Vivek Narayan Sharma v. Union Of India: Supreme Court Declares 2016 Demonetisation Notification Unlawful under RBI Act Section 26(2)

Introduction

The landmark judgment of Vivek Narayan Sharma (demonetisation Case-J.) v. Union of India delivered by the Supreme Court of India on January 2, 2023, addresses the legality of the Central Government's demonetisation initiative carried out in 2016. This judgment scrutinizes whether the demonicising of ₹500 and ₹1000 bank notes through an executive notification was in compliance with **Section 26(2)** of the Reserve Bank of India (RBI) Act, 1934.

Summary of the Judgment

The Supreme Court held that the **Notification dated 8-11-2016** proclaiming the cease of legal tender status for ₹500 and ₹1000 notes was unlawful. The primary reason was that the Central Government had initiated the demonicisation process without adhering to the procedural stipulations under **Section 26(2)** of the RBI Act, which mandates that such a notification should be made only upon the recommendation of the Central Board of Directors of the RBI. Instead, the demonicisation was carried out through an executive notification, bypassing the necessary legislative process, thereby rendering the subsequent **Ordinance of 2016** and the **Specified Bank Notes (Cessation of Liabilities) Act, 2017** invalid.

Analysis

Precedents Cited

The judgment references several pivotal cases to underline the principles of statutory interpretation and the limits of executive power:

• Chief Inspector of Mines v. Lala Karam Chand Thapar (1962) - Emphasized the importance of context and scheme in interpreting statutory language.
• Golak Nath v. State of Punjab (1967) - Reiterated the necessity of constitutional compliance in legislative actions.
• M.R.F. Ltd. v. State of Kerala (1998) - Discussed the criteria for legality and arbitrariness in administrative decisions.
• Jayantilal Ratanchand Shah v. RBI (1996) - Established that legislation must be enacted through proper channels and procedures.
• Vivek Narayan Sharma v. Union Of India (2023) - Directly relevant for elucidating the misuse of executive notifications in financial regulation.

Legal Reasoning

At the crux of the judgment is the interpretation of **"any series of bank notes of any denomination"** under **Section 26(2)** of the RBI Act. The Supreme Court concluded that **"any"** in this context signifies a **specific or particular** series and denomination, not **all** simultaneously. Therefore, the recommendation process outlined in **Section 26(2)** implies targeted demonetisation, contingent upon the RBI Board's recommendation.

However, in the 2016 case, the Central Government sought and obtained a swift recommendation to demonetise **all** series of ₹500 and ₹1000 notes. This broad application deviated from the intended narrow scope prescribed by the Act, constituting an act of **excessive delegation** and **arbitrary exercise of power**. The Central Government's action lacked the procedural compliance stipulated in the RBI Act, thereby rendering the notification and subsequent legislation unconstitutional.

Impact

This judgment serves as a **critical precedent** delineating the boundaries of executive authority in financial regulation. It underscores that significant economic measures like demonetisation must adhere strictly to statutory procedures and should not be executed unilaterally by the executive without requisite institutional recommendations. The decision fortifies the **independence of the RBI** and reinforces the necessity of **checks and balances** within India's financial governance framework.

Furthermore, it signals a judicial shift towards **conservative interference** in matters of economic policy, reserving such interference for clear instances of **constitutionality violations** or **absence of due process**.

Complex Concepts Simplified

Section 26(2) of the RBI Act, 1934

**Section 26(2)** empowers the Central Government to declare that certain bank notes of specified series and denominations will no longer be legal tender. However, this must be done **only** upon the **recommendation of the RBI's Central Board**. The term **"any"** in this provision is interpreted to mean a **specific series and denomination**, not all at once.

Excessive Delegation

**Excessive delegation** occurs when authority is granted beyond what the statute prescribes, allowing policymakers to act without sufficient guidance or constraints. In this context, issuing a notification to demonetise all series and denominations without adhering to procedural mandates is deemed excessive delegation.

Conclusion

The Supreme Court of India's judgment in Vivek Narayan Sharma v. Union Of India reaffirms the necessity for the Central Government to **strictly adhere** to legislative procedures when executing significant financial measures. By declaring the 2016 demonetisation notification unlawful, the Court emphasizes the **importance of statutory compliance** and the **independent oversight** function of institutional bodies like the RBI.

This ruling not only invalidates the specific demonetisation act but also sets a **precedent** ensuring that future financial regulations and economic measures cannot be bypassed through arbitrary executive actions. It strengthens the framework of **governance** by ensuring that **checks and balances** are strictly maintained, thereby safeguarding economic stability and the rule of law.