Case Summary: Vivek Narayan Sharma v. Union of India

FACTS

On the evening of 8th November 2016, the Government of India, through the Prime Minister, made a public announcement declaring that ₹500 and ₹1,000 denomination notes would no longer be recognised as legal tender. This policy, commonly referred to as “demonetisation,” effectively nullified nearly 86% of the currency in circulation in terms of value. The stated objectives behind this sudden measure were the eradication of black money, curbing of counterfeit currency, prevention of terror financing, and a push towards a cashless, digital economy.Following this announcement, the public was given a limited window to exchange or deposit the demonetised currency into bank accounts, subject to certain restrictions. The decision resulted in widespread disruption of daily life. People across the country, particularly in rural and semi-urban areas, faced long queues at banks and ATMs, and there was an immediate scarcity of valid currency, especially impacting the informal sector and daily wage earners.

This action prompted several legal challenges before the Supreme Court of India, questioning the legality, procedural propriety, and constitutional validity of the demonetisation exercise. One of the principal petitioners, Advocate Vivek Narayan Sharma, filed a writ petition under Article 32 of the Constitution, arguing that the notification issued by the Central Government was arbitrary, lacked legislative backing, and violated citizens’ fundamental rights under Articles 14, 19, and 21.

The petitioners specifically contested the application of Section 26(2) of the Reserve Bank of India Act, 1934, under which the demonetisation was purportedly carried out. According to them, this provision did not authorise the blanket invalidation of all series of a particular denomination. Further, they questioned whether the recommendation from the Central Board of the RBI, as required under the provision, was independent and prior to the government’s decision.The Central Government, in its defence, submitted that the move was a well-considered economic policy measure, carried out in coordination with the Reserve Bank of India. The RBI also supported the government’s stand and argued that the process followed was legally sound and within the limits of delegated legislation.

Given the constitutional importance of the issues involved, the Supreme Court referred the matter to a five-judge Constitution Bench. The primary question before the Court was whether the demonetisation process complied with the procedural and substantive requirements of the Constitution and the RBI Act.

ISSUES RAISED

1. Does the Central Government possess the authority under Section 26(2) of the RBI Act, 1934, to demonetise all currency notes of a particular denomination?
2. Was the process of demonetisation compliant with the constitutional principles of legality, proportionality, and separation of powers?
3. Did the move violate fundamental rights guaranteed under Articles 14, 19, and 21 of the Constitution?

CONTENTION

The petitioners in Vivek Narayan Sharma v. Union of India raised several constitutional and statutory objections to the 2016 demonetisation exercise. Their central argument was that the decision to demonetise ₹500 and ₹1,000 notes in their entirety lacked legislative backing and was procedurally flawed. According to the petitioners, such a far-reaching economic decision could not be undertaken solely through executive notification under Section 26(2) of the Reserve Bank of India Act, 1934.They contended that Section 26(2) permitted the demonetisation of a particular “series” of banknotes, not the entire denomination. Therefore, using this provision to invalidate the entire ₹500 and ₹1,000 denominations exceeded the scope of the statute and amounted to an abuse of delegated power. They further submitted that no independent and prior recommendation was made by the Central Board of the RBI, as required under the Act. Instead, they alleged that the process was reversed, that the Government had taken the decision and then obtained the RBI’s recommendation to give it legal cover. The petitioners also argued that the decision violated fundamental rights under Articles 14, 19, and 21 of the Constitution. It was submitted that the move was arbitrary, disproportionate, and caused widespread hardship, particularly to marginalised communities who lacked access to banking infrastructure. The suddenness of the decision, lack of planning, and inadequate provisions for currency exchange and withdrawal were highlighted as indicators of procedural impropriety and unreasonableness.

In addition, concerns were raised regarding the absence of parliamentary involvement. Petitioners maintained that a policy of such magnitude, affecting the entire economy and citizenry, required a detailed legislative process or at least ratification by Parliament. The use of executive power alone, they argued, undermined democratic accountability and contravened the principle of separation of powers. On the other hand, the Union Government and the RBI defended the decision. The Centre argued that demonetisation was a legitimate economic policy aimed at advancing national interest. It claimed that the decision was made in consultation with the RBI and was within the bounds of Section 26(2). The Government further asserted that the judiciary should refrain from interfering in matters of economic policy unless they were manifestly arbitrary or unconstitutional.

The RBI, in its submissions, supported the Government’s position and maintained that the recommendation for demonetisation was given independently and based on genuine policy concerns regarding counterfeit currency and unaccounted wealth.

RATIONALE

In its majority opinion (4:1), the Constitution Bench of the Supreme Court upheld the demonetisation exercise undertaken by the Union Government in 2016. The majority ruled that the decision did not suffer from any procedural or substantive illegality and was made in accordance with Section 26(2) of the Reserve Bank of India Act, 1934.

The Court held that the power under Section 26(2) is wide enough to allow the Central Government to demonetise all series of a denomination, not merely a specific series. It rejected the argument that the provision only contemplated demonetisation of limited series and affirmed that the statute permitted such a measure, provided it was based on the recommendation of the RBI Central Board. The Court found that the process followed was neither arbitrary nor rushed. It accepted the Government’s and RBI’s claim that the decision was made following consultation and deliberation, and that the RBI Board had recommended the demonetisation before the notification was issued. The Bench clarified that such a recommendation need not be published or subjected to public scrutiny, given the confidentiality required in such economic matters. On the question of separation of powers, the Court observed that demonetisation, being an economic policy decision, fell squarely within the domain of the executive. The judiciary’s role, it held, was limited to reviewing the decision on grounds of manifest arbitrariness, mala fides, or constitutional violations, none of which, in the Court’s view, were established. Regarding the alleged violation of fundamental rights, the majority acknowledged that the public faced temporary hardship due to the demonetisation, but held that such inconvenience could not render the measure unconstitutional. The Court noted that the objectives of the move, eliminating black money, counterfeit currency, and terror financing, were legitimate public purposes, and the policy was implemented with reasonable care.

Justice B.V. Nagarathna, in her dissent, took a different view. She held that the demonetisation was unlawful as the Central Government had not initiated the process independently, and the RBI’s recommendation lacked due application of mind. According to her, such a large-scale measure required parliamentary approval through legislation, and could not be effected merely through a gazette notification. However, she did not question the intent or objectives behind the measure.

Thus, the rationale of the majority judgment ultimately rested on judicial deference to economic policy, a broad reading of Section 26(2), and the view that temporary inconvenience did not amount to constitutional injury.

DEFECTS OF LAW

Despite the majority judgment upholding the validity of the 2016 demonetisation exercise, several legal and structural deficiencies remain in the legislative and procedural framework governing such significant economic decisions.

Firstly, Section 26(2) of the Reserve Bank of India Act, 1934, lacks clarity and specificity. The provision permits the Central Government to declare that “any series of banknotes” shall cease to be legal tender, upon the recommendation of the RBI. However, the phrase “any series” remains undefined and ambiguous. The majority’s broad interpretation, allowing for the invalidation of an entire denomination, risks enabling executive overreach without adequate checks.

Secondly, there is no procedural safeguard or parliamentary oversight embedded in the provision. Given the sweeping impact of demonetisation, the absence of legislative involvement or prior debate raises concerns about democratic accountability. This gap in law leaves room for excessive executive discretion on matters that deeply affect the economy and citizens’ daily lives.

Thirdly, the lack of a defined mechanism for assessing the proportionality of such a measure is problematic. The absence of statutory requirements for assessing the socio-economic impact, or for setting out transition safeguards, contributed to the considerable hardship faced by the public. The law does not impose any duty to publicly disclose the RBI Board’s recommendation, thereby reducing transparency in the process.

Justice Nagarathna’s dissent rightly pointed out that a monetary measure of this magnitude should not be undertaken without specific legislative action, reinforcing the need to revisit and amend the statutory scheme.

INFERENCE

The judgment in Vivek Narayan Sharma v. Union of India affirms the wide discretionary powers of the executive in economic policymaking, especially under statutes like the Reserve Bank of India Act, 1934. The Supreme Court’s majority ruling upheld the legality of the 2016 demonetisation, placing significant emphasis on judicial deference in matters of financial policy.

While the Court endorsed the procedural validity of the measure and the consultation between the RBI and the Government, the decision has raised critical concerns about constitutional interpretation, statutory precision, and institutional checks and balances. The majority’s broad reading of Section 26(2) effectively allows the Government to withdraw an entire denomination from circulation without legislative approval, a move that could set a concerning precedent if not limited in scope or procedure.

Justice Nagarathna’s dissent highlighted these constitutional concerns, emphasizing that such a far-reaching move should have been authorised by legislation, not mere executive notification. Her opinion reinforces the principle that while policy goals may be legitimate, the method adopted must strictly adhere to constitutional values and procedural fairness.

The judgment underscores the urgent need for reform in the legal framework governing currency regulation. Greater clarity in statutory language, institutional safeguards, and democratic oversight are essential to prevent potential misuse of power in future monetary decisions. In essence, the case reflects a judicial balancing act between respecting economic discretion and upholding constitutional processes. While the verdict settled the legality of the 2016 demonetisation, it left open important questions about the separation of powers, the role of Parliament in major financial reforms, and the extent of executive authority in a constitutional democracy.