The RBI Act does not give the Centre the power to place limits on cash withdrawals from banks.
Image credit: REUTERS/Danish Siddiqui
The Congress’s Rahul Gandhi condemned the move for the inconvenience that it caused to the common man, the Aam Aadmi Party’s Arvind Kejriwal has described it as a scam meant to benefit Bharatiya Janata Party associates and the Trinamool Congress’s Mamata Banerjee lashed out at the move, calling it draconian. Only Bahujan Samaj Party supremo Mayawati termed the decision an undeclared economic emergency, which has ended up hurting poor people and farmers.
While there is a tendency to dismiss Mayawati’s statement as political rhetoric, she does have a point regarding the Emergency narrative because the government notification authorising the demonetisation has also effectively frozen property rights by placing limits on cash withdrawals. While it imposed a restriction of Rs 4,000 on the exchange of banknotes (which was increased to Rs 4,500 on Sunday night), the notification restricted account holders from withdrawing more than Rs 20,000 per week (this limit was increased to Rs 24,000 also on Sunday.)
In effect, the Modi government has interfered in the account holder’s private contractual relationship with her or his bank and suspended the individual’s constitutionally-guaranteed right to enjoy property under Article 300A of the Constitution. And it has done so in a manner that lacks legal sanction.
The right to property
When the Constitution was adopted in 1950, it contained a fundamental right to “acquire, hold and dispose of property” in Article 19(1)(f). This fundamental right was quite contentious given the land reform legislation that Prime Minister Jawaharlal Nehru was trying to push through Parliament. Despite several legal provisions aimed at circumventing judicial scrutiny of such legislation and diluting the right to property, neither Nehru nor Indira Gandhi deleted that fundamental right. That honour went to the post-emergency Morarji Desai government, which proposed the 44th constitutional amendment in 1978. This amendment abolished the fundamental right to property but still retained it as a constitutional right in Article 300A. As it stands today, Article 300A states,
“No person shall be deprived of his property save by authority of law”.
The last decade has brought the right to property back into the spotlight with several high-voltage debates over land acquisition laws and the forest rights of Adivasis, thereby proving that the right to property is of importance to even the poor and marginalised.
The money in an individual’s bank account definitely comes within the legal definition of Article 300A. Thus, when the government imposes a limit on cash withdrawals it is in effect restricting the right of account holders to access their deposits because although they can technically access their money through electronic means or via cheque, the terms of contract with the bank give account holders the right to access the funds in the form of cash.
By curbing this right to access funds on the terms as per which the funds were deposited in the bank, the government is, in effect, depriving account holders of their property for a term of two weeks and perhaps longer.
The question that arises now is: has the Union government deprived account holders of their property for two weeks as per the law?
This is a crucial point because the Rs 10,000 limit on daily cash withdrawals from banks (removed on Sunday night) and the weekly withdrawal cap of Rs 20,000 (that was increased by Rs 4,000 on Sunday), was critical to this demonetisation plan in order to prevent a run on the banks by citizens, which could have imploded the national economy. Without a withdrawal limit in place, the government could not have imposed the demonetisation plan with such short notice.
The government notification
The entire demonetisation exercise has been conducted by the issuance of gazette notification no 2652 by a joint secretary under Section 26(2) of the Reserve Bank of India Act, 1934. Previous efforts at demonetisation such as the one in 1978 was done through an Ordinance and followed by a parliamentary legislation called The High Denomination Bank Notes (Demonetisation) Act, 1978. A copy of this law can be accessed on the fabulous Indian Kanoon site. So why did the Morarji Desai government issue an Ordinance and subsequently pass a legislation rather than issue a notification?
The answer most likely hinges on Section 26(2) of the Reserve Bank of India Act, 1934. This provision gives the Union government the limited power to demonetise certain currencies through a notification. This provision does not, however, give the government the power to freeze bank accounts through limits on cash withdrawals, disrupt normal banking operations and impose mandatory disclosure requirements (such as identity cards) while depositing cash into bank accounts or exchanging the now worthless legal tender.
For ease of reference I reproduce Section 26(2) as follows:
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 4[India] in payment or on account for the amount expressed therein, and shall be guaranteed by the 5[Central Government].
(2) On recommendation of the Central Board the 6[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 7[save at such office or agency of the Bank and to such extent as may be specified in the notification].
A plain reading of the provision clearly indicates that the Union government may issue a notification to demonetise legal tender but there is no mention of any powers to curb the constitutionally-guaranteed rights of citizens to access their money or the rights of banks to conduct their business.
Therefore, if the Union Government lacks the power under the Reserve Bank of India Act to place limits on withdrawals from banks or mandate identity proof while depositing money, it cannot force such requirements on account holders because Article 300A of the Constitution protects them from such interference unless it is done through a law.
The government could have perhaps circumvented this problem by enacting an Ordinance, as was done in 1978. However, unlike a notification, an Ordinance has to be approved by the Cabinet as per the provisions of the Government of India’s Transaction of Business Rules, 1961. Given this prime minister’s style of functioning, it is possible that he wanted to limit the number of people who knew about this decision in order to stop any leaks. From media reports it appears that the Cabinet was not consulted on this issue.
The more important question, however, is whether even an Ordinance of such a nature would have been constitutional because if the government can be given the power to freeze cash withdrawals from bank accounts for 15 days, what is to stop it from imposing such restrictions for 50 days or 500 days? The answer most likely is that such a move would violate the constitutional right to property under Article 300A. But that is a topic of discussion for another day.
Prashant Reddy Thikkavarapu writes for SpicyIP, a blog about Indian Intellectual Property Law and is a Research Associate at the School of Law, Singapore Management University.
This article was first published on Scroll.in