#Debriefed: The legal questions around the discontinuation of 500 & 1000 notes

500 Rupee note

Even as the political and financial implications of Prime Minister Modi’s surprise announcement that Rs 500 and Rs 1,000 notes will no longer be legal tender are being discussed threadbare, here is a brief summary of the laws and legal questions involved.

1. How was the change affected?

As is the case with most deeply significant legal developments, through a notification published in the Indian Gazette on November 8, 2016. In fact, there are three notifications that have been issued:

  1. SO 3407(E) [pdf]:
  • Fake currency notes being used for subversive activities
  • High denomination notes are being used for storing unaccounted wealth
  • Existing five hundred and thousand rupee notes have “ceased to be legal tender”
  • Old notes, up to an amount of Rs. 4,000/- can be exchanged at banks until December 30, 2016

2. SO 3408 (E) [pdf]

  • Lists the exceptions where the old notes can be used
  • Includes co-operative stores, government hospitals, pharmacies

3. SO 3409 (E) [pdf]

  • Marks the introduction of a two thousand rupee note

2. Why were the notes discontinued?

Now, the Finance Ministry’s press release gives two reasons for this change: one, to end the use of “Fake Indian Currency Notes” in illegal activities such as terrorism and drug trafficking, and two, to combat the black money or “shadow economy” existing in the country.

3. What are the laws at hand?

The single most important law in this regard is the Reserve Bank of India Act of 1934. This law allows the central government to take a number of important decisions, including the one announced last night.

More specifically,

  1. Section 24(1): This allows the government to introduce notes of any denomination less than ten thousand rupees.
  2. Section 24(2): This allows the government to discontinue notes of any value.
  3. Section 26(2): This empowers the central government to declare bank notes as ceasing to be “legal tender”

4. What has the Supreme Court said about black money?

One of leading cases when it comes to black money was the 1981 judgment in RK Garg, or the Bearer Bonds case, in which the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance and the Special Bearer Bonds (Immunities and Exception) Act, 1981 were challenged.

This legislation was enacted with the purpose of providing an outlet to the black money held by Indian citizens, which had become a threat to the national economy. And to put this black money to productive use, the Government had issued Special Bearer Bonds and had provided certain immunities and exemptions to citizens to invest their black money in these Bonds.

Delivered by a bench of Y Chandrachud, A Gupta, A Sen, P Bhagwati, SM Ali JJ, the majority judgment (Gupta J had a dissenting opinion) upheld the constitutional validity of both, the Special Bearer Bonds (Immunities and Exemptions) Ordinance and the Special Bearer Bonds (Immunities and Exemptions) Act.

It was not the last time the issue of black money was taken up.

More than five years ago, the apex court’s B Sudershan Reddy and SS Nijjar directed the constitution of a Special Investigation Team to monitor the steps taken to recover unaccounted wealth stashed outside the country. The directions were passed in a petition filed by none other than senior counsel Ram Jethmalani.

Supreme Court reopens after 49 days of holidays Constitutes SIT to look into black money

The matter has come up in the apex court now and then; in 2014, Attorney General Mukul Rohatgi submitted that the SIT had already been provided with a list of individuals who held foreign accounts.

In April this year, a PIL was filed demanding a CBI investigation into all the Indians named in the Panama Papers expose.

5. So, will a fresh PIL be filed?

Expect (at least) one to be filed somewhere in the country. After all, when PILs have been filed and entertained over religious sentiments being hurt by Pokemon Go, a development of this magnitude is unlikely to be left alone.

6. What next?

Well, in the immediate future, this will certainly hit those in the unorganised sector the most. How quickly Indian banks will be able to service this sector, and how effectively touts and middlemen are managed will be watched with great interest.

Long term, this has to be supported by some legislative movement towards capturing the money that has been stashed through off-shore accounts.

As for lawyers whose clients mainly pay in hard cash, the next few weeks will be trying times.

Thirdly, as Apar Gupta tweeted, the need for privacy legislation becomes all the more urgent. Privacy concerns over mobile wallets and the like have never been more relevant.