The Union Cabinet on Wednesday approved an ordinance to impose a penalty, including jail term, for those found holding possession of demonetised higher currency notes beyond a cut-off date.
Moreover, to extinguish any liability of the government and the Reserve Bank of India (RBI) on scrapping of the Rs 500 and Rs 1000 notes, the cabinet approved The Specified Bank Notes Cessation of Liabilities Ordinance, 2016 to amend the RBI Act which will also act as a deterrent for future litigations against note ban.
Both these ordinances, together called The Specified Bank Notes Cessation of Liabilities Ordinance 2016, have been sent to President Pranab Mukherjee for his approval and are likely to be turned into law during the upcoming Budget Session of the Parliament that is likely to begin in the last week of January 2017.
On 8 November, the Union Finance Ministry brought in a Gazette Notification after which Rs 500 and Rs 1000 notes ceased to be legal tenders with effect from 9 November. In yet another notification, the finance ministry introduced Rs 2000 rupee note and then followed that up with another one specifying that a new series of bank notes with different sizes and designs will be issued.
Ever since then, several writ petitions have been filed across the country questioning the legality of such an exercise. Such write petitions are pending before the eight high courts across the country while the Supreme Court of India has four petitions before it. Only the Madras High Court has abstained from interference in the matter calling it a policy decision of the central government.
It is for these very reasons that the Union cabinet approved the ordinance to amend the RBI Act to ensure it does not face legal action in the near future.
India twice had its tryst with demonetisation in 1946 and 1978 and on both the occasions it was dragged to courts of law over implementation, particularly exchange of old currency. And it was these legal challenges that forced the government to go for a Presidential Ordinance.
The previous legal experiences show that though the government can introduce the demonetisation exercise through a notification, it needs to be backed by a Presidential Ordinance or Parliamentary Law which ensures that the transfer and receipt of ceased currency notes do not reflect as a liability on the RBI.
Moreover, it puts a restriction on the RBI's obligation to exchange demonetised currency with the new ones.
The RBI is under statutory obligation under the Section 39 of the RBI Act to exchange scrapped currency with newer ones and it cannot decline to exchange the old notes just by a notification.
Therefore, it is essential for the government to bring in an ordinance or Parliamentary Act that can countermand RBI's statutory duty.
If the government wouldn't have brought an ordinance, the RBI would have no option but to keep exchanging scrapped currency with the new ones considering the RBI Governor's signed promise on these notes to pay the bearer.
The ordinance will finally be sent to the Parliament to turn it into a law which will help the government make note ban legally effective.
Otherwise, the RBI Governor's signed promise will continue to exist forcing the bank to honour its promise and exchange scrapped currency notes. And the lack of such an ordinance and law will attract legal hassles as it has happened on previous occasions. Also, the absence of such a law will put an obligation on the RBI to exchange even if the government issues a deadline to this effect.
The Central government must have acted carefully considering the legal complications that surfaced during the two demonetisation exercises held earlier in 1946 and 1978.
In 1946, despite the Governor General of India bringing an ordinance to scrap Rs 500, Rs 1000 and Rs 10,000, it was challenged in various courts which led to lot of confusion over the guidelines
Eventually, the government was forced to amend the RBI Act and insert a new section to ensure that the scrapped currency would cease to be legal tender from a specified date.
Similarly, the 1978 exercise by the then Prime Minister Morarji Desai attracted multiple litigation which interestingly was brought in as an ordinance which was replaced two months later by the High Denomination Bank Notes Demonetisation Act, 1978.
Despite this, the move was challenged in the courts including the RBI's obligation to exchange scrapped currency after the deadline set by the central government. However, the Delhi High Court held that the 1978 Act overrode the RBI Act and the bank was under no obligation to exchange old notes.
Learning from past experiences, the government was quick to approve an ordinance to avoid any legal challenges that could put it in a tight spot.
However, considering how a united opposition is not letting the government carry on any business in both the houses of the Parliament, it is likely to introduce it as a Money Bill to avoid any confrontation.