Demonetisation: Article discusses do Central Government (CG) exceeded its powers under RBI Act by allowing hospitals, petrol pumps, etc to accept invalid notes?


I really don’t remember having heard much of this word ‘demonetisation’ which suddenly has become the most talked about and discussed in India, not just among the economists, professionals or trade/business, but also by the common man on the streets. The reason isn’t any secret or unknown to anyone.

In a welcome move to curb black money, the Prime Minister of India Shri Narendra Modi announced a very bold decision in an unscheduled live televised address to the nation at 08:15 p.m. on the 8th November 2016 announcing #demonetisation of Rs 500 and Rs 1000 banknotes [hereinafter referred as Specified Bank Notes (SBN)] with effect from midnight of the same day, making these notes invalid and merely ‘pieces of paper’ for all general transactions. Apart from combating black money, the stated purpose is also to check fake currency, terror funding, drug trafficking and corruption. However, the sudden move to demonetise Indian Bank Notes is not new. Rs 1,000 and higher denomination notes were first demonetiaed in January 1946 and again the Janata Party coalition government of Shri Morarjee Desai had demonetised banknotes of 1000, 5000 and 10000 rupee on 16th January 1978 as a means to curb counterfeit money and black money.

I should now straight away jump to the legal aspect of demonetisation, which is the subject matter of this write up.


The Reserve Bank of India (hereinafter referred as ‘RBI’) has been constituted under the Reserve Bank of India Act, 1934 (hereinafter referred as ‘the Act’) to regulate the issue of bank notes and the keeping of reserves with a view to security monetary stability in India and generally to operate the currency and credit system of the country to its advantage.

Section 22 of the Act has given sole right to RBI to issue bank notes. And Section 24, which prescribes the denomination of the notes to be issued by the bank and included power of Central Government to direct the non-issue or discontinuance of issue of bank notes of such denominational values as it may specify in this behalf.

The legal tender status to every bank note is accorded by Section 26 of the Act which is reproduced below:

“26. Legal tender character of notes.

(1) Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government .

(2) On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.

Upon plain reading of Section 26, it is apparent that sub-section (2) has granted power to the Central Government to demonetise any denomination of bank note from a date notified by way of gazette notification. In exercise of these powers, the Government of India issued Gazette Notification No 2652 dated November 08, 2016 [(S.O. 3407(E)] to demonetise specified bank notes with effect from 09-11-2016. The relevant extracts are as below:

“Now, therefore, in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934) (hereinafter referred to as the said Act), the Central Government hereby declares that the specified bank notes shall cease to be legal tender with effect from the 9th November, 2016 to the extent specified below, namely:—…“

Thereafter, the said notification has set out the detailed procedures to be adopted by the banks for the implementation of the scheme and the procedure/limitation to exchange specified bank notes by public with valid notes with banks.

On the same day, the government issued one more notification no. 2653 dated November 08, 2016 [(S.O. 3408(E)] to notify certain exemptions for the convenience of the members of public in carrying out certain emergent and urgent transactions using the specified bank notes. The relevant extracts are as below:

“Now, therefore, in exercise of the powers conferred by sub-section (2) of section 26 of the Reserve Bank of India Act, 1934 (2 of 1934), the Central Government hereby declares that the specified bank notes shall not be ceased to be legal tender, with effect from the 9th November, 2016 until the 11th November, 2016, to the extent of transactions specified below, namely:—

(a) for making payments in Government hospitals for medical treatment and pharmacies in Government hospitals for buying medicines with doctor’s prescription;

(b) at railway ticketing counters, ticket counters of Government or Public Sector Undertakings buses and airline ticketing counters at airports for purchase of tickets;

(c) for purchases at consumer cooperative stores operated under authorisation of Central or State Governments;

(d) for purchase at milk booths operating under authorisation of the Central or State Governments;

(e) for purchase of petrol, diesel and gas at the stations operating under the authorisation of Public Sector Oil Marketing Companies;

(f) for payments at crematoria and burial grounds;

(g) at international airports, …;

(h) for foreign tourists ….”

This notification has since been amended several times and more exemptions have been allowed as means of convenience to the general public and also the exemption period has been extended and continuous review is being done.


With due respect, the author is of the view that the government has committed a grave legal mistake in granting exemptions to the transactions at specified entities like hospitals, petrol pumps, co-operative stores, railway counters, airport, etc. by exceeding its authority even though the intentions are to mitigate the inconvenience caused to the public.

The notification has been issued under section 26(2) of RBI Act as quoted above. The power granted under sub-section 2 can be divided into 2 parts:

  • Power to withdraw legal tender character of any denomination of any bank note from a specified date;
  • Power to grant exemption to such office or agency of the Bank and to such extent as may be specified in the notification.


The term ‘bank’ is defined in Section 2 (aii) of RBI Act, 1934 as “the Bank means the Reserve Bank of India constituted by this Act.” So, the meaning of term used in section 26(2) has to be given restricting meaning as per exhaustive definition and can’t be extended to cover commercial/ scheduled/other banks.

In simple words, once the Central Government has exercised its power to withdraw legal tender character of any denomination of bank note, it doesn’t have absolute power to grant exemption to any person other than provided in that sub-section. The exemption can be provided only to such office or agency of RBI and to such extent specified in the notification.

In view of the author, at no stretch of imagination, it can be said that the exemption to hospitals, petrol pumps, co-operative stores, railway counters, airport, etc is eligible for exemptions as office or agency of RBI. The establishment of offices and agencies are done under Section 6 as reproduced below:

“6. Offices, branches and agencies.

The Bank shall, as soon as may be, establish offices in Bombay, Calcutta, Delhi and Madras and may establish branches or agencies in any other place in India or, with the previous sanction of the Central Government, elsewhere.”

The agencies are established by the RBI under section 45 of the Act by entering into ‘agency agreement’ with commercial banks. It means all commercial banks may not be agencies of RBI, if such bank is not appointed as agent by RBI under section 45.

”45. Appointment of Agents.

(1) Unless otherwise directed by the Central Government with reference to any place, the Bank may, having regard to public interest, convenience of banking, banking development and such other factors which in its opinion are relevant in this regard, appoint the National Bank, or the State Bank or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or any subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, as its agent at all places, or at any place in India for such purposes as the Bank may specify.

(2) When any bank is appointed by the Bank as its agent under subsection (1) to receive on behalf of the Bank any payment required to be made into the Bank, or any bill, hundies or other securities required to be delivered into the Bank, under any law or rule, regulations or other instructions having the force of law, the same may be paid or delivered into the bank so appointed as the agent of the Bank.”

Thus, the Central Government has clearly exceeded its powers granted u/s 26(2) by giving exemption to transactions not related to office or agency of RBI in notification no. 2653 dated November 08, 2016 [(S.O. 3408(E)].

It is well known that if the legislature contemplates a situation and enacts or provides for a part of it, the other parts are deemed to have been excluded. The law is also well settled that a rule acquires statutory force, so long as it first, conforms to the provisions of the statute under which it is framed and second, it must be within the rulemaking power of the executive authority charged with framing the rules. Ref. Municipal Corporation of Delhi v. Birla Cotton Spinning and Weaving Mills AIR 1968 SC 1232, Union of India v. S. Srinivasan (2012) 7 SCC 683, General Officer, Commanding-in-Chief v. Dr. Subhash Chandra Yadav, (1988) 2 SCC 351.

The Hon’ble Supreme Court in case of Dr. Mahachandra Prasad Singh v. Honourable Chairman, Bihar Legislative Council and Ors.,(2004) 8 SCC 747 held that:

Underlying the concept of delegated legislation is the basic principle that the legislature delegates because it cannot directly exert its will in every detail. All it can in practice do is to lay down the outline. This means that the intention of the legislature, as indicated in the outline (that is the enabling Act), must be the prime guide to the meaning of delegated legislation and the extent of the power to make it. The true extent of the power governs the legal meaning of the delegated legislation. The delegate is not intended to travel wider than the object of the legislature. The delegate’s function is to serve and promote that object while at all times remaining true to it That is the rule of primary intention. Power delegated by an enactment does not enable the authority by regulations to extend the scope or general operation of the enactment but is strictly ancillary. It will authorise the provision of subsidiary means of carrying into effect what is enacted in the statute itself and will cover what is incidental to the execution of its specific provision. But such a power will not support attempts to widen the purposes of the Act to add new and different means of carrying them out or to depart from or vary its ends. (see Section 59 in chapter Delegated Legislation in Francis Bennion’s Statutory Interpretation 3rd Edn. ).”


To understand the second issue, the power of the Central Government is again extracted:-“…any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.”

The literal interpretation of the provision clearly provides that the Central Government should have specified any or all offices/agencies of RBI in the notification and also the extent of exemption. The word ‘such’ in the phrase ‘such office’ is of great importance as it refers to that office(s) which is specified in the exemption notification. Unfortunately, the Central Government has failed to specify which offices and/or agencies are exempted by it and to what extent. In the absence of proper exemption notification granting exemption to RBI offices and agencies, any deposit of specified bank notes with banks, which ceased to be legal tender, is void and without any legal force.

The author wish to clear that he is not against the policy of demonetisation but has raised an issue from purely legal perspective. The Supreme Court in Balco Employees’ Union (Regd.) vs. Union of India and Ors. 2002(2) SCC 333 observed (vide paragraph 92 and 93): “In a democracy, it is the prerogative of each elected Government to follow its own policy. Often a change in Government may result in the shift in focus or change in economic policies. Any such change may result in adversely affecting some vested interests. Unless any illegality is committed in the execution of the policy or the same is contrary to law or mala fide, a decision bringing about change cannot per se be interfered with by the court. Wisdom and advisability of economic policies are ordinarily not amenable to judicial review unless it can be demonstrated that the policy is contrary to any statutory provision or the Constitution. In other words, it is not for the courts to consider relative merits of different economic policies and consider whether a wiser or better one can be evolved.

Disclaimer: This article is the property of the author. No one shall publish, copy, reproduce or use it in any manner, for any purposes (except for personal, non-commercial use) without the written permission of the author. For Personal  personal, non-commercial useit can be used with due credit to the writer. The author shall not be responsible or liable for anything done or omitted to be done on the basis of this article.


Author        : Manoj Agarwal

Address      : Ganpati Campus, Lal Building Road, Rourkela – 769012, ODISHA

Contact       : +91-9937041788

E:mail          : [email protected]

Author Bio

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  1. K.LAKSHMAN says:

    Considering the flimsy nature of the newly issued RS.2000/-denomination notes,it is my fear that those who indulge in the printing of fake notes may be making hay while the sun is shining.I wonder how
    the rural folk can guard against transactions in fake
    notes circulating in a parallel economy,if the replication be not very complex.

  2. Pawan says:

    Very well written with lot of knowledge but I understand laws are applicable for democracy only! we are not under democracy anymore so Manoji please understand “BOSS IS ALWAYS RIGHT” and we have to toe the line.
    Our country is always ruled by stick by MUGHALS, BRITISH and now BJP.
    We if want sea change for our country then we have to change our self and move forward and think above money.

  3. Ashok says:

    Shri Aggarwal has glossed over an important part of Sec 26(2) namely “On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that”
    So far there has been no evidence that the Central Board of RBI has made any recommendation for demonetization.
    The entire exercise has been an ultra vires exercise of power by the Central Government!

  4. S.Srinivasan says:

    Sir, It is nice to read the article. The legal aspects are discussed well. The move of the CG to denomination currencies is good and this has fetched a good result. But instead of circulating the Rs.2000 in high volume if they have taken the action to circulate the Rs.500/- currency will me much useful to the common man. One request is that this good scheme should be supported and the exceeding of the power exercised for the benefits of the people should not dragon this.

  5. mahesh kumar says:


    5. BELOW 1 LAKH CAN BE DEPOSITED 30.12.2016


  6. PNV GIRI says:

    Nice to read your article . As for the recent dispensing wiith the high denomination of currencies concerned, I feel , although it is a good move by the CG, it would have been better if the RBI or CG had made more and easy exchange of the old currencies by public. They could have provided a lot of cash exchanging counters in all Govt offices providing lower denomination currencies instead of Rs.2000/- alone. I agree it might not be possible overnight but at least after a day or two it could have been well organised so that the common men who are still struggling would not have been inconvenienced.

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