Is Demonetisation Illegal?

Upadate: The Lok Sabha on February 8, 2017, passed the Specified Bank Notes (Cessation of Liabilities) Bill, 2017. Under the new law, holding, transfer and receiving of old 500 and 1000 currency notes is a criminal offence. The bill has thus ended the liability of the RBI and the government on the demonetised currency notes.

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At eight O'clock on November 8, 2016 evening, India was wide awake. Reason: In his televised special address, Prime Minister Narendra Modi had unveiled an economic tsunami where 86 per cent of the currency in Rs 500 and Rs 1,000 denominations ceased to be legal tender.

Since that day, the Reserve Bank of India and the Centre have taken many steps to lessen the problems of the common man faced due to demonetisation. At the same time, the Supreme Court has been flooded with public interest litigations (PILs) challenging the constitutional validity of the move. But the million-dollar question is: Is demonetisation legal?

While the matter has been referred to the five-judge constitutional bench, Propguide studies the legal aspects of the order which has hit the country's booming economy.

Violates the constitutional right to property under Article 300A: The only right ever to be erased from the list of fundamental rights was the Right to Property. It was demoted to a mere constitutional right. So, is cash-rationing a valid restriction on the constitutional right to property? Yes, because cash and bank accounts are property.

In Jayantilal vs RBI, in the context of the 1978 demonetisation, the top court had held that demonetisation is not merely a regulation of property, as the government is presently arguing, but constitutes compulsory acquisition of a "public debt' owed to the bearer of the notes declared illegal. Article 300A states that the state may deprive an individual of property only through 'law', and not by executive notification as the government has done.

Excessive delegation: Section 26(2) of the Reserve Bank of India Act, 1934, says that on the recommendation of the central bank, the central government may pass a notification in the Gazette of India that any series of bank notes cease to be legal tender. Fixing the date from which the demonetisation would come into force is the foundation of section 26(2) and constitutes an "essential law-making function" which cannot be fixed by the central government on behalf of the central bank.

Abridgement of fundamental rights: The currency ban had caused a lot of hardships to the common man as many of them could not carry out their business and trade (19(1) (g) and violated the Right of Life (Article 21) of those 100-odd people who died while standing in the long bank queues. While the government is within its right to curtail fundamental rights in the larger public good, it needs to prove that the curbs were 'reasonable'.

Act of Parliament needed: The precedent is that on the last two occasions of demonetisation (1956 and 1978) , the law was effected through an ordinance. But, this time the law was effected through a government notification. The rationale is that to have a rule which would have a draconian effect on the lives of people, a notification can't suffice.

Article 19(6) has no significance: The Centre would want to hide behind Article 19(6) of the Constitution but it has no relevance here. Article 19(6) says that nothing in Article 19(1) (g) shall affect the operation of any existing law in so far as it prevents the state from making any law imposing, in the interest of the general public, reasonable restrictions on the exercise of the rights conferred by the sub-clause. But the exception of Article 19(6) is not available to the central government as the notification is beyond "police powers".