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By Sujit Bhar


The Supreme Court on December 16 passed an interim order on demonetisation. The Court decided to constitute a five-judge constitutional bench to look into the legal validity of the centre’s move.

This was apart from the nine critical observations that the apex court made on the issue. These observations looked into a number of issues, including whether the November 8 order contravened several sections of the Reserve Bank of India Act (1934), or violated several provisions of the constitution. The special bench will look into all these aspects.


The apex court also made a critical observation on the cash withdrawal limits placed on account holders. It wanted to see if these withdrawal limits defied relevant articles of the constitution. And even within those limits, the court took cognisance of the fact that banks had refused to allow account holders to withdraw Rs 24,000 per week as per notification issued by the RBI.

The court noted the attorney general’s explanation on the shortage of new legal tender and suggested that these payments be made as and how possible.

The District Cooperative Banks (DCCB) found special mention in the observations made by the court. It looked into whether they had been “discriminated against by excluding them from accepting deposits and exchanging demonetised notes.”

This has been a very contentious issue, especially in rural India, where a slew of social developmental work have reportedly come to a halt, because not only these banks have been starved of cash, they did not have the authority to exchange old currency notes. The court noted with concern the reason given to it that these banks were not directly under the control of the RBI but were within the purview of NABARD.

The top court, however, stayed away from issuing any interim relief in extending the time limit for exchange of old currency notes, because this was a fiscal policy decision by the government. The court observed: “In our opinion, whether the exemption period should be extended or not must be best left to the judgment of the Government of the day with a hope that the Government will be responsive and sensitive to the problems encountered by the common man.”

The following are the nine key observations by the apex court, as “important questions (that) fall for our consideration in this batch of petitions (in the PILs submitted)”:

  • 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 300(A) of the Constitution;
  • Assuming that the notification has been validly issued under the Reserve Bank of India Act, 1934 whether it is ultra vires Articles 14 and 19 of the Constitution;
  • Whether the limit on withdrawal of cash from the funds deposited in bank accounts has no basis in law and violates Articles 14,19 and 21;
  • Whether the implementation of the impugned notification(s) suffers from procedural and/or substantive unreasonableness and thereby violates Articles 14 and 19 and, if so, to what effect?
  • In the event that Section 26(2) is held to permit demonetization, does it suffer from excessive delegation of legislative power thereby 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 the issues raised is maintainable under Article 32; and
  • Whether District Co-operative Banks have been discriminated against by excluding them from accepting deposits and exchanging demonetized notes.

These are the issues to be dealt with by the five-judge constitutional bench.

THE DISTRICT CO-OPERATIVE BANKS ISSUE

The apex court wanted to look deeply into the issue of the restriction placed on district cooperative banks in accepting deposits or exchange of demonetised currency of Rs 500 and Rs 1,000. The court observed: “Two broad aspects have been presented before us. The first is about the complete exclusion of the District Cooperative Banks from accepting deposits or exchanging demonetized notes. The second is about the avoidable financial stress on the District Cooperative Banks because of freezing the deposited demonetized notes received by the District Cooperative Banks between 11th and 14th November 2016, which is stated to be around Rs 8,000 crore…”

Supreme Court

The court observed that: “…the decision of the Authority to forbid the District Cooperative Banks from accepting deposits and exchanging demonetized notes, may require detailed hearing. It is only upon acceptance of challenge to that decision, that the bar placed on the District Cooperative Banks can be lifted. We are not inclined to suspend that bar as an interim measure.

“This is especially when the decision is the outcome of financial policy which the respondents claim to have adopted on the basis of experience. In particular, an apprehension has been expressed about the possibility of demonetized notes being converted or exchanged without proper audit, control or supervision,” the court maintained.

The reason given to the court about not allowing the District Cooperative Banks to function as a normal bank was that these banks “are not directly under the control of the Reserve Bank of India but within the purview of NABARD. The dispensation provided by NABARD is, according to the Attorney General, not in conformity with the strict regime provided under the provisions of Banking Regulation Act, 1949 and the Reserve Bank of India Act.”

On the issue of these banks “being precluded from utilizing the demonetized notes deposited with them between 11th to 14th November 2016 (when it was so permitted by the Reserve bank of India),” the court quotes from the Attorney General’s letter to the court. This letter says: “…as regards the deposits of Specified Bank Notes (SBNs) collected by DCCBs, the RBI has recommended that the SBNs collected by the DCCBs between 10th and 14th November 2016 may be exchanged with their linked currency chests after a 100% audit of the veracity of the KYC documents of the SBN depositing customers of DCCB is conducted by NABARD… For SBNs deposited by Primary Agricultural Credit Societies (PACS) also, similar 100% audit of the KYC documents of the members of the PACS should be conducted by NABARD…”

Lead picture: UNI

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