Notifications by the Department of Economic Affairs regarding Specified Bank Notes: Ceasing to be of Legal Tender
1. Introduction
November 8, 2016 will no longer only be remembered for the most anticipated elections of the United States of America, but also for the announcement made by the Prime Minister of India, abolishing legal tender of five hundred rupees and one thousand rupees valued bank notes of the existing series except with certain exemptions.
2. Power of the Central Government to abolish legal tender of Bank notes
2.1. The Reserve Bank of India (“RBI”) has the sole authority to carry on and transact the business of making and issuing bank notes in India by virtue of Section 17 (15) of the Reserve Bank of India Act, 1934 (“RBI Act”).
2.2. RBI Act also specifies that all bank notes shall be legal tender. However, Section 26(2) of the RBI Act, provides power to the Central Government on recommendation by the Central Board of Directors of the RBI to declare by notification that bank notes (of any series or denomination) shall cease to have legal tender with effect from a date as may be specified in the notification.
2.3. Central Government on recommendation of the Central Board of Directors of the RBI has issued the notifications S.O. 3407(E) and S.O. 3408(E) under Section 26(2) of the RBI Act.
3. Notification S.O. 3407(E)
Notification S.O. 3407(E) deals with the following (i) reasons for the said notification; (ii) Specified Bank Notes ceasing to be of legal tender; and (iii) Instructions to banking companies; and (iv) instructions to persons other than banking companies holding the Specified Bank Notes.
3.1. Reasons for the said notification
The reasons specified in the notification are:
(a) The fake currency notes of the Specified Bank Notes that are largely in circulation cannot be identified from the genuine notes and the use of the fake currency notes is causing adverse effect to the economy of the Country;
(b) The fake currency notes are also being used for financing subversive activities such as drug trafficking and terrorism, causing damage to the economy and security of the Country; and
(c) High denomination bank notes are being used for storage of unaccounted wealth.
3.2. Specified Bank Notes ceasing to be of legal tender
Notification S.O. 3407(E) declares that bank notes of denominations of the existing series of the value of five hundred rupees and one thousand rupees (hereinafter referred to as “Specified Bank Notes”) shall be ceased to be legal tender with effect from the 9th November, 2016 to the extent specified in the said notification.
3.3. Instructions to the banking companies
3.3.1.The banking companies have been instructed by the Central Government to do the following in the timelines specified below:
(a) File a return with RBI specifying the details of Specified Bank Notes held by the banking company at the close of business on November 8, 2016 not later than 13:00 on November 10, 2016;(b) Remit the Specified Bank Notes to the nearest currency chest or branches or offices of RBI;
(c) All the banking companies will remain closed for transaction of all business on November 9, 2016 except for the preparation for implementing this scheme;
(d) All ATMs, and other machines used for receipt and payment of cash must remain shut on November 9, 2016 and November 10, 2016;
(e) The sponsor banks of white label ATMs must replace the Specified Bank Notes with notes having legal tender prior to activation of ATM machines on November 11, 2016;
(f) All banks must ensure that their ATMs will only dispense Rs. 100 or Rs. 50 until further instructions from RBI; and
(g) From November 10, 2016 onwards the banks may begin normal transactions and submit on end of each business day, a statement showing the details of the Specified Bank Notes exchanged by the banking company in the format specified by the RBI.
3.4. Instructions to persons other than banking companies holding the Specified Bank Notes
3.4.1.In terms of the notification, any persons having the Specified Bank Notes other than the banking company may exchange the same with bank notes having legal tender at any issue office of RBI, banks and post offices up to December 30, 2016 subject to the conditions mentioned below:
(a) The Specified Bank Notes of aggregate value of Rs 4000 or less may be exchanged for bank notes with legal tender with a requisition slip format and proof of identity; The limit of Rs. 4000 will be reviewed after fifteen (15) days form the date of the notification;
(b) Any amount of Specified Bank Notes may be credited to the account of such person maintained with the bank if such account is KYC compliant, otherwise such person cannot deposit more than Rs. 50,000 Specified Bank Notes;
(c) Pursuant to (b) above, with respect to the Specified Bank Notes deposited by a person, the bank may credit equivalent amount to the account subject to normal banking procedures;
(d) Cash withdrawal over the counter will be restricted to Rs. 10000 per day and Rs. 20000 per week until November 24, 2016. The limit prescribed will be reviewed after November 24, 2016;
(e) Cash withdrawal through ATMs will be restricted to Rs. 2000 per day per card until November 18, 2016 and Rs. 4000 per day per card from November 19, 2016 onwards;
(f) There will be no restrictions on non-cash transactions; and
(g) Any person who is not able to exchange the Specified Bank Notes before December 30, 2016 will be provided with an opportunity to do so at specified offices of the RBI or such other facility until a later date.
4. Notification S.O. 3408(E)
Notification S.O 3408(E) saves the legal tender of the Specified Bank Notes until
November 11, 2016 to the extent that the Specified Bank Notes are used for the
transactions mentioned below:
(a) Making payments at Government’s hospital and pharmacies;
(b) Purchasing tickets at railway ticket counters, Government and public sector
undertakings airlines and busses;
(c) Purchasing at consumer co-operative stores operated by Central and State
Government;
(d) Purchasing petrol, diesel and gas at stations operating under the authorisation of public sector oil marketing companies;
(e) Payments and crematoria and burial grounds;
(f) Exchange of Specified Bank Notes by passengers arriving and departing at
international airports with notes having legal tender upto a limit of Rs. 5000; and
(g) Exchange of foreign currency or Specified Bank Notes by foreign tourists with notes having legal tender upto a limit of Rs. 5000.
