Tuesday, 22 November 2016

Fwd: Why Narendra Modi's Demonetization Law violates the RBI Act and amounts to an unconstitutional financial emergency


---------- Forwarded message ----------
From: Seema Sapra <seema.sapra@googlemail.com>
Date: Tue, Nov 22, 2016 at 11:27 AM
Subject: Why Narendra Modi's Demonetization Law violates the RBI Act and amounts to an unconstitutional financial emergency
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Cc: Seema Sapra <seema.sapra@gmail.com>, Seema Sapra <seemasapra@hotmail.com>


Here is my revised blog post tiled "Why Narendra Modi's Demonetization Law violates the RBI Act and amounts to an unconstitutional financial emergency" available at http://seemasapra.blogspot.in/2016/11/why-narendra-modis-demonetization-law.html 

I also reproduce it below. 

Seema Sapra 
General Electric Company whistleblower 


Why Narendra Modi's Demonetization Law violates the RBI Act - A preliminary examination by Seema Sapra

The Demonetization Law dated 8 November 2016 is a notification issued by the Government of India under Section 26(2) of the Reserve Bank of India Act 1934. It appears as if the Demonetization notification is not only a fraudulent exercise of power but is also ultra vires Section 26(1) and Section 26(2) of the RBI Act. 

Section 26 of the RBI Act reads: 
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]. 

The Demonetization notification can be read at http://finmin.nic.in/172521.pdf

Let us examine the violations of Section 26(1) and (2) by the demonetization notification. 

Under Section 26(2) the Government of India (GOI) can only demonetize "any series of bank notes of any denomination" at a time. The GOI with its demonetization notification has overnight demonetized two entire denominations of bank notes worth about 86% of the currency in circulation in India. The scale of the demonetization and its temporal immediacy makes this measure a violation of the legal tender guarantee of the GOI under Section 26(1) of the RBI Act. 

The power under Section 26(2) has to be exercised for justifiable and valid reasons which would be subject to judicial review. Further the measure adopted must be reasonable and must be commensurate with the objective sought to be achieved. It should not cause excessive financial, monetary, and economic disruption, loss and hardship that could have been avoided and which is not necessary to achieve the legitimate objectives of the exercise of power under Section 26(2). 

Modi's demonetization notification claims to have three objectives. These are reproduced below: 
"And whereas, it has been found that fake currency notes of the specified bank notes have been largely in circulation and it has been found to be difficult to easily identify genuine bank notes from the fake ones and that the use of fake currency notes is causing adverse effect to the economy of the country;
 And whereas, it has been found that high denomination bank notes are used for storage of unaccounted wealth as has been evident from the large cash recoveries made by law enforcement agencies;
 And whereas, it has also been found that fake currency is being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the country and the Central Government after due consideration has decided to implement the recommendations of the Board;" 

It is submitted that out of the three statements of objectives and purposes of the notification, it is only the fake currency issue that can amount to a valid reason for the exercise of the demonetization power under Section 26(2) of the RBI Act. It is further submitted that the demonetization notification is ultra vires as the measure adopted is far in excess of what the GOI needed to do to counter fake currency notes. The statement in the notification that "it has been found to be difficult to easily identify genuine bank notes from the fake ones" also appears to be factually incorrect and seems to have been included with malafide intent. 

It is important to understand that there is no legal bar on Indian citizens keeping their wealth and legitimate earnings in cash if they so desire. Therefore cash does not ipso facto equal black money. Further, demonetization cannot be used as a tax enforcement measure. The RBI is not a tax authority. Therefore demonetization cannot be justified in law for the second reason mentioned in the notification. Demonetization also cannot be a money laundering measure. The Demonetization notification in so far as it seeks to justify itself as an attempt to tackle tax evasion or money laundering is illegal and issued without jurisdiction. Withdrawal of legal tender character from bank notes for the purpose of addressing tax evasion or money laundering does not fall with the ambit of Section 26(2) of the RBI Act. The Demonetization notification is bad in law as it targets all citizens indiscriminately and without due process of law. US economist Lawrence Summers in a blog post has called this measure expropriation which has not only caused chaos in India, but also a "loss of trust in government". He writes: 

"We recognize that many of those who hold large quantities of cash in India have come by their wealth in corrupt or illegal ways.  So, the temptation to expropriate is understandable.  After all, as the argument goes, anyone who came by their wealth legally has nothing to fear from coming forward and exchanging old notes for new ones.
Most free societies would rather let several criminals go free than convict an innocent man.  In the same way, for the government to expropriate from even a few innocent victims who, for one reason or another, do not manage to convert their money is highly problematic.  Moreover, the definition of what is illegal or corrupt is open to debate given commercial practices that have prevailed in India for a long time."

The Government of India has also cluelessly violated Section 26 of the RBI Act by allowing for several exemptions to the legal tender status of the cancelled bank notes. Once the GOI notifies under Section 26(2) that any bank note series has ceased to be legal tender, Section 26(2) mandates that such bank notes can only be exchanged at an agency or office of the RBI as notified. The GOI has no power to thereafter permit such demonetized bank notes to be used for some select transactions at Government outlets or petrol pumps, or at hospitals, or at airline ticket counters or to pay GOI dues, or for farmers to buy seeds, etc. These exemptions and rules are all ultra vires Section 26(2) and amount to an illegal and arbitrary exercise of power in violation of Article 14 of the Constitution of India. 

Further under Section 26(2) of the RBI Act, the GOI does not have the power to place limitations on cash withdrawals by citizens from their bank accounts or from ATMs. The notification in so far as it places these restrictions is ultra vires Section 26(2) of the RBI Act. 

Similarly, under Section 26(2) of the RBI Act, the GOI does not have the power to limit the amount of demonetized bank notes that citizens can exchange at the RBI in cash. The notification in so far as it places these restrictions is also ultra vires Section 26(2) of the RBI Act. 

There is also a larger question of whether the demonetization notification is a fraudulent exercise of power in that the news of the proposed measure was selectively leaked in advance and whether therefore the notification has the hidden agenda of influencing imminent elections in India and targeting Narendra Modi's rivals and detractors. There is mounting evidence that news of the demonetization measure was selectively leaked out. This completely destroys the GOI argument that the need for secrecy is the reason for the Government's unpreparedness in dealing with the consequences of the notification which has created an artificial currency shortage in the country and which is adversely impacting people's daily lives and work and economic activity. The demonetization notification issued under Section 26(2) of the RBI Act is also issued upon the recommendation of the Central Board of the RBI. Now the RBI Central Board has representatives from private industry. Under RBI rules, the Central Board members must be given advance notice of Central Board meetings and agenda. Therefore how can the GOI claim that the demonetization announcement was kept secret? 

The unprecedented, misconceived and fraudulent demonetization notification of the Narendra Modi Government is nothing but the declaration of an unannounced financial emergency. It has eroded public trust in the Government of India and its legal tender guarantee. An administration that has messed up so monumentally has no right to continue in power. Prime Minister Narendra Modi should step down from his office along with Finance Minister Arun Jaitley. 

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