Demonetisation: On what legal grounds can RBI write off notes it promised to honour?

'I promise to pay the bearer of this note...' vows the RBI governor on every Indian currency note.

Every currency note is a contract between the bearer and the state, something that has been signed in good faith and ratified by the extant law of the land.

The question then is this: Can the contract be repudiated unilaterally by the state? Can the bearer of the note be shooed away when he demands its execution even when there is no expiry date or conditions on the contract?

Is the citizen-sovereign contract at the mercy of to executive's fiat taken without consulting the legislature?

Now, that the Supreme Court has refused to interfere in legal challenges filed against the Narendra Modi government's decision to outlaw Rs 500 and 1,000 notes, it is quite likely that some of the pertinent questions could finally be answered and the decision examined under the Indian Constitution.

Demonetisation: On what legal grounds can RBI write off notes it promised to honour?

People scuffle to exchange Rs 500 and Rs 1,000 notes in New Delhi. PTI

On Friday, the Supreme Court came down hard on the government and refused to entertain its request to put on hold petitions pending in various high courts challenging the decision to scrap Rs 500 and Rs 1,000 bank notes. The apex court is right. A decision that affects every Indian's life without going through the necessary legislative process — debate, deliberation and vote — ought to be seriously examined. The other two pillars of a democracy — the legislature and the judiciary — must be given an opportunity to scrutinise an executive decision with huge ramifications.

Two days ago, while at a conclave, former RBI governor D Subbarao had argued that he was not sure about the legal position of the government move.

He said all currency notes carry a legal obligation, as the “RBI has guaranteed that it will pay the bearer the sum or the value of the denomination that is printed on that note.”

“The government has not used the word demonetisation. All that the government has said is that it is withdrawing these notes as being legal tender. But it still leaves us with the question: does the RBI have the obligation to pay the bearer, or is that obligation over, after the government announcement,” he added.

To be fair to the Modi government, notes of higher denomination have been outlawed in the past too. In 1978, the Janata government had scrapped notes of higher denomination without facing legal hurdles.

Interestingly, as Subbarao points out, the government and the RBI have not used the term ‘demonetisation’.

"The press release issued by the government talks only about ‘cancelling the legal tender character’ of the high denomination notes, raising questions about whether they are drawing a fine distinction between delegalisation and demonetisation.

To the extent the de-legalised Rs 1,000 and Rs 500 rupee notes are destroyed (i.e. not returned to the banking system), the liability of the RBI should come down by that amount," the former RBI governor pointed out.

So, we need satisfactory answer to the relevant questions:

1) Can the state end its contract with citizens ex-parte?

2) On what legal grounds can the RBI write off notes it had promised to honour? Can banks just throw out people who go with these notes to banks after the deadline set by the government?

So far, several explanations have given for this 'delegalisation.' It has been sold as a panacea for black money, corruption, counterfeit currency, Naxalism and cross-border terrorism. We have been told that Kashmir will become quiet now becomes the youth there have no money to buy stones to throw at security forces.

But, not much has been put out in the public domain by figure of data and hard numbers. Most of the answers have come in the form of high-decibel rhetoric and through speeches where the Prime Minister has displayed an entire range of emotions.

But, somebody needs to separate the rhetoric from facts.

The government can, of course, ignore the Court's warning of there being a possibility of riots if things do not improve, the suffering of people is not mitigated and money is not pumped back into circulation. The queues are getting longer, people are dying outside banks and ATMs. In the rural areas, away from the echo chambers of TV studios and social media, there is panic and anarchy.

The court has given the government a warning, a wakeup call. It can, of course, continue to remain in denial and commit suicide.

Arun Shourie would feel vindicated. 

Firstpost is now on WhatsApp. For the latest analysis, commentary and news updates, sign up for our WhatsApp services. Just go to and hit the Subscribe button.

Updated Date: Nov 18, 2016 16:59:55 IST

Also See