In an op ed in the Economic Times on December 10, 2016, and an earlier, more detailed piece on the CPR website on December 6, 2016, I have argued that the demonetisation notification, as it exists, is illegal because it goes beyond the scope of what is permitted under the Reserve Bank of India Act, 1934, (“RBI Act”), the stated source of authority for the notification. There is also a prima facie case of direct and indirect abridgement of fundamental rights to movement (Article 19(1)(d)), trade or business (Article 19(1)(g), livelihood and in certain cases life (Article 21), the right to equality (Article 14), and the constitutional right to property (Article 300A).
It is clear that section 26(2) of the RBI Act empowers the government to demonetise, that is, to declare any series of notes as illegal tender. Therefore, that part of the notification which merely declares that “Rs. 500 and Rs. 1000” notes cease to be legal tender is permissible under section 26(2). In fact, the government twice before, in 1946 and 1978, carried out demonetisation lawfully, with the same goal of addressing unaccounted money. But neither the RBI Act, nor the Banking Regulation Act, 1949, empower the government to impose restrictions on cash withdrawals or deposits in the manner it has been done, and to discriminate between holders and non holders of bank accounts, as the present notification has done. Such actions require an authorising legislation, either an Act of Parliament or an Ordinance. Both in 1946, and in 1978, similar actions were authorised by an ordinance. The failure to issue an ordinance to provide the legal basis for the demonetisation notification this time renders the demonetisation exercise illegal. Even if the act of demonetisation is severed from the restrictions placed on people’s access to their cash and bank accounts, the latter stipulations are both illegal and unconstitutional on several counts.