Last week, the Prime Minister of India, in televised address to the citizens, announced that the old 500 and 1000 rupee notes would cease to be legal tender. While there has been a wide spectrum of response from all quarters, there is no doubt that this notification has taken most people by surprise.
Whether it will be revolutionary in the long run or not is a matter of speculations. However, the sudden demonetisation of legal tenders raises very serious questions of law. The Reserve Bank of India(RBI) is constituted under the RBI Act, 1934 and is governed thereby. Chapter III – ‘Central Banking Functions’ – of the Act concerns the issue of bank notes.
The Act gives the RBI the sole power to issue ‘bank notes’ but its power to issue ‘currency notes’ is determined by the Government of India on the recommendation of the Central Board of the RBI. (Section 22).
Section 24(1) of the Act specifies that denominational values of notes to be not more than 10,000 Rupees. Section 24(2) empowers the Central Government to direct the ‘non-issue’ or the ‘discontinuance of issue of bank notes’ of any denominational values as it may specify.
Section 25 empowers the central government to approve the design, form and material of bank notes. Section 26(1) says that every note should be a legal tender guaranteed by the Central Government subject to Section 26(2) which again empowers the Central Government to notify that ‘a series of bank notes of any denomination shall cease to be legal tender’.
The sudden weekend decision by the Government raises serious questions that need to be answered. Here are a few:
– Does the Act empower the Government or the RBI to modify the form of those denominations that are already in circulation such that old notes are automatically rendered useless?
– Does the statement undersigned by the Governor of the Reserve Bank of India (RBI) – ‘I promise to pay the bearer the sum of five hundred rupees’ convey any ‘special’ meaning with the public?
– Does that promise stand dissolved just because a government wanted to re-brand the currency notes?
– Is that promise more significant than the new or old design that the notes wear?
– If old 500/1000 notes are no longer legal tenders, what makes the 10/20/50/100 notes any more legal given they are imprinted with a similar promise issued by the same authority?
It seems that Sections 24 and 26 are disjointed with respect to discontinuance of issue of notes and the actual demonetisation. There is no specificity, in that, it does not specify the procedure for the discontinuance of issue, actual demonetisation and issue of newly designed notes.
The Government has, in reality, conflated Sections 24, 25, 26 into a single notification to discontinue, demonetise and re-brand the notes of higher denominations. Herein lies the legal questions that we need to ask whether or not the drive is successful.
In the last many years, the RBI has stopped the circulation of some coins and notes of small denomination but it was not as sudden as it was done last week. This might set a bad and ill-advised precedent for the future given the vagueness of the law in this regard.