Thread by @barandbench

[Demonetisation] The Supreme Court will begin hearing arguments today in a batch of pleas challenging the Central government's 2016 demonetisation that devalued ₹500 and ₹1,000 bank notes.

Follow this thread for live updates

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In its latest affidavit submitted to the top court, the Union Finance Ministry said that demonetisation was done in consultation with the Reserve Bank of India and subsequently ratified by Parliament.

Read more on the affidavit here:

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Bench assembles.

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Senior Advocate P Chidambaram begins submissions: I will be dealing with law, only some facts will be stated. After the last hearing, I filed one affidavit giving data and explaining my eight submissions.

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Chidambaram shows the RBI Act.

Justice Abdul Nazeer interrupts: Sorry to tell you, there should be silence in the court.

Justice Gavai: Conversations should be outside the court.

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Chidambaram takes court throught the preamble of the RBI Act.

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Chidambaram refers to Section 8 of the RBI Act.

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Chidambaram: 8(1)(c) is the only input into the board other than officials.

(Directors to be nominated by the Central Government)

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Chidambaram: On the date of demonetisation, seven of these ten posts were vacant. Only three directors were there under 8(1)(c). That can be corrected by the Solicitor General.

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Chidambaram shows Section 14 of the RBI Act.

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Chidambaram shows Sections 22 onwards.

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Court: Has 10,000 ever been printed?

Chidambaram: Yes, it was in circulation that's why the demonetisation of 46', but hardly..

Justice Gavai: Earlier judgment is with regard to that.

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Chidambaram: The sole right is with the RBI.

The point I am submitting is, the Central government cannot on its own initiate any proposal relating to currency notes.

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Chidambaram: It can only be on the central board's recommendation.

Shows Section 25.

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Chidambaram: The first submission is, what is the scope of 26 (2)?

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Chidambaram: At the time of demonetisation the currency in circulation was Rs 17.9 lakh crore. Today, according to RBI, it is 32.18 lakh crore. So, actually the currency in circulation has increased.

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Chidambaram: That is economic logic. As the GDP grows, more people have more income.. there will be a requirement of more currency which is why the right to issue currency is given to one independent authority.

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Chidambaram: It is that independent authority alone which can decide what is the cash in circulation that people need to carry out daily activities. All that must be assessed.

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Justice Nazeer: Maybe population growth also.

Chidambaram: That also, and the size of the economy. The GDP grows, there'll be more transactions.

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Chidambaram: This power is not given to the executive government. They can starve people of cash, and cripple their daily activities by not putting enough cash in circulation. Which is why..

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Chidambaram: .. back in 1934, in all countries, the right to issue currency is only with the RBI and they will decide.

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Chidambaram: Anything to do with currency must emanate from the RBI. Yes, there is a power to demonetise but that power must only be exercised when there is a recommendation from the RBI.

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Chidambaram: Historically governments have resorted to demonetisation in one of two situations:

1) To weed out denominations that are in disuse, or practically unusable like Rs 10,000 note.

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Chidambaram: 2) Currency which has become worthless due to hyper inflation.

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Chidambaram: Demonetisation in 1946 was of 11.5 % and in 1978 it was only 0.6 %

That is why there was no hue and cry. It did not affect the overwhelming population of the country.

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Chidambaram: In this background, on its true interpretation Section 26(2) of the RBI Act does not permit declaring as no longer legal tender all series of notes of a specified denomination.

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Chidambaram: The sections must be read down to mean that any series means a specified series of notes of a denomination. The series is denoted by an alphabet, number, photograph and year of issue.

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Chidambaram: Any series does not mean all series of notes of that denomination.

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Chidambaram: If in 2016 too if the government intended to declare all series of notes of a denomination as no longer legal tender, it could not have done so by making a notification under 26(2), only by passing a separate legislation.

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Chidambaram: It is absurd to say that 26(2) confers power on the executive government to issue a currency note of 500 or 1000 on 7 November and demonetise the same on 8 November!

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Chidambaram: Parliament then, thought and according to me rightly, Section 26 does not give power to declare all series of high denominations as no longer legal tender. Therefore, you had to pass plenary legislation.

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Justice Nagarathna: Are you suggesting that if a separate law had been made in this case- it would have been valid?

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Chidambaram: If a law had been made in parliament, this may have been valid because parliament would have debated this thoroughly and taken into account of withdrawing 86.4%

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Chidambaram: Parliament would have demanded information. What's is the proportion of these notes? How will it be withdrawn? How will it affect people? I'm assuming a debate has taken place. But if you do it by notification..

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Chidambaram: Look at th absurdity of the example I put in the affidavit, 300 Crore distinct notes can be printed by all printing presses. You print and issue a series on 7 November and demonetise on 8 November.

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Chidambaram: It is arbitrary exercise of power! RBI must apply it's mind, which series must be demonetised?

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Chidambaram: Any government can come and say I am demonetising! Please don't give that power to any executive government.

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Chidambaram discusses reasons for demonetisation.

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Chidambaram: My second submission is, Section 26(2) is liable to be struck down on grounds that it violates Articles 14, 19, 21 and 300A. It will amount to an impermissible delegation of legislative power.

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Chidambaram: Pertinently, the demonetisations of 76' and 48' were through separate act of parliament.

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Chidambaram: Under Articles 14, 19, 21 and 300A- life and livelihood are protected against arbitrary executive action.

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Chidambaram: If not read down, Section 26(2) would be unconstitutional and confer unguided power. On a plain reading, it is obvious that there is no policy and no guidelines in the said provision.

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Chidambaram: What matters shall be taken into account and what matters shall not be taken into account are not specified in the Section.

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Chidambaram: If a drastic power of demonetising currency notes of all series in certain denominations was intended to be conferred on the executive, Parliament should have laid down relevant matters to be taken into account.

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Chidambaram: In the absence of any policy or guidelines, it is submitted that Section 26(2) if not read down in the manner suggested would be unconstitutional.

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Chidambaram: Can you withdraw 99% of currency? Suppose they had done 100 rupee notes also.. that kind of power is available to an executive government!

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Chidambaram gives court information on how RBI withdraws some series.

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Chidambaram: This is application of mind, exercising your limited power.

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Chidambaram: It's an arbitrary, uncannonised, unguided power which no executive government should have.

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Chidambaram takes Court through the history of demonetisation.

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Chidambaram: They are still holding back three four documents which I had implored Your Lordships to call for. The 7 November letter to the RBI, the agenda note placed before the RBI board, the minutes of the RBI board and the recommendation.

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Chidambaram: The actual cabinet decision. These are all done in a matter of about 26 hours. The letter reached the RBI on 7th post afternoon, the board was called to meet on 8th.

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Chidambaram: They meet at 5.30, by 6.30 or 7, the recommendation is taken by hand to the cabinet. The cabinet is waiting and then the PM goes on television.

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Chidambaram: Kindly see how the board should meet. There are regulations framed called RBI General Regulations which govern the meeting of the central board of the RBI.

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Chidambaram shows Regulation 8.

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Justice Nazeer: It starts with the expression "ordinarily".

Chidambaram: I am not disputing this. 8(3) is mandatory coram.

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Chidambaram: Let's assume this was an emergency meeting, you should still give time to people to attend. How many attended?

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Chidambaram: Minutes should have been kept. Agenda and decision. Nothing has been disclosed to Your Lordships. You observed keep these documents ready.

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Chidambaram: Nothing has been supplied. I have completed my second submission. I will cite case law at the end.

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Chidambaram: My third submission is that the decision making process in the present case was deeply flawed. The process was actually reversed. the role of the RBI & government were reversed.

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Chidambaram: On a plain reading of Section 26(2), there is only one mandatory procedure that can be followed. Kindly keep in mind sole authority for currency notes is RBI.

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Chidambaram: It is implicit that the central board would consider all relevant material, weigh pros and cons, consider the impact on the people of the country and consequences on the economy before making a recommendation.

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Chidambaram: Upon receipt of the recommendation, the central government may take the decision to declare certain notes as no longer legal tender. Centre can also reject the recommendation.

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Chidambaram: It is implicit that central government must apply it's mind to all relevant factors, consider impact and consequences before deciding.

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Chidambaram: It is implicit in Section 26 (2) that adequate time must be devoted by both the central board and government before a major step like demonetisation is taken.

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Chidambaram: In the present case, facts on record will show that the procedure and implicit obligations were abandoned and the process contemplated under 26(2) was turned on its head.

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Chidambaram: The proposal emanated from the central government and was not initiated by the RBI. it was a virtual command by the Central government to the RBI and the RBI meekly obeyed the command and made a recommendation.

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Chidambaram: The central government seized upon the recommendation and promptly demonetised all series of notes in the denomination of 500 and 1000. No adequate care and consideration on the crucial matter.

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Chidambaram: No time at all was devoted by the Central government before it took the decision to demonetise.

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Chidambaram: The procedure followed was premeditated. In fact, it was a total violation of 26(2). Full info was not placed before the central board.

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Chidambaram: The enormous consequences of the demonetisation were not known to the central board especially directors falling under categories b and c, perhaps even d.

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Chidambaram: Members of the cabinet did not have the full info or relevant material since apparently the decision to demonetise had already been taken. The note for the cabinet, if any, did not contain the full information.

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Chidambaram: Unless this material is available, it will be difficult to come to a conclusion as to application of mind.

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Chidambaram: It is not a guess, but an informed guess that no one on the board or cabinet was told that 500 and 1000 rupee notes made up of 86.4 % of the currency. Your Lordships will have to take my word for it.

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Chidambaram discusses one of the counter affidavits filed by the RBI.

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Chidambaram: As per the counter, it is absolutely clear that the original recommendation came from the government. It was described by the government as advise and a proposal. This is reversing the process.

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Chidambaram: The government does not have enough information or data to gauge the burden it'll place on people. Only RBI has that information.

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Chidambaram: That is why law says that the recommendation must come from RBI.

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Supreme Court rises for lunch. Will resume hearing at 2 pm.

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Hearing resumes.

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Chidambaram: The recommendation for demonetising did not consider relevant factors before making the far reaching recommendations.

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Chidambaram: The consequences were not considered by the Central board or the government. As a result of demonetisation 86.4 % of the currency was declared no longer legal tender.

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Chidambaram: 2300 crore distinct notes became illegal. Since they were demonetised overnight millions of people were left with no valuable money to buy food, milk or even medicines. Thousands of families went without a meal.

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Chidambaram: Voluntary organisations had to distribute free food since the invalid notes could be exchanged at specified bank branches. It's been estimated that an average 11 crore people stood in queue everyday.

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Chidambaram: Wholesale markets shut down, village fair stopped, retail outlets reported a calamitious drop in sales. Industrial hubs came to a complete halt. Wages were not paid for several weeks.

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Chidambaram: Casual labourers represent 30 per cent of all employed persons in India and the numbers estimated a 15 crore individuals. All of them were without jobs overnight and consequently without wages.

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Chidambaram: It was sowing season. Since DCCBs were not allowed to exchange currency notes, millions of farmers were not able to withdraw and could not buy seeds or fertilisers.

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Chidambaram: Their produce suffered a huge crash. These are official statistics. Wholesale market prices crashed. Every commodity there was a steep fall in prices. Even the supply chain was disrupted.

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Chidambaram: Even the logistics of demonetisation have not been considered. Over 2300 crore notes were demonetised. Government's printing presses could only print 300 crore notes a month.

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Chidambaram: This gross mismatch meant it would take several months to print notes making it impossible for all persons to print their notes within a reasonable time. The government did not even consider that over ..

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Chidambaram: .. 215K ATMs would have to be recalibrated. In fact,initial days ATM did not take the 2k rupee note.2/3 of bank branches were located in metros and only a third were in rural areas. 90% of all ATMs were in 16 states

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Chidambaram: 7 states in the North East only had 5199 ATMs of which 3645 were in Assam.

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Chidambaram: This would mean that individuals living in rural areas and the North East would be adversely and disproportionately impacted. They would have to travel to other cities or towns to stand in line to exchange notes.

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Chidambaram: This is my allegation. Possible consequences were not researched or documented. they were not placed before the central board, nor were they spelt out in the resolution recommendation, nor were they placed before the cabinet.

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Chidambaram: The objectives in the notification were false, they could not have been achieved not were they achieved.

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Chidambaram shows the notification: One of the objectives was to draw people holding fake currency to exchange it for genuine currency. Only fake currency of a value of 43 crore was detected in the nearly 15.31 lakh crore of currency exchanged.

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Chidambaram: Fake currency represented 0.0028% of the total currency returned and exchanged.

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Chidambaram: One of the stated objectives was that fake currency had to be eliminated because it was financing subversive activities such as drug trafficking and terrorism.

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Chidambaram: It is common knowledge that despite impugned demonetisation, drugs are being traded extensively. Ministers have said it, that Punjab is becoming a conduit for drug trafficking.

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Chidambaram: it is also common knowledge that terrorism is not abated. Only last week there was an international conference on terrorism.

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Chidambaram: There is no evidence that only fake currency was financing terrorism. New 2000 rupee notes were found on the bodies of terrorists on 22 November, 2016. Hence, stated objective hopelessly failed.

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Chidambaram: The third objective was that.. this according to me is the most amusing objective in light of what happened.. people with unaccounted money.

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Chidambaram: according to the annual report, nearly 99 % of demonetised notes were returned. The conclusion is that practically all allegedly unaccounted for black money stored were exchanged and the exchanger recieved white money

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Chidambaram: In fact, there are commentaries that said that demonetisation turned out to be a clever money laundering machine which allowed holders of unaccounted wealth to convert their money.

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Chidambaram: Immediately after demonetisation, government introduced 2000 rupee notes. If the objective was to eliminate unaccounted wealth, black money, there was little sense in introduction 2000 rupee notes.

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Chidambaram: This actually facilitated holders of black money.

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Chidambaram: The central board of the RBI had a duty to caution the government.

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Chidambaram argues on the test of proportionality: Demonetisation imposed a disproportionate and intolerable burden on the people resulting in loss of hundreds of lives and livelihoods.

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Chidambaram: Doctrine of proportionality also applies to "economic decisions", and judicial review extends to economic decisions.

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Justice Nazeer: What can be done now? It is over now. First point, we will consider.

Chidambaram: Please state the law. If you hold that this process was flawed that is good enough, so that they do not go in such misadventure in the future.

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Justice Nagarathna: Even if procedure was followed, this adverse impact would have still happened.

Chidambaram: Not necessarily. If the decision making process had been what it ought to be and they had taken into account...

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Chidambaram: .. all this data. They may not have withdrawn 500 rupee note.

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Justice Nagarathna: The impact of a governmental action cannot have any real bearing on its validity.

Chidambaram: No.. applying the test of proportionality, Your Lordships can say it was an unreasonable action.

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Chidambaram: You must consider it there were other means to meet the same objective. No such alternative measures were examined either by the RBI or central government.

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Chidambaram quotes case law on the court's power to give an opinion on validity of demonetisation.

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Chidambaram on the Union of India's affidavit: There's no disclosure, financial inclusion and incentivising use of electronic mode is not an objective, less cash is not the objective.

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Chidambaram: 5.30 they meet, 8 o'clock the PM has announced. You have two and a half hours when all these momentous things took place.

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Chidambaram: What kind of decision making process is this? This is the most outrageous decision making process which makes a mockery of the rule of law. This process must be struck down for being deeply flawed.

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Chidambaram indicates relevant case law to the court.

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Justice Nazeer: I was just seeing your prayers. There is no challenge to Section 26(2), your only relief sought is quashing the notification.

Is there any other petition where the validity of the provision has been challenged?

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Chidambaram reads prayer: It is there.

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Chidambaram shows judgments on power to judicial review.

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Chidambaram: Demonetisation is an extreme step. There are three ways you can approach a problem associated with currency:

1) stop issuing the currency, or discontinue. That is mildest step.
2) What the RBI did in 2005 and 14.

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Chidambaram: 2) .. replace currency already issued. New note has better security features and old notes will be phased out.

3) is demonetisation, it is extreme and affects everyone in the country. For it, there have to be more rigorous standards.

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Chidambaram concludes: If there is one major economic decision taken in the last ten-twenty years, it is demonetisation. That must be held to a much higher standard.

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Chidambaram: Applying that standard, I would urge Your Lordships to declare that such a power is not available under 26(2) and if it is, then 26(2) itself would be unconstitutional.

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Chidambaram: The process followed was deeply flawed and did not apply the tests of proportionality and therefore, the relief may be molded.

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Senior Advocate P Chidambaram concludes. Court rises for the day. Senior Advocate Shyam Divan to argue tomorrow.

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