a 4-1 majority. Majority judgment:
  • "Any" was interpreted as "all" as the other proposed meaning is all but one, which isn't practicable.
  • RBI can delegate to the Central Government, with "inbuilt safeguards":
    • Act only on recommendation of Central Board of RBI
    • Preamble of RBI act
  • Court must confine to judging legality and nexus between objectives and action.
  • Test of proportionality applied based on larger public interest, Aharon Barak's 4-pronged tests:
    • Designated purpose for demonetization
    • Nexus between action and objectives
    • No equally successful alternative measures
    • Proper relation between social objectives and violation of constitutional rights
  • Exchange period was reasonable, any longer would have defeated the purpose.
  • Section 4 of the 2017 Act provided for a grace period, RBI had the power to accept SBNs.
  • Opening of the window falls outside the purview of judicial review.

Dissenting judgement (Justice BV Nagarathna):
Section 26 of RBI Act refers to a particular series and not all. For demonetization of all the series it needs to be done by plenary legislation by Entry 36 of Union List. It seems that demonetization was initiated by Central Government and RBI's Central Board's opinion was sought later. And Board acted on assurances of Central Government without applying its' own mind. Applying the Latin maxim expression unius est exclusio alterius meaning to do a particular thing a particular way or not all. Decision making seems to be flawed. Though action has already been taken this opinion can act as preventive measure for future instances.

By understanding this case, we understand section 26 of RBI Act, 2017, the application of purposive interpretation as well as the golden rule is dissenting judgement, demonetization process that happened in 2016, the objectives achieved and the problems that rose, preference of public interest over individual interest and application of Aharon Barak's 4 pronged test to check for the applicability of proportionality test.

The dissenting judgement counters the procedure that was established, and in view of 1946 and 1978 demonetization the reasoning seems to be more plausible. True that no action can be taken against something which happened approximately 6 years before, and a dissenting judgement can't be considered as a binding precedent, but the opinions made by Justice BV Nagarathna can be considered during similar instances in future.

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