Analysis: The Specified Bank Notes (Cessation of Liabilities) Act, 2017

Introduction:

Demonetisation is a situation where the country’s Central Bank (Reserve Bank in India) withdraws as an official mode of payment, the old currency notes of some specific denomination.

Demonetisation has been implemented twice before in 1946 and 1978. Prime Minister Narendra Modi delivered an unanticipated nationally televised speech at 8:15 pm on 8 November 2016. He declared that the two largest denomination notes would cease to be legal tender at midnight to counter black money. Holders of those 500 Rupees ($7.50) and 1,000 Rupees ($15) bills may deposit them at banks, yet couldn’t use them in transactions.

Background

The Specified Bank Notes (Cessation of Liabilities) Bill, 2017 was introduced in Lok Sabha on February 3, 2017. The Bill repealed the Ordinance on Specified Bank Notes (Cessation of Liabilities), 2016 promulgated on December 30th, 2016.

Parliament passed the Specified Bank Notes (Cessation of Liabilities) Act, 2017, in February 2017, and on 27 February 2017, President Pranab Mukherjee gave his assent. The legislation seeks to remove the risk of using demonetized currency notes to operate a parallel economy.

Key Features

• It ends the liability of the Reserve Bank of India (RBI) and the government on the demonetised Rs.500 and Rs. 1000 currency notes.
• It prohibits the holding, transferring or receiving of demonetised notes from 31 December 2016 and confers power on the court of a first-class magistrate to impose the penalty.
• Section 5 of the Act bars any person from knowingly or voluntarily, holding, transferring or receiving any specified banknote after the expiry of the grace period.

However, a person can hold not more than ten notes in total, irrespective of the denomination. Up to twenty-five notes can be held, if it is for study, research or numismatics.

• Section 7 of the Act states that whoever contravenes the provisions of Section 5 shall be punishable with fine, which may extend to ten thousand rupees or five times the amount of the face value of the specified bank notes involved in the contravention, whichever is higher.
• Fine of a minimum of Rs, 50,000 will be imposed for a false declaration by persons for being abroad during the demonetisation period (9 November-30 December, 2016).^[1]

Issues Faced

1. The notification dated 8.11. 2016  allowed old currency notes to be deposited till December 30, 2016, and specified that people unable to deposit them till this date would be given an opportunity later.^[2] The Ordinance, however, which came into force on 31 December 2016, made it an offence to keep old currency notes from that day onward and levied a fine. This overnight shift did not provide a window of exchange or deposit for an individual holding the notes on that day. Therefore, the holder not only lost the monetary value of the notes but he was still considered to have committed an offence. It suggests that there is no opportunity for a person who had the notes to avoid committing an offence and facing a penalty.

2. The purpose and intention regarding the imposition of a penalty for the possession of old currency notes are not very clear. One can compare the act of holding an invalid currency note with that of an expired cheque as both of these instruments are designed to complete transactions. A cheque is invalid three months after it is issued. Holding several expired cheques, however, does not warrant a fine.

Conclusion

This act provides legality to the actions of the government i.e the demonetisation of 2016. In November 2016 the government had banned the Rs 500/1000 notes to monitor black money and terror funding and people were given time to exchange or deposit these notes with them until December 30, 2016. There was also a grace period for exchanging/depositing the notes for people who during that time were not in India.

The change had resulted in a huge cash shortage of currency notes which eventually eased with the introduction of Rs 2,000 notes and new Rs 500 notes afterwards.

References:

^[1] The Specified Bank Notes (Cessation of Liabilities) Bill, 2017, PRSIndia (2020), https://www.prsindia.org/billtrack/specified-bank-notes-cessation-liabilities-bill-2017 (last visited Jul 5, 2020).

^[2] S. O. 3407 (E), Gazette of India, Ministry of Finance, November 8, 2016, http://finmin.nic.in/172521.pdf.