Union Government has no power to issue currency, petitioners challenging demonetisation tell the Supreme Court

The former union finance minister, and senior advocate, P. Chidambaram told the Constitution bench there is a clear admission in the Union Government’s affidavit that it did not follow Section 26 of the RBI Act while demonetising in 2016.


THE Supreme Court bench of Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian and B.V. Nagarathna continued hearing petitions, in Vivek Narayan Sharma versus UOI, filed in 2016, challenging the Union Government’s demonetisation decision of November 8, 2016.

Senior advocate P Chidambaram began his arguments by explaining to the bench the ways in which currency can be demonetised. He said that there are only two ways in which either the Union Government or the Reserve Bank of India (‘RBI’) can demonetise the currency.

The first method, he informed, is through legislation and the second is through Section 26 of the Reserve Bank of India Act, 1934 (‘RBI Act’). In the former, the RBI does not have a role to play because the law has to be made by the Parliament. However, in the latter, the RBI plays an important role, Chidambaram told the bench.

According to section 26(1), the currency is characterised as legal tender. Whereas, under section 26(2), any series of any bank notes of any denomination shall cease to be a legal tender on the recommendation of the Central Board to the Central Government by way of notification.

Limits of Section 26

“On two occasions in the past, when they wanted to demonetise all series of denominations, the Government resorted to the legislative powers. That has a bearing on the context of section 26.”

“…the Government of the day, on two occasions, held that the way to demonetise all series of one denomination was a legislative method and not under section 26…my submission is under section 26, you cannot demonetise all series of one denomination”, Chidambaram told the bench.

Also read: ‘Demonetisation notification not signed in the name of the President’: Petitioner before the Supreme Court

The term ‘any’ under section 26 will always be contextual,  he submitted.

Chidambaram’s second argument was that if the court is not inclined to read ‘any’ under section 26 as ‘some’, then there must be some guidelines to imply the same. However, there is nothing in either the Preamble or the Statement of Objects and Reasons that will guide section 26.

There is no other provision of the RBI Act that will throw light on the interpretation of section 26, Chidambaran told the bench.

“Therefore, if section 26 is interpreted to confer absolute powers to demonetise all series of any denomination, which naturally includes all denominations, there is a drastic problem.”

“If this section is to be read like this, I say, this section is unconstitutional. It contains no guidelines”, he argued.

Union Government has no power to issue currency

Further, Chidambaran told the bench that the Union Government does not have the power to issue currency by virtue of section 22 of the RBI Act.

According to section 22, the bank [RBI] shall have the sole right to issue bank notes in India. On and from the date the Chapter, which contains this provision, is enforced, the Union Government shall not issue any currency notes. The only power the Union Government has is to issue Government of India notes of the denominational value of one rupee under Section 28A.

Clarifying this argument, he said, the only decision the Union Government can make is to either not issue or discontinue any denomination on the recommendation of the Central Board as per section 24.

As far as demonetisation is concerned, under section 26(2), only when the Central Board recommends that the Union Government can act in the matter, considering that the exclusive powers of currency are vested with RBI.

Chidambaran said: “The process cannot be reversed that the Central Government is advising the RBI as has been done in the affidavit submitted by the Union in October 2018.”

Chidambaran read out the counter affidavit of the Union Government which clearly mentions that the Union Government ‘advised’ the RBI to consider withdrawal of the legal tender of the notes of higher denomination.

Thus, this emanating from the Union Government, is beyond doubt and it clearly suggests that section 26 procedure has not been followed, he concluded.

The hearing will continue tomorrow.

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