Guest Post: Seeking Proportionality in the FCRA – International and Comparative Perspectives

[This is a guest post by Viraj Thakur.]

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Introduction

NGOs are often funded by foreign sources. However, the ease with which they can acquire such foreign funding differs based on the object and jurisdiction of the NGO. For instance, the United States has specifically exempted NGOs from the purview of the Foreign Agents Registration Act (“FARA”), which involves the receipt of foreign funding by entities undertaking political activities. The Declaration on Human Rights Defenders, adopted by the United Nations (“UN”) General Assembly in 1998, highlights the role of NGOs (among others) in protecting human rights; it is pertinent to note that the declaration does not contain any clause regulating foreign contribution. In fact, as noted by the Special Rapporteur on the rights to freedom of peaceful assembly and of association, UN treaty bodies have found regulations on fundraising based on the origin of funding deeply problematic.

India, however, has a strict regime for regulating foreign funding to NGOs, implemented through the Foreign Contribution (Regulation) Act, 2010 (“FCRA”). The legitimacy of the act has recently been hotly debated with the search of Harsh Mander’s home, which some view as a ‘vindictive witch-hunt.’ These searches were carried out due to alleged FCRA violations by Harsh Mander’s NGO, Centre for Equity Studies.

The FCRA was amended in 2020, and these amendments were challenged in Noel Harper v. Union of India (2022). However, in this case, as has been argued earlier, the judiciary omitted legal principles entirely, presenting rhetoric as a substitute, entirely glossing over the question of proportionality.

Naturally, now, a question arises. If the FCRA is disproportionate, can a rational nexus be struck between the purpose of the Act and the means adopted? In other words, what alternatives can be adopted to make the impact of the FCRA proportionate?

In this article, I shall attempt to answer this very question. First, I consider international standards in regulating foreign funding to NGOs. I focus on a recent report released by the Financial Action Task Force (“FATF”) and focus on policy-based improvements. Secondly, I look closely at the Foreign Donations (Voluntary Activities) Regulation Act, 2016, which is in force in Bangladesh, to suggest means to temper the FCRA while pointing out a notable problem in both. Finally, I look at an international judgement which provides for a specific test of proportionality in dealing with the right to freedom of association of NGOs. In doing so, I argue for greater proportionality within the FCRA by suggesting measures to improve the existing shortcomings.

International Standards in Regulating Foreign Funding to Civil Society

While entities such as the UN believe that foreign funding must not be regulated, bodies such as the FATF have noted before that terrorist funding to NPOs (non-profit organizations) can pose a threat to a country. To this end, the FATF recently released a paper detailing best practices in dealing with such a situation, which may provide some answers as to how to balance the right to freedom of association of NGOs and national interests. Relying on this FATF paper, my primary objective shall be to propose a framework that would push India towards a rational policy intervention via the risk-assessment model proposed in the paper.

The first step would be to conduct a survey in order to determine which organizations fall within the FATF definition of an ‘NPO’:

A legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social, or fraternal purposes, or for the carrying out of other types of “good works.”

The next step is to identify any “vulnerabilities”(sectoral or organisational) that can be exploited by “threats” (referring to terrorist funding or misappropriation). According to the report, if no action is taken at all, NPOs serving as fronts for terrorist funding may infiltrate civil society. However, overregulating the sector can create regulatory barriers that can force legitimate NPOs to shut down. These vulnerabilities must be assessed based on data analysis, and not just rhetoric.

Next, public consultations and greater deliberation on legislative action is a must. This must be done periodically, as using tenuous and old data is unlikely to allow a balance between the spectrum of no action and overregulation, as the report shows. Additionally, involving the primary stakeholders will help build trust and ensure a balanced approach through the inclusion of diverse perspectives. Moreover, as noted in Annexure A to the report, the 2023 French National Risk Assessment involved a systematic analysis of NPOs and the risk of terrorist funding affecting them at a national-scale. In doing so, it also established certain classes of NPOs that may be more susceptible to terrorist funding. For example, NPOs that provide humanitarian aid in conflict areas/high-risk areas may warrant greater scrutiny than another NPO not fitting these criteria. Hence, creating intelligible differentia between groups of NPOs is another step to be considered, to prevent disproportionality.

Lastly, financial transactions of registered NPOs that utilize foreign funds can be made public to promote transparency. In India, currently, only a state-wise list of organisations registered under the FCRA is available, but not their financial statements.

The government must ensure that it does not discourage social welfare altogether. Regulation is important, but taking a rational research-driven approach is the first step in ensuring balanced regulation.  The normative message it ends up sending to NPOs currently is to enter at their risk and find their own sources of funding—resorting to foreign funding brings too many regulations and too much additional risk. 

Manifesting Proportionality via the FDVA in Bangladesh

Another good starting point may be a similar legislation from Bangladesh. The Foreign Donations (Voluntary Activities) Regulation Act, 2016 (“FDVA”) deals primarily with NGOs, and bears strong resemblance to the FCRA. However, it is less stringent in terms of imposing strict requirements on NGOs receiving foreign funding, and hence may serve as a reference point for tempering the language of the FCRA.

Section 7 of the FDVA, for instance, deals with the same subject matter as Section 7 of the FCRA, i.e., dealing with transfer of foreign funds between NGOs. Yet, their approach is radically different. The FDVA allows the transfer of foreign funds between NGOs, provided three basic conditions are met:

• The entity receiving the grant must be a registered organization under prevalent laws of Bangladesh;
• The NGO granting foreign funds must provide a proposal of the project to be undertaken. This proposal must include the details of the NGO receiving funds and contain an outline of the funds to be granted;
• The granting NGO or individual shall guarantee the implementation of the project in accordance with the conditions of approval of the project.

Section 7 of the FCRA instead imposes a blanket ban on any transfer of foreign fund, without any specific rationale. One of the reasons for such routing of funds is that large NGOs support smaller ones that do work at the grassroots level. It was noted in the parliamentary debate over the FCRA that this provision has been made absolute for no well-defined reason.

Furthermore, a parallel can be drawn between Section 9 of the FDVA and Section 17(1) of the FCRA, both providing for the bank account in which an NGO may receive foreign funds. While the former allows an NGO to open a bank account in any scheduled bank, the latter requires an NGO receiving foreign funds to open an account in an SBI branch in New Delhi. Moreover, as was pointed during the parliamentary debates over the amendment, there was no cogent rationale for this move. This is especially worrying, given that 93% of NGOs have accounts outside of Delhi.

Finally, Section 17 of the FDVA provides for an appellate tribunal in case of grievances and prescribes a time limit for redressal. Instituting such an alternate mechanism in India would be ideal, given that the delays of the Indian legal system imply that any NGO challenging its FCRA license being suspended, would find itself embroiled in a long struggle of litigation. This would impose another financial barrier on the NGO, making it harder for them to function. Currently, no such dedicated mechanism exists in India.

One common issue can be spotted in both legislations. Section 8 of the FCRA and Section 6(5) of the FDVA both prescribe that foreign funds can only be used to meet up to 20% of administrative expenditure requirements.

In the context of India, reading Section 8 in conjunction with the Foreign Contribution (Regulation) Rules, 2011 (“the Rules”) shows that under Rule 5, only expenses that are associated with field work or directly with the purpose of the organisation can be met freely through foreign funds. Anything else is categorised as ‘administrative expenditure.’ In light of the same, how does the Centre expect NGOs to expand, when foreign contribution can no longer be used to meet expenses such as rent, legal charges, accounting charges, etc? Such a severe restriction on the usage of administrative expenses only impedes social welfare, especially when this particular section has no justification in the FCRA or the amendment bill.

Conclusion

The FCRA has definite fault lines and displays signs of disproportionality. However, attempting more neutral policy making such as that in the FDVA would prove immensely useful for India, as would ensuring an empirical approach derived from the FATF paper. However, it is also important to note that apart from formal requirements such as through the FCRA, informal requirements also pose a hurdle. For example, requiring registration through government officials at the local level (as in Bangladesh, via the FDVA) often means jumping through bureaucratic loops that create prolonged delays. A more holistic policy overhaul must consider this as well in the Indian context too, apart from making the FCRA itself less rights-intrusive. This would allow a balance to be struck between the rights of civil society and national interest for security.

The Supreme Court’s Electoral Bonds Judgment – III: A Critique of Double Proportionality [Guest Post]

[This is a guest post by Chiranth Mukunda.]

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This essay considers the doctrine of “double proportionality” in the Electoral Bonds Case. In brief: the majority opinion, written by Chandrachud CJI, holds the various amendments brought through the Finance Act 2017 unconstitutional for being in contravention of right to information protected under article 19. Once it is established that the foundational design of the scheme was to make political donations through electoral bonds confidential, the enquiry proceeds to analyse whether the right to information is engaged (i), and whether the restrictions placed on right to information are reasonable and justified (ii).  On aspect (i), the court, following Association for Democratic Reforms (2002) and PUCL (2003), holds that information about political funding is essential for the voter to exercise choice and their freedom to vote, and as a corollary, for the effective exercise of freedom of speech and expression. Aspect (ii) is where the application of proportionality and double proportionality is used by the majority to determine whether the restriction of the right to information is reasonable vis-à-vis the purpose(s) of the scheme. Hence, In part I, I highlight the necessity of application of the double proportionality. In part II, I analyse whether the test of double proportionality is correctly laid down.

Balancing fundamental rights

Chandrachud CJI recognizes two purposes of the scheme in restricting access to information. These are then assessed on the touchstone of proportionality i.e., whether the abridgement of the right is disproportionate to the legitimate aim sought by the purpose(s)/objective(s) of the scheme.

Chandrachud CJI identifies the two purposes of the scheme as a) curbing black money and b) donor privacy. The majority opinion accepts the State’s’ submission that donor privacy or confidentiality is not only a means to achieve the aim of incentivizing political donations through legitimate banking channels, but also a substantive end in itself. It therefore holds that “the Constitution guarantees the right to informational privacy of political affiliation” under article 21, and that extends to political donations being confidential (para 141). Having held so, the question now is whether the Electoral Bond Scheme adequately balances the right to information against right to informational privacy of political affiliation.

Donor privacy as a legitimate aim and double proportionality

According to the majority, the conflict is between the right under restriction i.e., the right to information (Right A) and the countervailing right i.e. right to privacy of the donor (Right B). The traditional balancing exercise to resolve or avoid the conflict can be conducted by various means, for instance:

• It can be held that the right A trumps right B because the former right subserves the ‘larger public interest.’
• Alternatively, it can be held that held that there is ‘no real conflict’ between the rights either because one of the rights is not engaged, or the boundaries of the rights are circumscribed in such a way as to avoid conflict.

However, the application of proportionality in the ‘contextual balancing’ exercise between two competing rights is considered to bring in a ‘structured balancing exercise’ where both rights are given equal importance and weightage. It will be fruitful to highlight the reasons for double proportionality in balancing two fundamental rights, in order to analyse the test laid down by Chandrachud J (Para 157), and whether it is in consonance with the principled reasons behind the application and structure of the double proportionality test.

Reasons for Double-Proportionality

Reason 1: Equal Importance of both competing rights

In Re W,  reason 1 was expressed in these terms: “… each Article propounds a fundamental right which there is a pressing social need to protect. Equally, each Article qualifies the right it propounds so far as it may be lawful, necessary and proportionate to do so in order to accommodate the other”.  Application of the double-proportionality test to balance two competing rights of equal importance is said to secure ‘procedural justice’ by recognizing that both rights require full protection, and that this is accomplished by application of the proportionality test to the restriction on each right. It structures the enquiry in ways that minimizesthe interferences with both right A and right B, thereby giving fair and equal value in the enquiry to both the interests exemplified by competing rights.

Reason 2 : Single-Proportionality favours the right under restriction (Right A) over the competing interest of Right B

Chandrachud CJI recognises that the ‘priority-to-rights’ effect of proportionality enquiry, as it tends to give prominence to the fundamental right under restriction over the competing interests (para 153), and that single proportionality might not be appropriate when two fundamental rights are involved. When the competing interest is a fundamental right in itself, the prominence given to the ‘invoked right’ i.e. restriction of right A under challenge in the proportionality enquiry cannot be a ‘balanced exercise.’ This is because single proportionality enquiry, especially in the third stage, requires the minimization of interference to the right under restriction (right A) at the expense of the competing interest.

For example, the conflict in Campbell v MGN was between freedom of speech (Right A) and the right to privacy (Right B), both of which are equally protected rights under the ECHR. If the court were to adopt a single proportionality test to review the restriction of the invoked right (A), the furthering of competing right B would form the legitimate aim and the restriction of the right to freedom of speech (A) would have to have a rational nexus to the protection of privacy (right B). However, in the third stage, the court would have to consider whether the restriction on right A is the “least restrictive measure” to further the competing interest of right B. This entails prioritizing and maximizing the protection of right A, but not maximizing the interests of competing right B. This is incompatible with the proposition that both rights require equal and full protection.

Reason 3 : Single Proportionality is insufficient to take into account the interest of the competing right

It should be noted that it is not conceptually impossible to account for the fundamental importance of the competing interest (Right B) within the single proportionality test while testing the restriction of right (Right A). However, it would require modification, or what some call ‘distortion’, of the single proportionality test in order to recognise the importance of the competing fundamental right. For example, the third stage of proportionality would require not the maximum protection of right under restriction to which proportionality is applied, but maximum protection for both the rights. Instead of asking the question whether the measure is least restrictive of the right under restriction (A) and achieves the end in ‘real and substantial degree,’ the question would be whether the alternative measure would be least restrictive of both rights and achieves the purpose in ‘real and substantial degree.’

Then, the third stage of proportionality test is no longer about prioritizing and providing maximum protection to the right under restriction, but an equilibrium position of right under restriction and competing interest (right B).This modification is considered unsatisfactory for giving maximum protection and importance to both right A and right B. Therefore, double proportionality is envisaged as the same question being examined from two perspectives, rather than two different perspectives being considered under a single proportionality review of restriction on one right (invoked right). This flows directly from the reason 1 that both the rights are fundamental and deserve equal importance and consideration.

Chandrachud CJI’s three-step test

The major case after Campbell v. MGN  where the ‘balancing of rights’ was required was In Re S. The facts were that there was a gag order on news outlets, to prevent the publication of details and photographs of a 5-year-old child whose brother had been killed by their mother. The case concerned a conflict between freedom of speech of the newspapers (invoked right) and privacy of the child (competing right). Lord Steyn laid down the four propositions for the ‘ultimate balancing test’, last three of which include those laid down by Baroness Hale in Campbell, which Chandrachud CJI relies on.

First, neither Article has precedence over the other.

Secondly, where the values under the two Articles are in conflict, an intense focus on the comparative importance of the specific rights being claimed in the individual case is necessary.

Thirdly, the justifications for interfering with or restricting each right must be taken into account.

Finally, the proportionality test must be applied to each.

Chandrachud J modifies this test by holding that that second and third propositions are subsumed within the balancing (fourth) prong of the proportionality analysis. Further, he holds that:

a. if under the constitution, no hierarchy has been presented for the rights under consideration (firstly above), then :

the following standard must be employed from the perspective of both the rights where rights A and B are in conflict:

b. Whether the measure is a suitable means for furthering right A and right B.

c. Whether the measure is least restrictive and equally effective to realise right A and right B; and

d. Whether the measure has a disproportionate impact on right A and right B.

However, it is argued below that this distorts the double-proportionality enquiry and prioritizes the right under restriction (right A) over competing right B, and approximates towards a modification of single proportionality test, rather than a double-proportionality test. This is essentially evident from the subsequent analysis which Chandrachud CJI undertakes, where the contradictions of the test he lays down become apparent.

Subsequent Analysis and Contradictions

The first prong of proportionality is satisfied as each right ( A and B) provides a legitimate aim for the restriction of other.

On proposition (b):

 (b): Whether the measure is a suitable means for furthering right A and right B.

The question is framed in such a way that it is not possible to fulfil the requirement of suitability from both sides but is only possible from the side OF the invoked right (Right A). As Chandrachud CJI holds, the measure that places restriction on right to information(right A) is suitable for purpose of realizing the informational privacy of the donor (right B). However, the measure can never be suitable for purpose of realizing the right to information (right A).

“… the purpose of securing information about political funding can never be fulfilled by absolute non-disclosure. The measure adopted does not satisfy the suitability prong vis-à-vis the purpose of information of political funding. However, let us proceed to apply the subsequent prongs of the double proportionality analysis assuming that the means adopted has a rational nexus with the purpose of securing information about political funding to voters.”(para 162)

This is obvious. It is because the anonymity of the contributor (privacy of the donor, right B) is intrinsic to the Electoral Bond scheme (para 158). The measure can never be suitable to realise right to information (right A) because the measure places no restrictions on the right to privacy (B). It is the invoked right A i.e. right to information which has the potential to place restrictions on competing right B if the challenge is successful. The court’s responsibility is to balance the involved right against the competing right by application the proportionality analysis separately to right each, by considering protection of each as a restriction on another.

Is the question posed by Chandrachud CJI analytically sound for application of Double-Proportionality analysis? The answer is no. As Prof. Huge Collins commenting on Campbell v HGN and  In re S writes : “Given that there are [equal]competing interests, rights…the correct approach appears to be a double proportionality test. In other word, the case for interference with the separate rights of each party needs to be assessed separately according to a test of proportionality. The legitimate aim that may justify such an interference with a fundamental right ….include the protection of the fundamental right of the other party”

As Chandrachud CJI himself opines, the “standard must be employed from the perspective of both the rights where rights A and B are in conflict”. So, the question must be whether the restriction of the invoked right A (right to information) by the measure is suitable/rational to achieve right B (right to privacy). The answer might be yes/no. On inverse application, the question would be whether the potential restriction on competing right B (right to privacy) by protection of invoked right A is suitable/rational to achieve right A (right to information). The answer might be yes/no. There is no logical impossibly, as Chandrachud CJI finds to be engaged by the question framed. The assumption which Chandrachud CJI makes could be avoided if there was true application of the double proportionality test as shown in the table below.

It might be said that separate application of proportionality to each right considering the other right as legitimate aim is merely unnecessary repetition that has no substantive bearing on the final conclusion reached. However, that is not the case, as a single proportionality review in case of conflict of two equal rights has the potential to skew the balance in towards the invoked right to the disfavour of the competing right that is furthered by the measure. The ‘preferential framing’ negates the reasons mentioned above for balancing two equal fundamental rights by applying double-proportionality test. The test ensures that both the rights deserve maximum judicial protection by application of proportionality test to the restriction on each right.

Restriction of invoked right A (first stage)	Potential Restriction of  competing right B by the invoked right ( second ‘inverse’ stage)	The test Chandrachud CJI lays down
Legitimate aim: Conflicting operation of right B of equal value.   Suitability/rational nexus: Whether the restriction of right A is suitable to realize right B. Whether the restriction on right A is least restrictive measure and equally effective and whether the alternative such measure realizes the purpose of right B in real and substantial degree.     Balancing stage: Comparative importance of fundamental rights and justifications for restrictions on the same; Whether the restriction on right A is disproportionate to the purpose of right B	Legitimate aim: conflicting operation/protection of right A of equal value.   Suitability/rational nexus: whether the restriction of right B suitable to realize right A     Whether the restriction on right B  is least restrictive measure and equally effective to realise  and whether the alternative such measure realizes the purpose of right A in real and substantial degree     Balancing stage: Comparative importance of fundamental rights Justifications for restrictions on the same. Whether the possible restriction on right B by invoking of right A disproportionate to the purpose of right A	b. Whether the measure is a suitable means for furthering right A and right B.   c. Whether the measure is least restrictive and equally effective to realise right A and right B; and    d. Whether the measure has a disproportionate impact on right A and right B

On proposition (c)

Consider question (c): Whether the measure is least restrictive and equally effective to realise right A and right B.

If we bifurcate the question into two parts as Chandrachud CJI does for the above question (b), then we see that the question is either illogical (as it is similar to the above), or prioritizes the invoked right against the competing right B. Non-bifurcation essentially becomes a modified version of the necessity stage of single-proportionality test (reason 3).

i. whether the measure is least restrictive [on right A] and equally effective to realised right B [right to privacy].

The framing of this question itself prioritizes right A over right B. This is because right B i.e., the right to privacy is intrinsic to the measure. The question effectively being asked is whether the restriction on right to information (right A) by the measure (in furtherance of right B) is the least intrusive. This is prioritizing and  maximization protection offered to the invoked right against the competing right B that is effectuated by the measure.

However, if the question is asked differently, i.e. whether the alternative measure would be least restrictive of both rights and achieve the purpose in a real and substantial manner( conjoined question), it is then merely a modification of the least restrictive stage in the single-proportionality test to take into account of the competing right B, with limitations of that approach to effectively maximize the protection of both the competing rights (as explained in Reason 3).

ii. whether the measure is least restrictive (on right B) and equally effective to realise right A (right to information).

The measure is not placing any restrictions on right to privacy (right B), but is placing restrictions on right to information (right A). In fact, right B is intrinsic to the measure. If that is the case, the question is redundant. However, it is not redundant if the question is whether the alternative measure would be least restrictive and equally effective to realise rights A and B. But the question is not framed in that way.

Chandrachud CJI previously holds that the measure can never be suitable to realise right to information (right A). If that is the case, then this question is also one of logical impossibility, as a measure which can never be suitable to realise A can never be the least restrictive means of doing so. However, Chandrachud CJI avoids the second logical impossibility by framing the question conjoinedly as mentioned above.

Example: How would the third stage work in proportionality, applied separately from both perspectives

It would involve asking the same question from perspective of both right A and right B. From the perspective of right A, the question would be whether the restriction of right A is least restrictive means of realizing interest of right B. From the perspective of right B, the question would be whether the restriction on right B would be the least restrictive measure to realize right A. On the latter question, it might be said that there is no restriction on right B. However, the double-proportionality enquiry is merely tasked with balancing competing interests of right A and right B in the judicial setting. The competing rights mark a conflict for the space to be occupied by the judicial outcome, where giving protection to one involves restriction on another.

Consider section 29C of the Representation of Peoples Act 1951, which Chandrachud CJI holds to be minimally restrictive of both rights and secures the purpose of both rights in a real and substantial manner (para 165). The said alternative measure has to be considered from both sides as placing some restrictions on each right. Then, the question would be whether such restriction is minimized interference with each right vis-à-vis the purpose (competing right) considered from both perspectives, rather than a single question of whether the measure under challenge is least restrictive of both rights.

On Proposition (d) whether the measure has a disproportionate impact on right A and right B.

This question suggests that the measure can have disproportionate impact on the right B. However, at the risk of repetition, the right B is intrinsic to the measure. The question makes sense only if the question is modified into whether the identified alternative has disproportionate impact on either right. As table A shows, this involves separately asking two questions from two perspective by considering protection of each right (example: in the identified alternative measure) as a restriction on each other.

However, Question (d) is not applied at all as the Chandrachud CJI holds that the necessity stage (c) has not been satisfied, and therefore there is no need of applying the balancing stage (para 167). Having held that double proportionality standard formulated by Baroness Hale in Campbell v MGN is adopted, and having held that the first two components of the Campbell standard of  “comparative importance of the actual rights being claimed in the individual case” and “justifications for interfering with or restricting each of those rights” is to be submerged within the balancing stage, Chandrachud J does not complete the said double-proportionality standard adopted. As discussed above, even the last component of Campbell standard of “applying the proportionality test to each” is not satisfactorily applied, as the questions are framed in a way that prioritizes the invoked right A against the competing right B: thus negating the very reasons for application of the double-proportionality test.

Conclusion

The Court fails to apply proportionality separately to each of the rights. Having held that there were two competing rights, the balancing exercise by application of proportionality in relation to each other is required to give due recognition to the equal importance and maximum protection to each right. Although the outcome of the case might not differ, the propositions laid down suffer from lack of clarity for future application. The question is framed in a way that would either lead to no answers or one which would prioritize the right under restriction i.e., the invoked right A. It is argued in this essay that what the majority opinion effectively applies is a modified single-proportionality test with all the analysis happening in the necessity (third) stage, making most of the questions in the test laid down redundant without a modification in the framing. This, it is submitted, makes the test incomplete.

The Supreme Court’s Electoral Bonds Judgment – I: Political Equality and Electoral Transparency [Guest Post]

[This is a guest post by Kieran Correia.]

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On 15 February, a five-judge bench of the Supreme Court handed down judgement in Association for Democratic Norms v Union of India, popularly known as the Electoral Bonds Case. Two opinions were issued – the majority opinion authored by Chandrachud CJI, joined by Gavai, Pardiwala, and Misra JJ, and a concurring opinion by Khanna J. Both held the Electoral Bond Scheme (EBS) unconstitutional; supporting legislation – such as the amendments to the Representation of the People Act 1951 (RPA), Companies Act 2013, and the Income-tax Act 1961 (IT Act) so on made by the Finance Act 2017 – were also declared unconstitutional.

The Court also passed an order requiring, inter alia, the State Bank of India (SBI) to submit details of each electoral-bond contribution and purchase from 12 April 2019 till the present within three weeks, which the Election Commission of India (ECI) is to publish on its Web site within a week.

The Court’s judgement joins a vanishingly small number of pro-democracy verdicts in recent Indian constitutional jurisprudence. The verdict’s mobilization of the principle of political equality – in ensuring equality in influence over both electoral outcomes and policy – rests on the principle that elections in a democratic system must be subject to popular oversight and made available to public participation. Combined with a rigorous order, the Court’s intervention also promises to begin the process of levelling an electoral field that has become dangerously uneven over the past few years.

The majority opinion broadly deals with two issues: the non-disclosure provision – making it optional for parties to disclose information pertaining to their funding – and the unlimited donations provision, which eliminated the limit on how much each corporation could donate to a party.

In this post, we will examine the background of the judgement at some length and discuss the Court’s preliminary analysis of the scope of its review before moving on to its reasoning for the non-disclosure provision and how it infringes voters’ fundamental rights. We will also focus at some length on Chandrachud CJI’s proportionality analysis. A later piece will take up the Court’s treatment of the second issue of unlimited donations.

Electoral Funding and the EBS

Much has already been written on the EBS, including on this blog, so I will try to be light on the facts. Chandrachud CJI’s opinion begins by diving into the history of electoral funding in India. Electoral funding is regulated by a complex legal landscape, comprising three pieces of legislation – the RPA, IT Act, and Companies Act. The opinion specifically focusses on the regulation of corporate funding, tax regulation that attempted to curb black money, and election law that mandated transparency.

Barring a brief period between 1969 and 1985, when corporate funding was explicitly prohibited, such funding has been tightly regulated by law since 1960. There was a cap on corporate funding, disclosure requirements were high, and – this was implied – donations could only be made through ordinary instruments such as cheque, bank draft, and electronic clearing system. The Finance Act 2017 loosened or eliminated all of these restrictions.

Tax legislation exempted the income of political parties through financial contributions and investments from income tax. This was made subject to, inter alia, the requirement to maintain a record of contributions. However, the Finance Act 2017 eliminated this requirement as well if contributions were received by electoral bonds.

A similar transparency requirement existed in the RPA. Political parties had to declare the details of contributions in excess of a certain amount to receive tax exemptions under the IT Act. However, the Finance Act 2017 eliminated this requirement too for electoral-bond contributions.

On 2 January 2018, the Department of Economic Affairs in the Ministry of Finance notified the EBS. The EBS defines an electoral bond as “a bond issued in the nature of promissory note which shall be a bearer banking instrument and shall not carry the name of the buyer or payee.” Importantly, the EBS notified the SBI – a nationalized bank with direct government control – as the bank authorized to issue and encash bonds. Moreover, the information received by the authorized bank was to be treated as confidential.

Scope of judicial review

The Court begins its analysis with the smaller – but no less important – issues relating to the scope of judicial review. The Solicitor General, in his submissions, argued that the impugned amendments and the EBS pertain to matters of “economic policy” (Respondent’s Written Submissions, paras 172–201). One of the petitioners, on the other hand, in their Rejoinder Submissions rebutted this contention by highlighting that “the EBS is an executive instrument that deals with political party funding, and, therefore, indisputably, with entities that participate in the electoral process” (Petitioner’s Rejoinder Submissions, para 7) (emphasis in original).

Here, the Petitioner drew on John Hart Ely’s version of the representation-reinforcing justification of judicial review – in broad strokes, the idea that the rôle of judicial review, a counter-majoritarian force in a democracy, is to correct impairments in the representative process. Since the petitioners had challenged legislation and a scheme which fundamentally impacted the electoral – and therefore representative – process, the Court could not be light touch and afford a presumption of constitutionality.

The Court cleaves apart the two issues. In dealing with the first issue – whether the impugned pieces of legislation are “economic policy” – the Court agrees with the petitioners in tagging them as “amendments [that] relate to the electoral process” (para 41) and therefore proceeding with the ordinary level of scrutiny.

However, on the second, the Court remains reluctant to divest these amendments of the protection afforded to them by the presumption of constitutionality. Unfortunately, the Court does not supply much reason here apart from declaring that it “cannot carve out an exception to the evidentiary principle which is available to the legislature based on the democratic legitimacy which it enjoys” (para 45). The consequence of this is that the burden is on the petitioners to establish a prima facie violation of their fundamental rights by the State.

Political equality and the disclosure of information

The Court sets the stage for discussing the two main issues by underscoring the connexion between money and politics. This context-framing is important as it is the power that wealthy corporations and individuals exert over the political process that makes unregulated political contributions so dangerous to democracy. The Court – to its credit – recognizes this at the outset (para 55).

The amendments to the RPA, IT Act, and Companies Act – as mentioned earlier – eliminated the most elemental requirement of electoral-financing regulation: disclosure. Companies now needed only to disclose the total amount they contribute to political parties, not the specifics. The electoral bond itself was also shrouded in secrecy, as we have already seen.

The challenge to this new régime, then, was that the non-disclosure of information infringes on the right to information of the voter under article 19(1)(a) of the Constitution. The Court responds to this challenge by analysing the jurisprudence around the right to information. In tracing its evolution, the Court noted how it shifted from an instrumental right – to further transparent government – to a right with intrinsic value. In the latter phase of the Court’s jurisprudence, the Court recognized the “inherent value in [the] effective participation of the citizenry in democracy” (para 65).

The right to information, the Court notes, was extended to the requirement of candidates to disclose their criminal records and assets. The question that subsequently arises, however, is whether this jurisprudence would apply to political parties – and not to individuals alone. The analysis of the Court has two prongs: first, whether there exists a right to information about the funding of political parties; and secondly, whether the impugned provisions and the EBS constitute a “reasonable restriction” under article 19(2).

The Court here delves into the centrality of political parties in the electoral process in India. Despite the open-list first-past-the-post system used here, the candidate is not the focal point of the election; the political party plays a prominent rôle too. This is due to a variety of reasons: the ubiquity of a pre-election manifesto, the Westminster style of governmen, with a loose separation between legislature and executive, the use of symbols to denote parties by the Election Commission of India, and the object of India’s anti-defection law being the party – all point to the political party, despite not being mentioned in the original text of the Constitution, being a central unit of the electoral process (paras 79–93).

By placing the political party at the centre of our analysis, it only stands to reason that political parties must be subject to the same requirements candidates are. The Court recognizes this basic inference (para 95). However, it goes one step further and articulates a transformative principle undergirding the political process in India – political equality.

Political equality manifests itself in two ways: the principle of “one person, one vote,” and the promise of shielding the political process from socioeconomic equalities. The two are joined at the hip: if one person is to enjoy only one vote, it follows that individuals or corporations with disproportionate power cannot exert their oversize influence on the electoral process and distort the voting process. As the opinion notes, “This guarantee [of political equality] ensures (a) equality in representation; and (b) equality in influence over political decisions” (para 98).

To enforce political equality, then, the influence of moneyed interests on the electoral process must, at the very least, take place in plain sight. The electorate must be able to – by its own initiative or through the media – have access to this information. The Court, moreover, rejects the argument that the anonymity of the contributor goes both ways; parties can exploit various loopholes to ascertain the identity of the donor. Retrieving this principle of political equality – long ignored by Parliament and the judiciary – the Court holds that the voter has the right to information about party funding, and the EBS and impugned amendments are, therefore, violative of article 19(1)(a) of the Constitution. The next step is to see whether the impugned scheme and law are saved by article 19(2) or outweighed by another fundamental right.

Before we look at the Court’s proportionality analysis, however, let us briefly look at the Court’s analysis of the amended section 182(3) of the Companies Act, which emaciated the disclosure requirement. The Court finds the replacement of the requirement to disclose the particulars by that to disclose the total amount contributed to political parties unconstitutional. Under the amended section 182(3) of the Companies Act, the company did not need to disclose to which party it has contributed money; the amended section 29C of the RPA exempted parties from disclosing information of contributions received through electoral bonds.

This information, however, was “necessary to identify corruption and quid pro quo transactions in governance. Such information was also necessary for exercising an informed vote” (para 172), leading the Court to strike down section 182(3), as amended by the Finance Act 2017, unconstitutional, restoring the older version.

Proportionality and Double Proportionality

Before we actually dive into the opinion’s proportionality analysis, a brief note about the Court’s reluctance to employ the proportionality test is in order. Many scholars have noted how the Court’s proportionality jurisprudence is muddled, often confusing it with an older proportionality review used in fundamental rights cases. Others, including the editor of this blog, have pointed out how the Court has been unwilling to use proportionality in high-stakes cases against the executive.

The use of the classic four-part proportionality test in the majority opinion represents a stark departure from both these maladies. The proportionality test, as is well known, comprises four stages: legitimate goal, rational connexion, necessity (i.e., least restrictive and effective measure), and balancing. The Court extensively subjects the EBS and the impugned provisions to each stage of the proportionality test.

The Court finds that “curbing black money” and “protecting donor privacy” are the proposed aims of the impugned scheme and provisions. The Court, importantly, agrees with the Petitioners and finds that the legitimacy of a stated goal should be traceable to the article 19(2) grounds – unless it is a competing fundamental right. While “curbing black money” could plausibly trace itself to “public order,” the Court adopts a narrow meaning of the term and concludes otherwise.

A proportionality enquiry would ordinarily end there. However, the Court chooses to proceed with the next three stages. The second stage is whether the proposed measures bear a rational nexus to the stated goal. The State submitted that anonymity would incentivize contributors to contribute using licit channels, which the Court hypothetically accepts.

The third stage, at which the Court ends its enquiry, is whether the EBS and the non-disclosure requirement are any less restrictive – but equally effective – measures available to the State. Here, too, the Court rejects the State’s arguments. The Court brings up other measures – cheques, electronic transfers, and so on – and Electoral Trusts, another method of receiving political contributions which are also effective in curbing black money. Therefore, the Court answers this question in the affirmative.

However, in analysing the second ground – donor privacy – the Court adopts the double proportionality test, as two fundamental rights are in play here: the donor’s right to privacy and the voter’s right to information. As Chandrachud CJI writes, “[The proportionality standard] would prove to be ineffective when the State interest in question is also a reflection of a fundamental right” (para 152).

While this standard is not new to Indian jurisprudence, having been invoked by the Court in Central Public Information Officer, Supreme Court of India v Subash Chandra Agarwal, the Court articulates a clear, three-part test in this case to balance the conflict between two fundamental rights if the Constitution does not create a hierarchy between the conflicting rights:

1. Whether the measure is a suitable means for furthering right A and right B (in other words, bears a rational nexus to both rights);
2. Whether the measure is the least restrictive and equally effective to realize right A and right B; and
3. Whether the measure has a disproportionate impact on right A and right B.

In the first stage, the Court finds that the EBS bears no rational nexus to the voter’s right of information as the information about contributions is “never disclosed to the voter” (para 163) (emphasis in original). It goes on to state that “[t]he measure adopted does not satisfy the suitability prong vis-à-vis the purpose of information of political funding” (ibid). Like the earlier proportionality enquiry, the Court should have stopped here but chooses to apply the next two stages.

The next stage is whether there are less restrictive measures available to the State. The Court answers in the affirmative. The RPA protects the privacy of contributions under twenty-thousand rupees. The Court understands this purpose as circumscribing the influence of money in shaping electoral outcomes and policy while still allowing the genuine expression of political views, protected by article 19(1)(a). The exact question of whether this threshold is sufficient is outside the Court’s purview; what matters is that an alternative, less restrictive, measure exists. This leads the Court to strike down the EBS as unconstitutional (para 169).

The Court – to be clear – did not need to undertake this double proportionality analysis. The principle here is not informational privacy; the stated aim, as the Petitioner argued, is unregulated donor privacy (Petitioner’s Written Submissions, para 65), which is not a legitimate state aim. However, the Court’s elaboration of the double proportionality standard supplies a useful tool for balancing two fundamental rights in a future case.

Conclusion

The Court’s judgement is a welcome departure from a long tradition of extending deference to Parliament and the Executive in matters of “policy.” Representative democracies are all too vulnerable to the problem of “the People,” as constitutional actors, retreating into their private lives as the whirring noise of legislation and government plays out in the background. The majority opinion, however, paves a path for the People to be active participants in everyday politics.

The Court’s rigorous proportionality analysis, too, is a significant positive development – possibly the first time that a majority opinion has invoked the doctrine to strike down legislation and executive policy in a high-stakes matter. If the opinion signals anything for future jurisprudence, it is that the proportionality test – and with it the culture of justification – is finally here to stay.

Guest Post: The P&H High Court’s Judgment on Domicile Quotas in the Private Sector

[This is a guest post by Varun Dhond.]

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Economic liberalisation, privatization and the resultant shrinking share of the public sector, has limited the extent of reservations in employment. One method for States to address this and expand the scope of affirmative action is by passing laws providing for reservations in the private sector. This will give rise to its own set of challenges and will require adjudication by Courts in the future. Another method for States to increase the share of reservation for their people is by introducing domicile quotas. These quotas are often criticised for promoting ‘linguistic chauvinism’ and failing to balance A. 19 freedoms.

The State of Haryana recently adopted a mix of both these methods, which was challenged before the Punjab and Haryana High Court.

The Haryana State Employment of Local Candidates Act, 2020 was challenged before the Punjab and Haryana High Court for (i) being Violative of Part III of the Constitution [specifically A.14 and A.19(1)(g)]; and (ii) the state not having legislative competence, since (a) the law fell within the domain of List I, Entry 81 (Inter-State Migration) of the 7th Schedule and (b) that the State was barred due to A.35, which granted exclusive competence to the Parliament/Centre..

The Act provided for inter alia 75% reservation in private employment (excluding any form of public employment under the Centre or State Govt) for ‘low paying jobs’ for a period of 10 years. According to the State, a large influx of ‘migrants’, competing with locals for low paying jobs, was impacting the local infrastructure, leading to environmental and health concerns. It was thus set out by the State that the law would promote local employment and give the state a buffer of 10 years to develop its local infrastructure to meet the demands of migrant labour. The State further contended that industrial powerhouses were exerting their dominant position to enforce an inequitable bargain with migrant labour to lower the wage benchmark, and that local unemployment needed to be addressed. Thus, the law justified creating a classification based on an intelligible differentia that had a rational nexus to the objects sought. The State also contended that industrial plots were allotted in lieu of 75% local employment as a pre-condition for allotment, but the aspect of allotment wasn’t in lis before the HC.  

There were 4 questions decided by the HC: 

(1) Maintainability: The HC followed settled law that reliefs under writ jurisdiction can’t be denied on technicalities as laid down by the 11 Judge Bench of the SC back in the ‘Bank Nationalisation Case’. The HC thus rightly held that the Petitions were maintainable, since an association of persons could invoke writ jurisdiction, if they had a legitimate interest involved. 

(2) Legality of Reservation in Private Employment: The HC opined that the Law would “destroy the precious heritage of this nation and the identity of the Constitution of India has to be protected”. By relying on Govt. of NCT Delhi v. Union of India, the HC borrowed principles of constitutional morality, which it considered an ‘essential check’ on unbridled power without checks and balances. It further stated the need for ‘cultivating the understanding of constitutional renaissance’ and that constitutional idealism would dictate ‘an implicit trust’ between constitutional functionaries. Thus, the actions of the State to distinguish between citizens of the country based on their domicile would be contrary to the above principles. I am disinclined to agree with the approach of the HC.

The HC followed a peculiar reasoning by holding that the state can’t provide for reservation in private employment, if reservation provided in the same manner, in public employment, is forbidden. While doing so, however, the HC failed to explain exactly how reservation in the public employment, if provided in the same manner, is barred. In the case of M Nagaraj, the SC had upheld reservations in promotions for SC/ST’s, relying on the flexible/dynamic nature of the constitution. While doing so, the SC laid down three tests (referred to as the ‘triple test’) which needed to be fulfilled when granting reservation in public employment. The HC failed to conduct such an exercise or engage with what are the legal standards or tests which will be needed to be applied by Constitutional Courts when evaluating/interpreting laws dealing with reservation in the private sector.  

The HC thus failed to decide the fundamental question, on whether reservations in the private sector are constitutional. The consequent question that thus arises is whether the triple test of Nagaraj ought to be applied to private reservations as well. This was a question which required adjudication by the HC as it is an issue that is likely to persistently arise in the future.

(3) Legislative Competence of the State to pass the Law was challenged on 2 grounds:

(a)  Specific Bar under A.35 r/w. A. 16(3): The HC rightly rejected this contention and held that the bar under A. 16(3) was only qua public employment and thus wouldn’t apply to the Law in challenge.

Nevertheless, the HC went on to conclude, based on the merits of the law, that it was “beyond the purview of the State to legislate on the issue and restrict the private employer from recruiting from the open market”. While doing so, the HC referred to a constitutional bar against discrimination of citizens based on their place of birth and residence, without considering the fundamental distinction (see below). While acknowledging that A. 16(3) will not be applicable to private employment, the HC followed a similar line of reasoning: that equality of opportunity in employment is guaranteed, there can’t be discrimination in employment and that if at all, it is for the Union/Centre to do so and thus beyond the purview of the State. Here, the HC’s reliance of A.16 is misplaced, since the SC in Government Of Andhra Pradesh vs P.B. Vijayakumar has clearly laid down that the scope of A.16 is limited to public employment.

(b) Applicability of Entry 81 of List 1 of the 7^th Schedule: the HC held that while the Law used the term ‘migrant’, the pith and substance of the law didn’t deal with ‘inter-state migration’. While disapproving of the term ‘migrant’ to refer to non-domiciled labour, the HC held that “an effort is being made to distinguish between the citizens of this country on account of their domicile and their belonging to the State of Haryana”. The HC further noted that “India is one integral whole and it is an indestructible unit but had only been divided into different States for the convenience of administration” and that commercial intercourse was one of the principles which were conceptualised by India’s founding fathers. The HC thus accepted the Petitioners’ contention and concluded that the underlying object of the legislation was “to create an artificial gap and a discrimination qua the citizens of India” and was thus detrimental to national interest.

The HC came to such a conclusion based on incoherent reasoning, since there is a fundamental distinction between granting reservation on the basis of ‘place of birth’ and ‘domicile’. This distinction has been accepted by the SC in DP Joshi v. State of Madhya Bharat, wherein the constitutional validity of reservations on the basis of domicile was upheld.

Another limb of the HC’s rationale was that the law was contrary to constitutional principles as it was majoritarian in nature, based on popular sentiments. Such a reasoning alone, can’t be the basis to strike down a Law unless it is found to be violating of Part-III of the Constitution. The HC also cautioned that such a law would result in different states enacting similar laws which would result in “putting up artificial walls throughout the country.” This, too, is flawed, since an unforeseeable future outcome can’t be a consideration to strike down a law in the present.

(4) Reasonable Restrictions under A.19.

The HC held that the impugned law was disproportionate, as it extended to all types of private employment, and granted the State powers to exercise absolute control over a private employer (the HC referred to this as ‘license raj’). I am inclined to agree that the impugned law, as it stood, ought to have been struck down for being disproportionate and unreasonable, due to the vast expanse of powers granted to the State. Nevertheless, the manner in which the HC arrived at its conclusion must be scrutinized.

Any form of rights based analysis would require a Court to discuss the nature of restrictions imposed and decide whether they are proportionate, based on the State justifications. The State justified the laws on the basis of policy considerations: that the law was needed to develop adequate infrastructure for migrants and address problems of local unemployment. The HC failed to engage with the State’s justifications for the law or to explain how the law is disproportionate. It is thus significant to note that the HC didn’t follow a deferential standard of review since it ignores presumption of constitutionality and the notion that the legislature must be presumed to have understood and deliberated on the needs of people. On the contrary, the HC doubted the justifications behind the law and actively rebutted it in the strongest terms.

The HC held that the Law is contrary to constitutional freedoms under A.19 and unconstitutional, since “a wall could not be built around by the State and the spirit and sole of the oneness of the Constitution of India could not be curtailed by the parochial limited vision of the State.”. It further invoked principles of fraternity to strike down the statute being contrary to foundational premises of the Constitution, as it treated the non-residents of Haryana as “secondary citizens”. While doing so, there was misplaced reliance on US SC Judgments dealing with provisions which were held violative and discriminatory on account of race, since the HC believed that the Indian Constitution borrows heavily from the USA. This chain of reasoning is flawed, since the HC ought to have examined the question of who were intended beneficiaries of the law and whether such a classification was constitutionally justified, by applying the twin tests of Article 14.

The HC concluded on the question of classification, by stating that the State cannot negatively discriminate against those who don’t belong to the state, based on the reasoning that “once there is a bar under the Constitution of India, we do not see any reason how the State can force a private employer to employ a local candidate,” without emphasising how exactly the Constitution bars reservation policies on the basis of domicile. The HC thus erred in not deciding where the appropriate balance lies between reasonable restrictions of A.14 and 19 freedoms and the power (or rather the extent of power) of states to legislate on domicile quotas. 

Conclusion

The HC concluded its analysis by stating that the “respondent-State has directed the private individual to do what itself is barred from under the Constitution.” Such an analysis is erroneous, since the HC failed to explain what exactly is barred under the Constitution. By not engaging with how the law is disproportionate, the HC followed a rather interventionist standard of review, which is in contrast to the general deferential standard that constitutional courts adopt on matters of economic and social policy. By not deciding on the fundamental question of whether reservations in the private sector are constitutional, the HC has failed to address the elephant in the room. Ambiguity about the application of the corresponding tests to decide the legality of reservation in the public sector remains. This lacuna is bound to persist in the future, when similar laws are interpreted.

“Jumping into a pit of fire with your eyes closed”: Proportionality, Sealed Covers, and the Supreme Court’s Media One Judgment

In early 2022, this blog had covered the travails of the MediaOne TV channel in battling a government ban before the High Court of Kerala. The judgments of the single judge and division bench of the High Court – both of which upheld the government’s ban on the TV channel – had seen two of the most egregious instances of “sealed cover” jurisprudence in Indian courtrooms. MediaOne had been banned without being informed why and without a hearing. When it challenged the ban in court, it was unable to argue its case because the government claimed – and the court indulged it – “national security”, and submitted material in a “sealed cover.” Things reached a truly farcical pass when the division bench perused the material in the sealed cover, openly admitted in its judgment that the impact on national security was not “discernible”, but went ahead and upheld the ban anyway.

A measure of sanity prevailed in the Supreme Court, when the ban was stayed while the Court heard the matter at length. And sanity was restored (at least in this case!) today, when the Supreme Court delivered its judgment striking down the ban on both substantive and procedural grounds.

As the sealed cover played so important a part in proceedings before the High Court, the division bench of the Supreme Court – Chandrachud CJI and Hima Kohli J – spends a substantive part of its judgment on this issue. As anyone following this blog would know, sealed cover jurisprudence has become something of an epidemic in Indian courts in recent times, especially in civil rights cases: challenges to civil rights violations are routinely knocked back because the government claims – and the court indulges it – “national security”, and submits material in sealed covers. Frequently, when an organisation is banned under the Unlawful Activities Prevention Act [“UAPA”], and invokes the statutory procedure of challenging the ban before a UAPA Tribunal, the State produces “evidence” in a sealed cover, which even the banned organisations lawyers are not allowed to see, thus making any meaningful defence a non-starter. The “sealed cover” is thus used by the State in two distinct kinds of civil rights proceedings: first, when it has banned, censored, or otherwise punitively acted against someone, and invokes the sealed cover so that that person cannot defend themselves; and secondly, when someone challenges state action for a rights violation, but to make good their challenge, requires information in the possession of the State.

In today’s judgment, the Supreme Court articulates a set of principles that will, ostensibly, apply to both sets of situations. Before examining what, precisely, the judgment holds in that regard, it is important to note the overarching principles that the Court sets out. Naturally, the refusal to disclose evidence on grounds of national security violates an individual’s due process rights under Article 21. Chandrachud J. holds that, much like a substantive violation of Article 21 must be adjudicated on the touchstone of the four-pronged proportionality standard, the violation of constitutional procedural rights must also be adjudicated with regard to the proportionality standard (paragraph 51). Importantly, this applies not simply to the question of the sealed cover, but to principles of natural justice generally, including the right to a hearing and to a reasoned order; indeed, in this case, the State was unable to justify why it refused a hearing to MediaOne, and why it did not provide a reasoned order (paragraph 57). The explicit application of proportionality to the denial of the principles of natural justice is an important development, and I will leave it to my administrative law colleagues to parse the implications in greater detail. I will, here, note that the Court’s analysis of the values underlying principles of open justice repays close study (paragraphs 53-61).

Let us pause here for a quick recap of the proportionality test. The test has four prongs. A rights-infringing measure – to be justified – must (a) have a legitimate aim, (b) the measure must be suitable for achieving that aim; (c) it must be the least restrictive alternative (‘necessity’) available; and (d) there must be a balance between the extent of the restriction and the importance of the goal (proportionality stricto sensu). As an example, if referee Paul Tierney shows a red card to Leandro Trossard for questioning his decision not to award a penalty for a blatant handball by Virgil Van Dijk in the box – as he has been bribed by agents from Manchester – then that decision fails the proportionality test, and – in an ideal world – would be reviewed and set aside.

Back to the case. Having established that MediaOne’s right to a fair hearing was breached, the Court turns to the question of justification. The Union of India – and indeed, the High Court – had argued that the Supreme Court’s prior judgments in Ex-Armymen’s Protection Services and Digi Cable Network essentially shut out any scope for the principles of natural justice once national security was claimed. Chandrachud J. notes, however, that this is a misreading of the two cases: there may, on occasion, be less scope for the application of natural justice in national security cases, but there is no blanket exclusion (paragraph 74). This then raises the question: on what legal basis is the denial of natural justice to be adjudicated? In paragraph 75, Chandrachud J. answers it thus:

The mere involvement of issues concerning national security would not preclude the state’s duty to act fairly. If the State discards its duty to act fairly, then it must be justified before the court on the facts of the case. Firstly, the State must satisfy the Court that national security concerns are involved. Secondly, the State must satisfy the court that an abrogation of the principle(s) of natural justice is justified. These two standards that have emerged from the jurisprudence abroad resemble the proportionality standard. The first test resembles the legitimate aim prong, and the second test of justification resembles the necessity and the balancing prongs. 

Now, it follows that national security is a “legitimate aim” (although – Chandrachud J. is careful to note – it does not follow that all reports of investigative agencies are always confidential, especially given the vastly expanded role that investigative agencies play in society today (paragraph 81). Indeed, in this case, the Court finds that the materials on the basis of which the Intelligence Bureau recommended denial of security clearance to MediaOne were already in the public domain (paragraph 98 – 99), and that therefore, even on the most deferential standard of review, no reasonable person could come to the conclusion that non-disclosure of this material would prejudice national security.

However, assuming that the legitimate goal of national security was indeed in play, the Court then comes to stage 2 of the proportionality test – the suitability/rational connection stage. Here the Court finds that while the State may validly resist complete disclosure by claiming a rational nexus with the legitimate goal, it cannot – at the very least – deny to the affected individual a summary of the reasons why their rights are being restricted (paragraph 102).

We now come to the crucial part of the analysis, which is the stage of the “least restrictive alternative” (step 3 of the proportionality test). Here, the Court marshals a range of alternatives that various jurisdictions apply, when faced with the question of non-disclosure of certain evidence on grounds of national security. First, a Court could simply wash its hands of the issue, and hold that a claim of national security places an issue outside the pale of judicial review (for example, in the MediaOne case, once a claim of national security was made, the ban could not be reviewed on that ground, period); secondly, the Court could engage in a “closed material procedure”, which is akin to sealed cover evidence, with one crucial distinction: in a “closed material procedure”, a “special advocate” is appointed on behalf of the affected individual, and this special advocate has access to the non-disclosed material; and thirdly, the Court could engage in a “public interest immunity” proceeding, where the material in question is struck off the record altogether – that is, neither party can rely on it, and nor can the court. Chandrachud J. arranges these alternatives in a descending order of how severely they impact natural justice, with declining judicial review the greatest restriction, and public interest immunity proceedings the least restrictive (relatively) (paragraph 113).

The Court then goes into how – specifically – public interest immunity has been applied in India and in comparative jurisdictions. Chandrachud J. notes that a public interest immunity claim is subject to judicial review; that the extent of scrutiny would depend on various factors, such as the injury caused by non-disclosure, the class of materials involved, the burden of proof, and evidentiary requirements; in particular, where non-disclosure impacts not just the parties, but has broader ramifications for open government and constitutional governance, the degree of scrutiny would be higher; and once injury is proven, proportionality is deployed (paragraph 133).

Now, at this stage, proportionality is being deployed for a dizzying variety of purposes, so it is important to take a step back. At the macro level, at this point of the judgment, we are presently in the third stage of the proportionality test as applied to the denial of natural justice to an individual, affecting their procedural rights under Article 21. That is, the Court is considering – and elaborating upon – the various, less restrictive alternatives to a sealed cover, in dealing with claims of non-disclosure due to national security. One of these lesser restrictive alternatives is the public interest immunity procedure. Now, when the State claims public interest immunity, proportionality makes a second appearance, that is, in adjudicating whether or not to allow the PII claim. This deployment of proportionality is internal to PII, which itself is nested within the third step of proportionality as applied to departures from natural justice.

It is vital to keep the two uses of proportionality separate in one’s mind, otherwise the judgment will very swiftly stop making sense, especially as the language used by the Court in paragraph 138 seems to move between these two levels of analyses, as PII is – of course – also a departure from the principles of natural justice. Perhaps it may help to clarify – at this stage – that the Court is involved in answering two separate questions here: first, using the proportionality standard to decide which proceeding (sealed cover, closed material, PII etc) it to be used, if any; and secondly, in the context of PII, using proportionality to decide the legitimacy of a State PII claim.

In this context – and drawing from Section 124 of the Evidence Act – Chandrachud J. notes that in a claim for PII, the burden of satisfying all prongs of the proportionality test lie on the entity (read: the State) claiming non-disclosure (paragraph 141). Based on section 124 of the Evidence Act, he collapses the first two prongs of the standard into one (whether public interest will be injured by the disclosure), and then posits the necessity and the balancing prongs as the second and third steps of a “modified” proportionality test, as applicable to PII.

Having done this analysis, the Court then moves back one level, to its original analysis of the various options that must be considered at the necessity. Having noted that the sealed cover procedure infringes rights to a greater degree than PII, Chandrachud J. therefore holds that “the sealed cover procedure cannot be introduced to cover harms that could not have been remedied by public interest immunity proceedings.” (paragraphs 145, 147) As he notes:

The claimant would be jumping into a pit of fire with their eyes closed even if they consent to a sealed cover procedure. As Lord Kerr remarked in Al Rawi (supra), the claim that closed material procedure would provide a fairer outcome is premised on the assumption that the adjudicator is impartial. However, beyond this assumption, it must be recognised that the court could be misled by the material that is not subject to inspection and examination. This would lead a situation where the court renders an unfair judgment and such an unfair decision would not be amenable to both judicial review and public criticism on merits. (paragraph 155)

Having said this, however, the Court does not explicitly rule out the use of sealed covers. Immediately after this, Chandrachud J. notes that:

While it would be beyond the scope of this judgment to lay down the possible situations when the sealed cover procedure can be used, it is sufficient to state that if the purpose could be realised effectively by public interest immunity proceedings or any other less restrictive means, then the sealed cover procedure should not be adopted. The court should undertake an analysis of the possible procedural modalities that could be used to realise the purpose, and the means that are less restrictive of the procedural guarantees must be adopted. (paragraph 158)

In the final – brief – part of the judgment, the Court unseals the proverbial cover, and looks at the government’s substantive case for banning MediaOne (paragraphs 160 onwards). Unsurprisingly, the Court finds that the government has failed to make out any case whatsoever, its concrete allegations not going beyond proximity to a previously banned – but not un-banned – group, and certain substantive content that the it finds unpalatable. The Court has little trouble in disposing off these contentions as manifestly ill-founded, and the ban – therefore – falls on substantive grounds as well

As a final, important point, in the dispositive part of its judgment, the Court adds a component to PII proceedings. It holds that:

To safeguard the claimant against a potential injury to procedural guarantees in public interest immunity proceedings, we have recognised a power in the court to appoint an amicus curiae. The appointment of an amicus curiae will balance concerns of confidentiality with the need to preserve public confidence in the objectivity of the justice delivery process. (paragraph 171)

In conclusion therefore, what is the importance of the judgment – other than the very important fact that MediaOne’s ban was struck down? We can summarise as follows:

1. If the government intends to deny the principles of natural justice to an individual (including on grounds of national security), it must justify the denial on the touchstone of proportionality.
2. The Court must judicially review the claim to national security at the first step of the proportionality analysis, to ensure that the claim is indeed one of national security. This will ensure that utterly frivolous cases – such as MediaOne’s – fall at the firt hurdle itself.
3. Non-disclosure of even a summary of reasons why an individual’s right is being infringed (such as, say, through a ban) fails the rational nexus prong of the proportionality standard.
4. If the government wishes to invoke non-disclosure on grounds of national security, and passes the first two prongs of the proportionality test, then a sealed cover is not the default option. The Court must consider less restrictive alternatives – as part of the third prong of the proportionality test – such as PII proceedings, PII proceedings with redactions, or closed material proceedings. Notably, although the judgment does not say this, it follows that if indeed the Court chooses the sealed cover it must show how this meets the “least restrictive standard.”
5. If it is the government that claims PII, then this claim must – in turn – be tested on grounds of proportionality, requiring – if necessary – a second application of the four-pronged test (note that the Court must in any event apply the test to decide if non-disclosure is justified per se).
6. If PII is chosen, then the Court must appoint an amicus curae to represent the individual’s interests.

There is no doubt that today’s judgment is a valuable contribution to proportionality jurisprudence, that it attempts an inoculation against the sealed cover epidemic, and that it is pro-liberty in its outcome. However, the sheer complexity of the tests laid down make this very much a case of “the proof of the pudding will be…” Indeed, recall for a moment how eager the single judge and the division bench of the High Court of Kerala were in deferring to the State – so much so that even the Supreme Court finds it disquieting in its judgment. Now imagine these Courts being asked to deploy this double-four-pronged test, designed to protect individual rights. Would they not find it easier to simply ignore the test – as so many courts have found it easier to simply ignore the proportionality standard itself, when it leads to inconvenient results (as in the recent demonetisation case?). One would hope not, but proportionality’s failure to take hold as a rights-protective test in India does make one worry about how successful more complex iterations of it will be. That, however, is a worry for another day! For now, MediaOne can celebrate a long-overdue and deserved vindication of its constitutional rights by the Supreme Court.

Guest Post: Proportionality’s Fifth Prong – A Reassessment

[This is a guest post by Rudraksh Lakra.]

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Introduction

In this piece, I examine how the recent decision of the Supreme Court in Ramesh Chandra Sharma v State of Uttar Pradesh (Civil Appeal No 8819 of 2022) (“Ramesh v UP”) contributes to its jurisprudence on proportionality. I had previously noted in a blog post that the Supreme Court has yet to clearly define and consistently apply the standard of proportionality in its jurisprudence, a sentiment shared by many others (see here, here, here, here, here, here, here, here, and here). In fact, the Court’s track record on proportionality is best described as “patchy”.

Rather than extensively discussing the application of proportionality in the case of Ramesh v UP, I shall focus on the theoretical concerns that emerge from the judgement. Specifically, the judgement’s introduction of a “fifth prong” to the standard of proportionality: the requirement of “adequate safeguards”. I suggest that this prong is not actually a fifth stage of the test, but rather an inquiry that should be made within the existing stages of the proportionality test. This interpretation best enriches the standard of proportionality. I also explain at which stages the Court ought to demand and examine the requirement of “adequate safeguards”.

Standard of Review

The Supreme Court in the Ramesh v UP case was tasked with adjudication on the constitutionality of an impugned administrative measure against the touchstone of Article 14. The Court applied three standards for this task, the standard of reasonable classification, arbitrariness, and then finally proportionality. Although it has become customary for the Court to apply these tests together, they require the state to meet vastly different expectations and evidentiary burdens. Without delving into the criticisms of the standards of review under Article 14 and how they could be redesigned, which others have already examined (see here, here, here, here, here), I would like to make two limited points. [A], the first and second prongs of the proportionality standard already encompass these two less demanding tests, as implicitly acknowledged by the Court itself (see paragraph 52). [B] Second, given this overlap, it is unclear why the Court applies all three standards simultaneously, which goes against the principle of judicial economy.

Standard of Proportionality

The Court remarks that proportionality has been developed by the Indian Courts throughout the years and has now attained the form of a “five-pronged test”. For this assertion, the Court relies on the K. S. Puttaswamy v. Union of India (2017) (“Puttaswamy I”) judgement, and more recently, in the Gujarat Mazdoor Sabha v State of Gujarat (2020) (“Sabha v Gujarat”).

According to the Court in the case of Puttaswamy I, a nine-Judge Bench of this Court had laid a four-pronged test that can be summarised as:

…The action must be sanctioned by law;

The proposed action must be necessary in a democratic society for a legitimate aim;

The extent of such interference must be proportionate to the need for such interference;

There must be procedural guarantees against abuse of such interference. (Paragraph 49)

This paragraph along with the opinion of J. DY Chandrachud is interpreted as the Supreme Court endorsing the standard of proportionality in the Puttaswamy I judgement. This interpretation was initially adopted by one of the editors of this blog and has found support in subsequent decisions of the Supreme Court and academic literature (see here, and here). However, there was a lack of clarity regarding both the substantive content and evidential requirements of the test beyond the prima facie agreement between the bench vis-à-vis the adoption of the test (see here, and here). The plurality opinion contained an internal contradiction in the description of the design of the proportionality at various parts of the opinion, and it adopted evidentiary standards that were deferential to the state (see here, and here). On the other hand, J. Kaul, whose opinion was the controlling one, adopted the standard proposed by the petitioners without any guidance regarding the evidentiary standards (see here and here). The petitioners had forwarded the standard followed by the European Court of Human Rights, which uses the term “necessary in a democratic society” (see here, and here). This term has a very specific import in the European context and takes into account the “pressing social needs” within member states, which guides the European Court of Human Rights’ margin of appreciation jurisprudence. There was no clarity as to how this standard would be harmoniously incorporated into the existing rights review framework in India. In fact, the culture in the European Court of Human Rights is not to apply to four-prong test in a structured and sequential manner in every case, rather their focus is on the least restrictive stage and especially the balancing limb. 

The Supreme Court interprets the Sabha v Gujarat as laying down the following standard: “in order to determine the validity of state action that could infringe on fundamental rights, it must pass the following conditions, namely, (i) [t]he interfering with the fundamental rights must have a state purpose, (ii) the said rights-infringing measure must be based on a rational nexus between the interference and the state aim, (iii) the measures must be necessary to achieve the state aim, (iv) the restrictions must be necessary to protect the legitimate objective and (v) [t]he state should provide sufficient safeguards for the possibility of an abuse of such rights-infringing interference (Paragraph 50)”. The Court observes that “[a]lthough the fifth prong, as mentioned in the Gujarat Mazdoor Sabha (Supra) has not been expressly mentioned in Puttaswamy, Chandrachud J (as His Lordship then was), in our view, rightly has read that in the Gujarat Mazdoor Sabha case (supra) to complete the test (Paragraph 51)”.

Relying on Sabha v Gujarat, the Supreme Court adopted the fifth prong of proportionality, i.e., “sufficient safeguards”. The rationale for this adoption is found in another paragraph where the Court notes that “[s]tate action that leaves sufficient room for abuse, thereby acting as a threat against the free exercise of fundamental rights, ought to necessarily be factored in in the delicate balancing act that the judiciary is called upon to do in determining the constitutionality of such state action – whether legislative, executive, administrative or otherwise (Paragraph 51)”. As Bhatia has already noted, this paragraph recognizes two key points. Firstly, it acknowledges that abuse “does not take place outside the law, but is baked into the law”. Secondly, it places the burden on the State to proactively address and reduce the risk of abuse within the legislation itself. Bhatia concludes that “in future, highlighting the potential for abuse in a law is a good ground for challenging its constitutionality, under the proportionality standard.” By considering the sufficiency of safeguards, the Supreme Court has an opportunity to provide guidance on the baseline safeguards that must be complied with in specific cases. For instance, over the decades, the European Court of Human Rights has developed a rich jurisprudence on sufficient safeguards. It has established certain baseline safeguards for cases involving surveillance, DNA profiling, and data protection (see here, here, here, here, and here). This jurisprudence should be developed gradually, in a case-by-case manner, and should be context-specific. If this jurisprudence is well-developed, it can help internalise baseline good practices among state actors and increase the burden on the state to justify its interference, thereby acting as a counterweight against the abuse of state power. In the next section, I explore how the requirement of sufficient safeguards can best operate in the context of proportionality and enrich its analysis.

Incorporating Adequate Safeguards within the Proportionality Framework

As previously mentioned, in Ramesh v UP, the Supreme Court drew inspiration from the Sabha v Gujarat judgement and included “adequate safeguards” as part of the fifth prong of proportionality. While I support the inclusion of the requirement of “adequate safeguards”, I do not believe it should be treated as a separate element of the test. Rather, a more strategic and appropriate approach would be to incorporate the requirement within the existing four pillars of the test. According to scholar Panaccio, proportionality is best viewed as a heuristic tool, where the quality of reasoning and justification improves as the quality of the information provided at each stage of the test improves. Understanding the design and effectiveness of the safeguards could enhance the stages of necessity and balancing (more on this shortly). It is not sufficient to assess a state’s measure in isolation; instead, the measure’s design as a whole must be closely scrutinised in the specific context and circumstances of the case. From this, it follows that understanding the impugned measures along with its proposed safeguards is a precursor to and is indispensable to the process of assessing its constitutionality at each stage.

Alternative Imagination of Proportionality

In this sub-section, I build upon my claim that “adequate safeguards” should be incorporated with the  requirement of proportionality but not as a distinct limb of the test. For this objective, I shall take a case study and explain how the examination of the stage of necessity and proportionality stricto sensu/balancing would be augmented by the examination of the stage. In fact, these are the two stages where Court often examines and reads in safeguards within the impugned measure. For the case study, let us take up a legislation that purports to provide a framework for communication surveillance. 

Necessity

At the stage of necessity, the state is required to adopt the least restrictive measure that would achieve its objective. The different versions of the test diverge on the question of the extent to which an alternative measure needs to advance the stated goal. According to the dominant version of proportionality, the alternative must achieve the state’s goal to the same extent (the “traditional understanding of necessity”). However, a different understanding of this stage is based on the decision of the Canadian Supreme Court in Alberta v Hutterian Brethren of Wilson Company. According to this, at the stage of necessity, the state should adopt the less restrictive alternative that achieves its aim to a “real and substantial degree”.

Under both the Hutterian model of necessity and the traditional understanding of necessity accounting for safeguards is integral to the process of conceptualising alternatives. In the context of the communication surveillance law, possible less restrictive measures could include ex-ante and ex-post independent review, incorporating data protection principles, establishing the procedure for authorisation, defining the role of actors, exception of certain categories, and redressal mechanism. This is not to say that every one of these possible alternatives would be the “legitimate” alternative measure in contrast to the state’s measure and this would also be contingent on the version of the necessity a Court adopts. For example, if a court applies the traditional understanding of necessity, there is a greater chance that an alternative like ex-ante and ex-post oversight by an independent body (Alternative A) would not be considered a legitimate alternative compared to only ex-ante oversight by an independent body (Alternative B) in achieving the state’s goal, as it adds preliminary procedural steps before initiating an investigation. However, if the court adopts the Hutterian model of necessity, Alternative A may be considered a better alternative than Alternative B, as it would still advance the goal of state communication surveillance albeit to a slightly less extent.

Regardless of which version of necessity is adopted, taking into account the feasible safeguards, as discussed above, allows the Court to examine a number of alternatives. Another tactical advantage is that this enables the Court to explore less restrictive options without questioning the wisdom of the means adopted by the state. If the Court were only to review the measure by itself without considering the safeguards, it would significantly limit its scope of inquiry. In this scenario, the Court could only envision alternatives that would question the wisdom of the means adopted by the state. In the context of communication surveillance, such potentially less restrictive alternatives could be investigative tools that do not involve communication surveillance.

Proportionality stricto sensu/Balancing

At this stage, the extent of the interference with the right/interest should be proportional to the extent of contribution of the state’s measure to the competing right or interest. To this end, the two interests/rights have to be balanced against each other. Let us return to the example of communication surveillance legislation. One important factor in determining if the law is disproportionate will be the possibility of abuse. To understand the possible degree of abuse, the incorporation of the aforementioned safeguards is integral. This would locate the analysis in the concrete circumstances of each case. To ensure that the measure proportionally balances the right and the competing interest, a court may even read in or demand that the state incorporate certain safeguards. In the context of communication surveillance legislation, this may include safeguards that may not be considered legitimate alternatives under the third stage, such as ex-ante and ex-post oversight by an independent body, as discussed earlier.

In conclusion, the requirement of adequate safeguards should be incorporated within the existing framework of proportionality. This is because the requirement is already inherent within the different stages of the test, and considering safeguards is crucial for the proper adjudication of proportionality. Moreover, I posit that safeguards are best examined and incorporated at the third and fourth stages of proportionality. However, the approach of the European Court of Human Rights regarding the element of adequate safeguards is distinct. In the following sub-section, I will present arguments against the adoption of the approach of the European Court of Human Rights.  

European Court of Human Rights Approach to Adequate Safeguards

One element of the European Court of Human Rights test to determine the consistency of a member state’s interference is to ensure that any interference by a public authority with a right has to be in accordance with the law. This expression not only necessitates compliance with domestic law but also relates to the “quality of that law”, requiring it to be compatible with the “rule of law” (Big Brother Watch and Others v. the United Kingdom [GC], 2021, para 332). Quality of law includes the following requirements: clarity, foreseeability, accessibility, and adequate safeguards to protect against arbitrary interference (Big Brother v. UK Para 332-339).

In my view, examining “adequate safeguards” is more appropriate at the stage of necessity and balancing, rather than legality (as is the approach of the European Charter of Human Rights). I present two arguments to support this claim. Firstly, as we have seen before, the element of ‘adequate safeguards’ can be included within the test, while enriching the adjudication at the third and fourth stages. Secondly, the European Court of Human Rights practice of examining the adequacy of safeguards at the stage of legality can introduce balancing at this stage.  This means that the Court would then be required to examine whether the safeguards are designed in such a manner that it can proportionately address the harm. For example, in the case of Roman Zakharov v. Russia, the Grand Chamber of the European Court found that although Russian law requires prior judicial authorization for interception measures, in practice, Russian judges only apply purely formal criteria in deciding whether to grant authorization, rather than verifying the necessity and proportionality of imposing such measures (Para 272). Introducing balancing at the stage of legality raises serious conceptual concerns because it conflicts with and significantly devours the scope of balancing. Furthermore, the Supreme Court has a long history of carrying out general “all things considered” balancing exercises between various interests, rights, and duties at stake in the matter at hand. Deviating from the discipline-inducing structural and sequential nature (see here, here, here, here, and here) of the test can lead to the Court falling prey to its old habit. This would lead the Court to again applying lower standards of review under the disguise of applying proportionality (see here, here, here, and here). Finally, it is also important to remember that balancing is the most controversial stage of the test  (see here, here, here, here, and here) so introducing it within the stage of legality can raise legitimacy concerns. 

Conclusion

The Supreme Court decision in Ramesh v UP has contributed to the evolution of proportionality in India by introducing the requirement of “adequate safeguards” as part of the fifth prong of the test. However, I have attempted to make a case for the incorporation of “adequate safeguards” within the existing four pillars of the proportionality framework. I sought to demonstrate this would enable the Court to engage in a nuanced and contextual analysis of measures in each case. I clarified at which stages this inquiry is best conducted.

The evolving proportionality jurisprudence of the Supreme Court has highlighted a lack of understanding of the theoretical underpinning of the test, its architecture, and how it operates in practice. As Chandra has noted in her work the adoption of the proportionality test has not unsettled or disrupted “preexisting configurations of relations between citizens and the State as mediated through rights, or between the judiciary and other branches.” For proportionality to be a bridge to “culture of justification” the duty falls squarely on the Supreme Court to first, provide the proportionality test a theoretical grounding which best aligns with the constitutional vision, second, to design and coherently lay down the both substantive and evidentiary aspects of the test in manner that forwards this theoretical framework and finally, to apply this test in concrete cases. The last aspect is the most pertinent as theoretical expositions and explications matter little if they do not translate into a counterweight against the executive’s excess in cases where the stakes are “real”.

Proportionality’s Fifth Prong

In an interesting judgment delivered on 20th February 2023, a two-judge bench of the Supreme Court undertook further evolution of the proportionality standard under Indian constitutional law.

Ramesh Chandra Sharma vs State of UP arose out of the Greater Noida Authority’s decision to pay differential compensation rates for certain land that it had acquired under the old Land Acquisition Act. The Authority divided landholders into “Pushtaini” and “Ghair-pushtaini.” Pushtaini landholders were those who had acquired the land before the establishment of the Authority in 1991, or who had subsequently received it through partition or a family settlement. Ghair-pushtaini landholders were those who had purchased the land after the establishment of the Authority. Pushtaini landholders were paid greater compensation than Ghair-pushtaini landholders. Before the High Court, the Authority defended this classification on the basis that it was providing for the “sons of the soil”, i.e., landholders whose income depended directly on the land, as opposed to those who had purchased it for other reasons. A Full Bench of the Allahabad High Court agreed, and upheld the classification.

The Supreme Court, however, disagreed. A two-judge bench of Murari and Bhat JJ held that the impugned classification failed all three tests under Article 14: reasonable classification, arbitrariness (which the Court framed as a Wednesbury enquiry), and proportionality. With respect to reasonable classification, the Court found that the Authority’s basis for distinction between Pushtaini and Ghair-pushtaini landholders was both under-inclusive and over-inclusive: to the extent that the idea was to protect people who made their living off the land, the 1991 cut-off date was not fit for purpose, as it would leave some people who did depend on the land out of the loop, while protecting others who did not. This is an interesting finding, as the Supreme Court does not often strike down State action on grounds of under- and over-inclusiveness; it generally holds that legislation cannot draw bright lines, and some play in the joints is always available. Clearly, in this case, the Court felt (although it did not say) that the under- and over-inclusiveness was too great to justify, even under deferential standards. The Court then further held that the classification lacked a determining principle, and therefore failed Wednesbury arbitrariness.

It is the Court’s proportionality analysis, however, that is most interesting. We normally think of the proportionality test as containing four prongs – legitimate State aim, suitability, necessity, and balancing (proportionality stricto sensu). Here, however, relying upon the judgment of Gujarat Mazdoor Sabha, the Court added a fifth prong: that “the state should provide sufficient safeguards for the possibility of an abuse of such rights infringing interference.” (paragraph 50) On an analysis, it found that the Greater Noida Authority’s classification violated more or less every one of the five prongs of the proportionality standard.

The addition of a fifth prong to the proportionality standard is a very interesting development. One of the common recourses that the Court has often taken to uphold problematic laws has been to say that the possibility of abuse does not make a law unconstitutional, and that consequently, if there is abuse, the individual is free to invoke legal remedies to save themselves. This reasoning, however, is flawed: abuse rarely takes place in open contravention of law. Almost always, it takes place under cover of law, and is enabled because the law leaves far too much room for discretionary executive action within its interstices.

The Supreme Court’s awareness of this fact in Ramesh Chandra Sharma is evident in the reasoning that it gave for adding the fifth prong. It noted that:

State action that leaves sufficient room for abuse, thereby acting as a threat against free exercise of fundamental rights, ought to necessarily be factored in in the delicate balancing act that the judiciary is called upon to do in determining the constitutionality of such state action – whether legislative, executive, administrative or otherwise. (paragraph 51)

This is extremely important, as it recognises, first, that abuse does not take place outside the law, but is baked into the law; and secondly, it places the burden firmly upon the State to affirmatively mitigate abuse within the legislation itself. Under the doctrine laid down by the Court, therefore, in future, highlighting the potential for abuse in a law is a good ground for challenging its constitutionality, under the proportionality standard.

Of course, it remains to be seen whether the fifth prong will have any genuine bite. Ever since the proportionality test was first articulated in formal terms by the Supreme Court in 2016, its record has been patchy: whereas the Court has deployed it rigorously in cases where the stakes are low, in cases with higher stakes for the political executive – as we have discussed on this blog – proportionality has been deployed inconsistently, and has been used a tool to wave State action through rather than to scrutinise it. The proof of the pudding, therefore, will be in the eating.

Guest Post: Business as Usual – Melancholy Takeaways on Proportionality from the Demonetisation Case

[This is a guest post by Rudraksh Lakra.]

Introduction

There are two key duties Courts have to fulfil while adjudicating on legal interests or rights. First, to coherently design and define the standard of review, which includes both substantive and procedural standards (including standards of evidence). Second, to ensure that this exercise is not merely performative, Courts must apply the standard they lay down dutifully to the facts of the case. In the context of proportionality, the Indian Supreme Court (“Indian SC”) has had a long history of failing to satisfactorily perform these two functions (see here, here, here, here, here, and here). The Indian SC has repeatedly applied lower standards of review under the disguise of applying proportionality (here, here, and here). Its attempt to define the standard clearly has been lacking and often muddled (see here, here, here, here, and here). All of this undermines the claim of the current Chief Justice DY Chandrachud that proportionality reflects a bridge from a “culture of authority” to a “culture of justification”. 

Initially, this piece aimed to assess the reasoning of the Indian SC on proportionality in the Vivek Narayan Sinha v Union of India decision (“Demonetisation Judgement”), which concerned the constitutionality of the Indian Government’s overnight demonetisation of 86.4% of the currency notes in 2016 (see the analysis of the case here and here). In the process of reading, it emerged that this was not possible as there was no reasoning. The Court follows a “business as usual” approach vis-a-vis proportionality, falling prey to the proclivities that have so far impeded it from developing meaningful proportionality jurisprudence. This piece seeks to compensate for the court’s refusals to engage with the test and assess the claims on the merits based on available information.

Standard of Review

In the Demonetisation judgement the petitioners had posited that proportionality was the suitable standard of review as demonetisation infringed fundamental rights (see here and here). On the other hand, the respondents stressed on the fact that demonetisation was an economic policy based on the recommendations of the Reserve Bank of India, an expert body and an independent body (see here and here). Therefore, they argued it should be subject to a standard of review with a lower threshold (see here, and here). These two stances constitute two different visions for adjudication one provides excessive deference to the whims of the executive and one that promotes a “culture of justification”. The Court had the duty of clearly delineating which vision it would adopt.

However, the approach is mix-and-match, and lacks a coherent vision. The Court first adopts the Wednesbury standard (which sets a low threshold for the state to pass) because demonetisation was an economic policy (Para 226). After quickly concluding that the measure passes the Wednesbury standard the Court moves on to proportionality analysis (See from Para 263). From the lens of judicial economy, it raises the question about the duplication of resources. A more concerning issue is how we reconcile these two distinct standards of review which constitute different visions of adjudication and vis-a-vis power configuration between citizens, the judiciary and the executive. The Court’s failure to offer any cogent reasoning for its raises apprehension about its understanding of the applicable standard of review and its larger implication.

Standard of Proportionality

In the Demonetisation judgement, the Indian SC clearly defined and articulated the conception of proportionality that it wished to apply. This is a rare occurrence (see here, here, here, here, and here). The Court adopted the “the four-pronged test culled out by Aharon Barak, former Chief Justice, Supreme Court of Israel which has been reproduced in the case” of Modern Dental College v State of Madhya Pradesh (“Modern Dental College”) (Para 270). The Court further relied upon the Internet and Mobile Association of India v Reserve Bank of India to hold that proportionality should be rooted in evidence and the state should provide “at least some empirical data” to substantiate its goals (Para 263 and 265).

However, there are conceptual issues with the Court’s reasoning that need to be flagged. First, the Court asserts that the standard of proportionality in India is one forwarded by Barak based on their interpretation of Modern Dental College. This interpretation is flawed as in the case of Modern Dental College the Indian SC referenced both Barak’s version of the test as well as the separate Canadian test in R v Oakes without explaining which one is to be adopted in India. Both these tests are structurally distinct and empirical data shows these differences lead to divergences in the approach of German and Canadian Courts impacting judicial outcomes.

Second, the standard forwarded by Barak among others has been subject to significant criticisms including for the fact that it is a balancing-centric test with other stages having a low threshold (see here, here, here, and here). Even among the certain proponents of proportionality, this has necessitated a discourse about how the test can be best designed to achieve its original motivations. I have tried to locate this conversation in India elsewhere.

Deference in cases related to economic policy

Before I turn to the Court’s application of proportionality, an important issue which had a direct bearing on the test’s application needs to be attended to. This concerns whether and to what extent deference should have been accorded to the executive in the Demonetisation case. Readers will recall that the respondents had highlighted that this case involved adjudication over an economic policy which was based on the recommendation of the RBI, an expert and independent body. These factors formed the basis for providing wide deference to the respondents. The Court held that “[i]t is not the function of this Court or of any other Court to sit in judgement over such matters of economic policy and they must necessarily be left to the Government of the day to decide” (Para 225). This position has valid policy reasons. However, the need is for the Court to view deference as existing on a spectrum, where the degree of deference ought to be determined in a case-to-case manner based on an evaluative criterion. Without comprehensively theorising on factors that would influence the degree of deference in each case these factors should account for (1) the quality of consultative dialogue and research that preceded the policy, (1) the degree of epistemological certainty vis-a-vis policy, (3) the nature and degree of the adverse impact of the policy, and (4) whether there was a situation of urgency or emergency. As for the first factor, both J Nagarathna and the petitioners detail how the consultation was illusionary: the policy was approved within 24 hours by the RBI, in addition to the fact that there was a conflict between the bank’s goals for demonetisation and the government’s.

Policymaking is often conducted in situations of epistemological uncertainty; this is the policy rationale behind the second factor. However, the degree of certainty can change with time and progress in research. In the case of demonetisation, the policy was adjudicated six years after its promulgation. This is crucial as within this period we have a lot of expert evidence including data from the government that provides evidence that the demonetisation failed to meet its stated objectives and a similarly designed policy has little chance of meeting such goals (see Para 8.2 and 8.3 of this written submission).

As for the third factor, demonetisation had a profound adverse impact on the economic security of the state both short-term and long-term and it had significant human costs as well (see here, here, here, here, and here). Since the judgement is largely “academic” as it is being delivered 6 years after the lapse of the policy this was an important opportunity for the Court to record and condemn the imposition of the currency ban. This would be symbolic but still a valuable official admission of the injustice.

Proportionality

At para 275 of the judgement the majority approvingly cites this quote: “every noble cause claims its martyr”. Bhatia  emphasises and reflects on this quote which the majority uses to dismiss the argument raised by petitioners’ regarding the hardships caused by demonetisation. This quote indicates the Court views demonetisation as any other policy with its acceptable “collateral” damage, and as Bhatia rightly notes it is evidence of callousness and a disregard for human life. Given that this is the frame through which the majority views the issue it is not surprising that the proportionality analysis reflects this business as usual approach. Below I shall examine the Court reasoning at the stage of suitability, necessity and balancing to highlight the callous attitude of the Court. I shall also re-examine those stages to explore if the demonetisation would have passed them if the Court applied the test scrupulously both based on evidence at the time of its introduction and when the Court delivered its judgement in 2023. I will not explore the stage of legitimate aim which in my opinion the demonetisation would pass.

Suitability

Court’s Reasoning

The Court explains that the second test entails an examination of whether there is rational nexus between the impugned measure and the state’s declared purpose (Para 273). The two main stated goals were reducing the circulation of counterfeit currency and eliminating black money (Para 271). Did demonetisation have a rational nexus with these two goals? The Court answers this question by using a rhetorical question: “Can it be said that demonetizing high denomination bank notes of Rs.500/- and Rs.1000/- does not have a reasonable nexus with the three purposes sought to be achieved?” (Para 273). The Court does not engage with argument and the evidence including the government’s own data which the petitions had forwarded. In fact here the evidentiary inquiry should have been stricter upon the government given in the past demonetisation measures with similar objectives in India had failed, and such large-scale overnight demonetisation is without many helpful precedents around the globe as well.

Re-examination of the stage

Let us first travel back to November 2016 when demonetisation was introduced by the Government. Would the measure have met the second stage? As I elaborate below in my opinion certainly not as the measure was fundamentally flawed by its very design. It could not have made an effective  contribution towards the two stated goals. The evidence that has emerged since the lapse of the policy has further confirmed the lack of rational nexus ex-post.

Taking first the goal vis-à-vis black money, economists had explained that black money in India at the time was kept predominantly in non-cash assets or was often in foreign banking haven systems (see here, here and here). Only an estimate of around 3% to 6% of black money was represented by currency. Even this money could easily circulate around the economy through investments and laundered through intermediaries. In fact, economists had warned that the demonetisation could have a counter effect by targeting unintended groups who predominantly hold cash (either in savings or for day to day operational concerns) for instance small merchants or women (see here and here). Therefore, the measure did not have a rational nexus with the goal of eliminating black money ex-ante and the evidence that had further come to light confirms the measure would fail this stage even ex-post. Since, as per RBI’s data 99.3% of the demonetised banknotes were deposited back to the bank (see Para 8.2 of this written submission). These estimates were preceded by reports of complex money-laundering networks that arose during demonetisation that led to almost all of the black money being laundered (see here and here). Therefore demonetisation had a counterproductive impact on the goal of black money.

As for eradicating counterfeit currency, economists had explained that demonetisation would only have a meagre impact on the production of counterfeit currency as it would not target the root of the issue (see here and here). Let us assume that the Indian administrative machinery had 100% efficiency in detecting fake notes. Even then capturing counterfeit currency does not catch those who minted them or prevent them from developing systems to print fake currency for the new legal tender.  For instance, ever since the introduction of the 2000 INR note in November of 2016 according to the RBI estimates they constitute 16.5% of the total value of all counterfeit notes. From 2017-2022 the estimated value of the 2000 counterfeit notes was 35.83% of the total value of all counterfeit notes annually (see Para 8.3 of this written submission). Finally, as per RBI data, only 0.0028% were counterfeit (ibid.). This could be due to the low percentage of fake currency in circulation at the time or the lack of efficiency of Indian administrative machinery to detect fake notes. Therefore, demonetisation did not have a rational nexus with the goal of eradicating counterfeit currency either ex-ante or ex-post.

Thus, demonetisation fails at this stage as it only had a negligible contribution towards its declared goals. This is due to both its flawed design and its disastrous implementation. Failure at this stage means that the demonetisation would fail proportionality and consequently would be unconstitutional. Nonetheless, I engage with the state of necessity next.

Necessity

Court’s Reasoning

The necessity limb requires that amongst the two means that can promote the State’s aim to the same extent, the one that is the less intrusive of the rights should be chosen. The petitioners had not proposed alternative measures but they posited that the government had not considered any alternatives (see here and here). Despite this the Court provides carte blanche deference to the government at this stage observing all the “areas which are purely within the domain of the experts and beyond the arena of judicial review” (Para 275). This is regrettable and this reasoning is seriously flawed. As I have elaborated above in this case deference should have been limited in this case if any was granted. Keeping that in mind, limited deference could have been provided while conducting the necessity analysis. For instance, the Court could have only asked the government to provide proof that it had considered alternatives and then shifted the burden of proof onto the petitioners to establish that there were other valid alternatives. An absolute abdication of scrutiny is completely unmerited, though perhaps not surprising given similar recent instances.

Re-examination of the stage

Scholars have posited that necessity has a low threshold in the standard of proportionality forwarded by Barak and others, which is applied in Germany (see here, and here). This is also reflected in empirical evidence. According to me, this is one of the rare cases where the measure could have failed even with this low threshold of necessity. An important caveat before the main analysis due to the paucity of space, I shall not provide in-depth details about how alternatives could have been designed and implemented. Rather I shall point towards the possible alternative directions that the government could have taken.

I would like to reiterate that demonetisation was foundationally flawed and its potential to contribute to the state goals (black money and counterfeit currency) was meagre. This was further compounded by the calamitous implementation. Therefore, it will not be difficult to find potential alternative measures that may have achieved the State’s goal to the “same (here, rather ineffective) extent”. The alternatives could range from more structural changes or designing and implementing demonetisation. For the latter category regarding counterfeit notes, the government should have conducted capacity building before demonetisation to bolster its capacity to detect counterfeit notes and to prevent the new note series from being widely counterfeited.

Regarding black money, a greater understanding was required of the complex money-laundering networks which were enabled by gaps in the banking security systems, and lack of adequate supervision of the relevant financial entities and intermediaries among other factors. Targeting these networks required gaining an understanding of the issues of the complex logics and the logistics of the level Indian financial system (both formal and informal) and the ground-level realities and obstacles. Based on this data then solutions had to be tailored which would have focused on designing suitable incentives for black money disclosure, eliminating non-essential intermediaries in money-laundering networks, building capacity to detect laundering (administrative, technical, and investigative) and proposing a more effective supervision framework. The colossal failure of demonetisation offers lessons about overreliance on technocratic and “marketworld” protocol and solutions that focus on maximising efficiency while maintaining the structural status quo. This is often in neglect of considerate policy making which is based on meaningful consultation with relevant stakeholders, and accounts of those facing greatest adverse impact.

On the structural side, one of the key approaches could have been to take measures to target the heavily cash-dependent nature of the Indian economy. In a less cash-dependent economy, it is relatively more difficult to conduct cash-based money laundering and tax evasion (see here, and here). In fact, countries like Singapore and South Korea have had greater success while demonetising their higher denomination currency due to their economy being less cash-dependent (see here, and here). Other systemic measures could have focused on strengthening the anti-graft law, targeting offshore parking of black money, focusing on the flow of proceeds of money laundering, especially to sectors with a higher risk of laundering, and better anti-money laundering regulations. Therefore, demonstration would not pass the stage of necessity.

Balancing

Court’s Reasoning

Finally, at this stage in the proportionality test, the question is whether the interference with the right is justified considering the gain in the protection for the competing right or interest. To this end, the two values have to be “balanced” against each other.

The Court refuses to answer the question of whether the Government properly balanced its interests with the possible deleterious impact of demonetisation by cowering behind its lack of competence to judge economic issues and by an abysmal attempt at constitutional reasoning which hangs on a rhetorical question: “can it really be said that there is no proper relation between the importance of curbing the menace of fake currency, black money, drug trafficking & terror financing on one hand and demonetizing the Rs.500/- and Rs.1000/- notes” (Para 276) 

The Count does not engage in balancing because that would require considering both interests which the Court has no concern in. As the Court itself put it “merely because some citizens have suffered through hardships would not be a ground to hold the impugned Notification to be bad in law” (Para 255). Here the term “hardships” is a euphemism behind which hides the real extent of suffering and devastation caused by demonetisation. The Court actively invisibilises this suffering and their loss of life of citizens by its failure to engage at this stage with the harm caused by demonetisation and all that could have been undertaken by the Government to prevent this harm. It is this refusal to engage with these arguments that makes the Court complicit.  

Re-examination of the stage

As I explained above demonetisation failed to achieve its goals and the measure from the get-go was flawed. Compare this with the massive economic, and human cost of the policy. The demonetisation of 86.4% legal note tender in an economy that is close to 90% cash-reliant overnight led to chaos. This was accompanied by haphazard, ill thought out and constantly changing banking withdrawal policies, and logistical nightmares for instance the ATMs not dispensing new notes (also see, here, here, and here). These lead to a large deficit in the total amount of cash ready for circulation. After a month and a half after demonetisation the currency in circulation was only about half of the pre-demonetisation amount. The demonetisation hurt those people who were not the intended targets such as small merchants, women who had savings, and those with a lack of ready access to financial services (see here, and here). By an estimate, 82 people had died due to demonetisation within a month of the announcement of the policy. The policy was followed by a fall in growth rate in all relevant indicators and the GDP (see here, here, here, here, and here). Consequently, in my considered opinion demonetisation of Rs.500/- and Rs.1000/- notes as legal tender is clearly disproportionate.

Conclusion

The goal of this piece was to examine the proportionality analysis in the Demonetisation Judgement. The Court followed a “business as usual” approach while adjudicating on proportionality. Despite the certain theoretical concerns, the Court clearly explained the standard of proportionality. But when actually it comes to examining the constitutionality of the impugned measure it failed to scrupulously apply the standard. The Court also had a benefit of hindsight as it adjudicated six years after Demonetisation which it fails to appreciate. As the petitioners had explained, ex-post facto evidence would clearly show that Demonetisation was a failure from the get go. This kind of reasoning is the embodiment, and an indication, of an executive court.

I wrote in the introduction that “[i]n the process of reading it emerged that this was not possible as there was no reasoning.” This meant that the Court failed to engage in cogent and methodical constitutional reasoning; rather the Court’s reasoning is sustained by rhetoric (can it really be said), metaphors (merely because some have suffered hardships), and euphemisms (“every noble cause claims its martyr”). It provides a convenient frame within which judges can invisibilise and trivialise the “harships” of the already marginalised masses. In the midst of this clouding rhetoric being feigned as constitutional reasoning, it becomes our responsibility as scholars and observers to bring light to alternative possibilities, or what could have been – so that there remains a record of the court’s failure to meet the minimal rigours expected of it When courts are our beacons of last resort and fail to acknowledge the harm caused by state action, then that non-acknowledgment becomes our history, and “everything else is lost”.

Guest Post: Strategic Executive Veneration: Demonetization and the Right to Property

[This is a guest post by Kartik Kalra.]

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The Supreme Court recently delivered its judgement in Vivek Narayan Sharma v. Union of India, a 4:1 verdict on the constitutionality of the demonetization exercise. The majority answered every single question in favour of the state: first, that the term “any” u/s 26(2) of the RBI Act, 1934 empowers the state to demonetize any series of any bank notes (¶151); second, that the conferral of such a power doesn’t constitute excessive delegation (¶207-8); third, that the particular exercise of this power u/s 26(2) under S.O. 3407(E) (“demonetization exercise”) met the principles of Wednesbury irrationality (¶234); and fourth, that the exercise of powers u/s 26(2) satisfied the four-pronged test of proportionality (¶278). While the first two questions concern the vires of state action, the last two concern constitutional compatibility. This piece concerns the last question – the use of proportionality to assess the validity of the demonetization exercise.

Unlike Wednesbury irrationality, satisfying the proportionality enquiry requires that state action have a proper purpose, a rational connection to this proper purpose, the non-existence of any lesser-restrictive means of achieving that purpose, and a gain from the achievement of that purpose that outweighs the harm to the right. But what right? Even before the first stage of the enquiry, the Court must identify the impugned state action and the affected rights. The identification of affected rights, which serve as the locus of the proportionality enquiry, is key – while the harm to the right of a religious denomination may be easy to justify, the harm to human dignity would require a huge set of benefits to be gained by the state action. In the present judgement, the majority identifies the right to property as the only right that demonetization engages, flying in the face of well-settled jurisprudence that calls for a recognition of all rights affected by the use of state power:

269. The proportionality doctrine is sought to be placed in service on the ground that in the case of Jayantilal Ratanchand Shah (supra), the Court held the bank notes to be property and as such, impugned Notification imposed unreasonable restrictions, violative of Article 300-A of the Constitution of India.

270. Let us test the four-pronged test culled out by Aharon Barak…

In identifying the right to property as the sole affected right against which state action must be tested, the Court turned its back towards a spree of fundamental rights violations caused by the demonetization exercise. In this piece, I argue that the Court’s identification of the right to property as the sole affected right frames the proportionality question in a manner that makes upholding the demonetization exercise inevitable. I then undertake a proportionality enquiry that takes cognizance of the engagement of the right to life, arguing that demonetization must have been held unconstitutional due to the availability of lesser-restrictive alternatives, including the state’s absolute abstention from taking any action, which would have contributed to attaining demonetization’s objectives with a similar, if not greater, degree of efficacy. In order to make this argument, firstly, I evaluate the Court’s proportionality enquiry and lay bare the reasoning it employs to conclude demonetization’s satisfaction of the same; secondly, I argue that the Court’s refusal to evaluate the efficacy of demonetization cannot stand simultaneously with the demands posed by the proportionality enquiry, for it assesses validity via an assessment of comparative efficacy; thirdly, I enquire into demonetization’s satisfaction of the necessity prong, arguing that the state’s absolute abstention from taking any action would have been one among a set of lesser-restrictive alternatives possessing a similar degree of efficacy to demonetization. I conclude that the Court, in order to uphold state action, strategically identified the right to property as the sole affected right, which enabled State impunity.

Proportionality and the Right to Property

The Court considered the right to property to be engaged by the demonetization exercise, whose validity would have to be assessed using a proportionality enquiry. In undertaking its enquiry, it used the first prong to identify three objectives that demonetization sought to achieve – i) the elimination of “black money”; ii) the elimination of counterfeit currency; and iii) the elimination of subversive activities, including terrorism, that use counterfeit currency (¶271). It then moved to the second prong, where it assessed the ability of state action to contribute to furthering the three objectives of demonetization. Its analysis in this prong was done in the following manner:

273. Can it be said that demonetizing high denomination bank notes of Rs.500/- and Rs.1000/- does not have a reasonable nexus with the three purposes sought to be achieved? We find that there is a reasonable nexus between the measure of demonetization with the aforesaid purposes…

There isn’t much reasoning the Court adopts in this prong, and Gautam has already critiqued it as resembling the form “Can it be said that A is not B? We find that A is B.” To be fair to the Court, however, the second prong is highly deferential, and is constrained to evaluating whether state action even marginally contributes to the fulfilment of the proper purposes. As long as this marginal contribution is present, the satisfaction of the second prong is concluded, and the Court moves to the necessity prong. This prong examines minimal impairment, assessing the availability of any lesser-restrictive alternatives to the impugned state action that can achieve the state’s proper purposes in a real and substantial manner. This prong is where the Court’s identification of the right to property as the sole affected right gains significance, for it is able to formulate the question as “how much of the right to property in banknotes must be infringed to meet the state’s proper purposes” instead of “whether there exists an alternative to demonetization in order to achieve the state’s proper purposes”. It says the following:

275. Whether the Courts possess an expertise to decide as to whether demonetization of only Rs.500/- denomination notes ought to have been done or the denomination of only the notes of Rs.1000/- ought to have been done or as to whether particular series of the bank notes ought to have been demonetized. These are all the areas which are purely within the domain of the experts…

On this basis, it holds that given the Court’s inability to define the quantum of the banknotes whose demonetization would have restricted the right to property less, the third prong stands satisfied. This answer was inevitable, given the couching of the question of rights in terms of the right to property. The absence of a determining principle to assess the quantum of banknotes whose demonetization would minimally impair the right to property in banknotes was obvious, and yet the Court chose to make that particular right the core of its enquiry. It escapes a proper enquiry at the balancing stage as well, asking rhetorically “can it really be said that there is no proper relation between” the state’s objectives and the infringement of the right to property (¶276). It doesn’t enquire into the benefits attained via demonetization versus the harm to the right in property, holding that actually, no right to property is even engaged:

277. In any case, by demonetization, the right vested in the notes was not taken away. The only restrictions were with regard to exchange of old notes with the new notes, which were also gradually relaxed from time to time…

Thus, after attempting to undertake a proportionality enquiry, the Court holds that it was a meaningless endeavour, for the right to property in banknotes isn’t actually even taken away. You can always deposit your money in the bank, get as much of a right to property in banknotes back – then what violation of the right to property are you complaining of? If the Court were to ultimately hold that demonetization doesn’t even engage the right to property, a proportionality enquiry was intended solely a red herring in its overall state-knows-best reasoning. On this basis, I submit that the Court made a strategic choice in favour of the state in the very beginning when it chose to identify the right to property as the sole affected right, turning its back towards the spree of human rights violations that the demonetization exercise caused. In the following section, I identify these rights, and argue that the Court refused to recognize the well-entrenched principle of recognizing the engagement of every single right affected by state action. In case it did, it may have seen a different outcome of its proportionality enquiry.

“The State Knows Best” and the Obfuscation of Efficacy

The demonetization exercise had wide-ranging implications for a plethora of fundamental rights. If judgements on Article 21 repeat ad-nauseum that the right to life means “something more than mere animal existence”, on what basis don’t a hundred deaths, millions standing in queues for days on end, hunger and under-nutrition, and a massive loss in livelihoods even call for a recognition that the right to life of the population was affected? Workers in the informal and agricultural sectors were substantially deprived of their salaries and wages, with many compelled to perform unpaid work for a prolonged period, affecting the right to livelihood. Lack of food and a breakdown of the agricultural economy have also been alleged, leading to circumstances of situations of hunger and malnutrition, affecting the right to food. The state compelling its citizens to stand in long queues for days on end that led to approximately a hundred deaths, all in pursuit of three instrumental aims, affects human dignity. 

A blind-eye towards the devastating consequences of demonetization stands behind the Court’s obfuscation of two distinct issues – the rights affected by demonetization following the decision, and the post-facto efficacy of the demonetization. While the latter would not be relevant at the third stage of the proportionality prong, the former would be extremely relevant in determining the locus of the proportionality enquiry. The Court holds that it isn’t capable of “assess[ing] or evaluat[ing] what would be the impact of a particular action and it is best left to the wisdom of the experts” (¶252). But what constrains its ability to evaluate the impact of state action on fundamental rights – isn’t that its very job? If there exists quantifiably verifiable evidence that shows a spree of human rights violations caused by demonetization, it is unclear why a recognition that these rights were affected be withheld. An effects-based assessment of the engagement of rights is the norm since RC Cooper (¶49). In Anuj Garg, the Court held that the effects of a stereotype-perpetuating law would determine the locus of its enquiry (¶44); and in Madhu and Ravina, it held that the unequal effects of a facially neutral law must be taken into consideration in assessing engaged rights (¶19; 12). On this basis, while the state may have intended to impose a limitation, howsoever transient, on the right to property in banknotes, the ultimate effect of that limitation on other rights would be determinative of the rights engaged by the state action. The right to life, therefore, would be engaged, and the Court would undertake an analysis of the reasonableness of state action on that anvil. The first two prongs of the enquiry would still be mostly similar, where the Court identifies demonetization’s objectives and its ability to marginally contribute thereto. For the third prong, it must be recalled that the state has offered three objectives for demonetization – i) the elimination of “black money”; ii) the elimination of counterfeit currency; and iii) the elimination of subversive activities, including terrorism, that use counterfeit currency (¶271).

The Court, however, was unable to do anything meaningful at the third prong due to its obfuscation of the above two questions – its stance against the examination of demonetization’s post-facto efficacy also became a ground to refuse an examination of demonetization’s efficacy within the necessity prong. The Court, including Nagarathna J. (¶20), held that judicial review of economic policies must occur independent of their ability to attain their purported outcomes:

247. However, we do not wish to go into the question as to whether the object with which demonetization was effected is served or not or as to whether it has resulted in huge direct and indirect benefits or not.

This proposition is fair, for using the post-facto failures of demonetization as a ground to hold the exercise unconstitutional would be unfair to the state – it would impute to it a constitutional requirement of predicting the unforeseeable. This is not, however, what the necessity prong asks. It enquires into the availability of similarly efficacious alternatives with the state at the time the impugned state action was taken, while the efficacy of the impugned (and alternative) state action is that which the state must have pre-empted using objective materials. In the Court’s necessity analysis, however, it states the following:

274. As such, what measure is required to be taken to curb the menace of fake currency, black money and terror financing would be best left to the discretion of the Central Government, in consultation with the RBI. Unless the said discretion has been exercised in a palpably arbitrary and unreasonable manner, it will not be possible for the Court to interfere with the same.

The Court concedes its inability to determine alternatives to the impugned state action at the time that the state action was taken, for the state knows best. While the subsequent failures of demonetization would not be a ground to hold the exercise unconstitutional, the availability of alternatives at the time the exercise was taken is exactly what the test enquires. In Aadhaar, the Court has provided the following composition of the enquiry (¶155):

1. Identify a range of possible alternatives to the present state action;
2. Examine the ability of these alternatives to attain the state’s purported objectives in a real and substantial manner;
3. When similarly efficacious alternatives are available at Stage 2, examine their rights-restrictive nature;
4. If an alternative at Stage 3 is able to be lesser-restrictive than the present state action, the impugned state action fails the necessity test and is unconstitutional.

In order to determine whether any alternative would have been able to fulfil the state’s objectives with similar efficacy at Stage 2, it logically follows that the objectively pre-empted efficacy of the impugned state action at the time that it was taken must also be examined. This stage, by design, is comparative in evaluating efficacy, and would necessarily require an efficacy-based assessment of the impugned state action. If the Court wished to shield the state by holding that the state action is economic in nature, it must have avoided invoking an enquiry that assesses validity using efficacy. While it can be argued that the Court must show greater deference to the state in its enquiry given that demonetization is an economic policy, my argument is solely that once proportionality is invoked, there is no question of “more” or “less” deference in terms of how the test stands in India – there exist only four steps, and the third step consists of a further four steps – there’s no scope of tinkering with the objective components of the enquiry. If the Court wished to show greater deference to the state, the way of doing it was to stop at the third stage of its enquiry, where it concluded that demonetization satisfied the Wednesbury principle (¶234). It did not choose this path, invoking proportionality while simultaneously refusing to evaluate the availability of alternatives. Once proportionality is invoked, this cannot be done, and the enquiry would proceed using the abovementioned four stages. I undertake this enquiry in the following section.

An Efficacy-based Minimal Impairment Analysis

In the instant case, the state submitted that 98% of the demonetized currency has returned to it, indicating low post-facto efficacy in eliminating unaccounted cash and fake currency notes (¶20, Nagarathna J.). This, however, cannot be of direct use at this stage, for the question instead is demonetization’s pre-emptive efficacy at the time that state action was taken. For all three objectives, the Court could have asked the state to produce evidence of demonetization’s efficacy that the state envisioned, along with information of alternatives that were available at the time that state action was taken. Even if the state could somehow prove that demonetization was the only alternative available that could attain all three objectives with the efficacy that it envisioned, the Court would still assess alternatives at Stage 1.

Consider the following alternatives to demonetization available with the state at the time state action was undertaken, whose efficacy based on their ability to curtail unaccounted cash, counterfeiting, and connected terror-funding and must be evaluated: i) the status quo itself; ii) a gradual replacement of the former Rs. 500 and Rs. 1,000 banknotes with new notes that are difficult to counterfeit; iii) moving against individual counterfeiters under the Indian Penal Code (“IPC”), and attaching their assets under the Prevention of Money Laundering Act, 2002 (“PMLA”); iv) use of Section 51A(a) of the Unlawful Activities (Prevention) Act (“UAPA”), 1967 to impose individualized sanctions on organizations and individuals “engaging in or suspected to engage in” currency-based terror-related activities.

Unaccounted cash, hold some authors, is not hoarded, and is instead always in circulation in the form of assets being bought and sold. The fact that almost all of the demonetized currency returned to the state wasn’t extraordinary – for information with the state already indicated that a conception of “black money…held in the form of notes tucked away in suit cases or pillow cases is naïve” (11). Further, data of the National Crime Records Bureau suggests that the new Rs. 2,000 banknote is no less susceptible to counterfeiting as compared to the former Rs. 500 and 1,000 banknotes. One monograph suggests the following:

In any case, demonetisation is hardly an effective measure against counterfeiting in future. It would be so only if the technology employed in printing the new legal tender prevents any possibility of these notes being faked in future. However, it is now evident that the security features in the newly released notes are no different from or even slightly less than in the earlier notes. Therefore, they are just as liable, if not even more liable, to being counterfeited. (19)

Further, terror-related activities pertaining to counterfeit currency are estimated to be minimal, with the large-scale introduction of such currency to cause economic instability being absolutely unheard of. Even if an immense counterfeiting problem exists, this kind of activity could as easily be undertaken using new currency notes, for the new notes are no less susceptible to being counterfeited than the old ones. On this basis, option (i) of maintaining the status quo is a very real alternative carrying a similar degree of efficacy as the present state action, having the ability to meet the state’s three objectives in a manner akin to the demonetization exercise. By doing nothing, the state could have achieved its objectives in an equal, if not better manner.

The RBI, in its 2015-16 Annual Report, has stated that counterfeited currency constitutes only 0.0000070% of the total currency in circulation (page 92). Given that the problem being combatted isn’t as large, a gradual replacement via option (ii) could also have served to eliminate this proportion of counterfeited currency. Further, it must be noted that the Indian state is now more powerful than ever, and has a plethora of targeted mechanisms to curtail currency-related subversive activities instead of having to demonetize its currency. If the RBI identifies counterfeited currency in circulation, it means that the currency is being used to buy and sell something in the market, along with the fact that such currency is being produced. This series of acts with counterfeits – from production to transacting – constitutes an independent offence u/ss. 489A and 489B of the IPC. If the state discovers that a bunch of entities are involved in the regular production of counterfeits, it can proceed against them individually under the above sections. Further, the PMLA considers Sections 489A and 489B to constitute scheduled offences, meaning that the proceeds from committing those offences shall be deemed “proceeds of crimes”, and that the assets purchased using such proceeds can be attached u/s 5 of the PMLA. Lastly, the state can also invoke Section 51A(a) of the UAPA to freeze “all economic resources” of an individual or organization that has engaged in, or is suspected to be engaged in currency-related acts of terrorism. Options (iii) and (iv), therefore, are individualized mechanisms of combatting counterfeiting and its corresponding terror-related activities. Given their individualized nature, they may enjoy a comparable, if not greater efficacy than demonetization in reducing the 0.0000070% counterfeit currency in India. On this basis, options (iii) and (iv) may be able to fulfil the state’s objectives in a real and substantial manner, and satisfy Stage 2 of the enquiry.

Given the availability of four alternatives to demonetization, their rights-restrictive nature is evaluated at Stage 3. It must be noted that option (i) is the least rights restrictive – for all that’s asked of the state is to abstain – and its non-action would be more efficacious and less rights-restrictive than the present state action. Option (ii) may also be of a similar rights-restrictive nature as option (i), for the state’s gradual replacement of counterfeits may not have a significant impact on fundamental rights. The use of option (iii) may lead to a violation of the guarantee against non-retrospectivity, which has been discussed here; and the use of option (iv) may lead to the violation of the guarantee against non-arbitrariness, for the UAPA confers uncannalized powers on the state to freeze assets of persons that it “suspects” to have engaged in terrorism. While there may be rights violations caused by invoking options (iii) and (iv), the only question is whether any of the four options is less rights-restrictive than demonetization – and if it is, then the demonetization exercise is unconstitutional.

It is clear that options (i) and (ii) are less rights restrictive than demonetization, for they effectively indicate the continuation of the status quo for the citizen. The less-rights restrictive nature of any of the options leads to a conclusion of demonetization’s unconstitutionality, and the exercise would therefore fail at this prong. Regardless, consider options (iii) and (iv): while they may also violate fundamental rights against retrospectivity and arbitrariness, the overall deprivation of the right to life caused by the demonetization exercise – with numerous deaths, loss of livelihoods, hunger, and a state of desperation – must be considered greater. This doesn’t mean that the violation of one’s guarantee against retrospectivity is justified in pursuance of the right to life of a hundred others – it only means that the greater rights-restrictive nature of one, in the presence of the other, is a violation of fundamental rights because the other was always available. If the state would have employed Section 51A(a) of the UAPA to freeze the assets of a counterfeiting-related terror suspect, a separate constitutional enquiry would lie against that exercise of state power, and alternatives to the invocation of Section 51A(a) would have to be identified – whose efficacy and rights-restrictive nature would then be evaluated. In this way, there’s no overall free pass given to the state, which must always show why it couldn’t do something else that was less rights-restrictive in pursuit of its objectives.

On this basis, I submit that the availability of lesser-restrictive alternatives to demonetization with a similar degree of efficacy at the time of undertaking the state action means that the exercise is unconstitutional. The state could just have let it be, and still achieved its objectives more effectively than it did using demonetization.

Conclusion

But the Court doesn’t enquire into any of this. In the garb of its state-knows-best reasoning, it considers the right to property the sole right engaged, turning its back towards the spree of human rights violated by demonetization. It cloaks its super-deferential enquiry as proportionality, while simultaneously refusing to evaluate demonetization’s efficacy. The most bewildering segment of the decision, however, is its absolute inattention towards the meaninglessness of the state action, the implications of which are deemed irrelevant (¶257). If the state could do nothing and still attain its objectives with greater efficacy than doing something, and in doing that something it causes immense hardship and fundamental rights’ violations, the Court simply says that as long as you’re getting your banknotes back, there’s no right to even complain of. This mode of reasoning is chosen strategically to uphold state action – from choosing among engaged rights arbitrarily, to holding that a determination of the quantum of the infringement of the right to property in banknotes lies solely in the domain of experts (¶275). This is strategic executive veneration – framing its enquiry in such a manner that all pieces of the puzzle come together to validate state action.

Schrödinger’s Central Bank: Key Issues in the Upcoming Demonetisation Judgment

Last week, it was announced that a Constitution Bench of the Supreme Court would be delivering judgment in the constitutional challenge to the central government’s 2016 banknote demonetisation. The case itself had been heard through November 2022, and reserved for judgment on 7th December. On this blog, we have uploaded the written submissions of the parties in the case, accessible here. Ahead of the pronouncement, this piece will deal with some of the constitutional issues at the heart of the case.

Judicial Evasion

Recall that the demonetisation of Rs 500 and 1000 banknotes was announced on 8 November 2016. The case was heard in November 2022, six years after the fact. When arguments began, the bench asked counsel for the petitioners whether the issues in the case had now become ‘academic.’ In response, counsel laboured at some length – both in court, and in their written submissions – to establish that even if demonetisation itself had become fait accompli, its constitutionality was still a live issue, especially as it concerned crucial and unanswered questions about the relationship between the Reserve Bank of India and the central government. Notably, in their written submissions, the government and the RBI urged the Court not to get into the adjudication of purely academic issues.

For obvious reasons, petitioners before the Court could not answer this question in the manner that it merited. On this blog, however, we have no such compunctions. The real answer is that the constitutionality of demonetisation is academic because the Supreme Court made it so. A perusal of the orders in Writ Petition No. 916/2016 (the matter eventually argued by Mr. P. Chidambaram) reveals that it first came up for hearing on 11th November 2016, three days after demonetisation was announced. A further perusal of the orders in Writ Petition No. 906/2016 (designated as the lead matter) reveals that the demonetisation challenge came before the Supreme Court on the following dates: 15.11.2016, 25.11.2016, 2.12.2016, 5.12.2016, 9.12.2016, 15.12.2016, 16.12.2016, 27.1.2017, 7.3.2017, 21.4.2017, 31.7.2017, 15.9.2017, 19.3.2018, 28.3.2018, 10.7.2018, 24.8.2018, 10.12.2018, 25.2.2019, and 2.9.2019. That is a total of nineteen hearings, before it was actually heard by the Constitution Bench in 2022. Indeed, the hearing of 16.12.2016 is particularly important, because on that date, a two-judge bench of the Supreme Court referred the matter to a Constitution Bench as it raised questions of constitutional importance, and simultaneously interdicted all High Courts from hearing any matter pertaining to demonetisation. Effectively, therefore, the Supreme Court took sole charge – and sole responsibility – for deciding this case.

Let us for a moment grant that regular housekeeping issues justified a one-month delay between the filing of a case and the referral to a Constitution Bench. Even after that, the Supreme Court had ample time to adjudicate the case while the issues were still live (as the right to privacy case showed, the Court is entirely capable of hearing and deciding constitutional cases quickly when it so chooses). But the Court didn’t do that. It evaded. It dodged, ducked, and weaved. It stung like a butterfly and floated like a bee. A large number of the orders after 16.12.2016 involve the Court granting “one final opportunity” to the Respondents to file counter-affidavits. Ultimately, what the record reveals is that the Supreme Court simply wasn’t interested in hearing the demonetisation case while its orders may still have had some bite.

This is why, despite the petitioners’ gallant attempts to demonstrate that the issue is not academic, one is left distinctly unconvinced. Because even if this bench were to buck the trend of judicial deference to the executive, find that demonetisation was unconstitutional, and lay down standards and principles ‘for the future’, this would be of no use if, when that hypothetical future arrived, a future Court once again simply evaded deciding the case until it became a fait accompli. As the long-pending challenges to the abrogation of Article 370 and the constitutionality of electoral bonds show, judicial evasion remains very much a part of the Court’s repertoire at the moment.

Substantive Issues: The Status of the RBI

As a perusal of the written submissions, and the coverage of the oral arguments reveals, many challenges have been raised to the constitutionality of demonetisation. At the heart of the case, however, lies the crucial question of the relationship between the Reserve Bank of India and the central government. This is implicated by Section 26(2) of the RBI Act, which has been invoked as the legal authorisation for the 2016 demonetisation. Section 26(2) states, in relevant part:

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…

The key legal issue turns upon the meaning of the phrase ‘on recommendation.’ Petitioners argue – in essence – that if central bank autonomy is to mean anything at all, then the recommendation has to come independently from the RBI, and anterior to the central government’s actions. The recommendation from the RBI cannot come at the instance of the central government. In the present case, however, the chronology reveals that the process was initiated through a central government letter ‘advising’ demonetisation on 7th November 2016, followed by the RBI recommendation to that effect on 8th November, 2016 (see Sections III and IV of the Petitioner’s written submissions). This reversal of the process is ultra vires Section 26(2), especially as the RBI Act, as a whole, is premised on the independence and autonomy of the central bank. On the other hand, it is the case of the government and of the RBI that it is open for the Central Bank to base its ‘recommendation’ on the advice and inputs of the central government, especially on issues within the executive’s domain (such as combating terror financing, eliminating fake currency, and eliminating black money). The RBI can still make an independent decision based on those inputs. Indeed, the Attorney-General’s written submissions make no bones about this, arguing specifically that, in the context of Section 26(2), an “integrated role that will be played by RBI and the Central Government acting together in promotion of public interest” (para 2.1). According to the government, therefore, central bank autonomy does not mean an arms-length distance between the government and the bank, but rather, an ‘integrated role’ in which both organs ‘act together.’

The core issue, therefore, is how do we understand the place and scope of the central bank in our constitutional scheme, and what do we mean when we say that the central bank is meant to act ‘independently’ of the government. In this context, there are two points worth flagging.

First, in the context of the interaction between different institutions, the ability to initiate a process has a significant bearing upon questions of independence and autonomy. For example, recall the decision of the Supreme Court of Kenya in the BBI Case: one of the questions before the Supreme Court was whether the President of Kenya could (directly or indirectly) initiate an amendment process that – according to the Constitution – was meant to be the reserve of the People (“the popular initiative”). Upholding the findings of both the Kenyan High Court and the Kenyan Court of Appeal, the Supreme Court found that the President could not. Underlying this finding was the insight that the independence and autonomy of the People to initiate constitutional change would be largely illusory if a figure as powerful as the President could effectively make use of the same avenue: it would then become a top-down amendment process rather than a bottom-up one. While the context is different, of course, the considerations in the present case are largely similar: it is an open question to what extent two institutions can act in ‘together’ and in an ‘integrated’ manner, when one of the two institutions is the political executive. Given that fourth branch institutional independence is already exceedingly weak (for example, the RBI Governor is appointed by the executive), if the central government was effectively allowed to play an initiating role under Section 26(2), it is an open question to what extent any subsequent ‘recommendation’ from the RBI would be at all ‘independent,’ in any meaningful way.*

Secondly, if we read the Attorney-General’s submissions closely, there emerges a rather surprising internal contradiction within the government’s own case on this point. One of the arguments made by the Petitioners is that, unless given a narrow construction, Section 26(2) suffers from the vice of excessive delegation: it does not lay down any guidelines or considerations on the basis of which the RBI is supposed to make a recommendation for demonetisation. The Attorney-General’s response to this is interesting: he argues that the question of excessive delegation does not arise, because under the scheme of the RBI Act, in the domain of currency management and regulation, the Bank occupies a status even higher than Parliament. Consider:

RBI is not just like any other statutory body created by an Act of legislature. It is a creature, created with a mandate to get liberated even from its creator. (Paragraph 1.1.1).

And:

What is taking place, by virtue of Section 3 of the Act, read with the other provisions therein, is the transplanting of the primary responsibility of currency management in the country from the domain of the union executive to an expert body, the RBI (which acts through its Board), set up exclusively for this purpose. (Paragraph 1.1.2)

And:

The RBI is specifically empowered to do certain things to the exclusion of even the Central Government. Therefore, to place its decisions at a pedestal lower than that of even an executive decision, would do violence to the scheme of the Act. (Paragraph 1.2)

What we have, thus, is Shrödinger’s central bank: simultaneously higher than Parliament, while working ‘together’ with the executive; higher than Parliament when it comes to justifying the scheme of the RBI Act, but on par with the executive when it comes to justifying demonetisation; in essence, the central government wants to eat its cake (by defending the RBI Act’s unconstrained delegation of functions to the RBI), but also have it (by retaining a broad role for itself in the performance of those functions). This is nothing other than a plea for executive impunity.

Due Process: A Sealed Cover in All But the Name

Let us assume, however, that the central government’s interpretation of section 26(2) is correct. At a minimum, however, for the recommendation to be a recommendation, it would still require the RBI to exercise independent judgment, and not act as a rubber stamp for the government. It would also require the recommendation to meet constitutional standards of rationality, at the very least. This, then, leads to the procedural part of the petitioners’ challenge, i.e., a challenge to the decision-making procedure that underlay the 2016 demonetisation.

This also leads us to perhaps the most egregious part of the present proceedings. It is obvious that a challenge to the decision-making procedure can hardly be made without access to the documents on the basis of which the said decision has been made. As the petitioners’ written submissions indicate, the following documents were sought for in this regard:

… (i) the contents of the Central Government’s letter dated 07.11.2016; (ii) the agenda note prepared by the RBI for the meeting of the Central Board on 08.11.2016; (iii) the Minutes of the said meeting dated 08.11.2016; (iv) the text of the recommendation made by the RBI on 08.11.2016; (v) the file containing the consideration by the Central Government on 08.11.2016; (vi) the Cabinet Note prepared on 08.11.2016; (vii) and the Minutes of the Cabinet dated 08.11.2016. (paragraph 7)

As the records of proceedings reveals, the government refused to provide these documents. Now, in the Supreme Court’s order of 7th December 2022, in which it reserved judgment, we come across the following line:

Learned counsel representing the Union of India and the Reserve Bank of India are directed to produce the relevant records.

This is mind-boggling.

In a constitutional challenge focused upon flaws in the decision-making procedure, the Supreme Court has asked the State to produce relevant evidence after the hearing is over. It has asked the State to reveal its decision-making process – which is under challenge – at a time in the hearing when the petitioners can no longer address arguments. And the Supreme Court is now going to hand down a judgment – ostensibly – based on materials that were the basis of the challenge before it, but which one side has not been given access to. This is, in essence, the sealed cover by another name: a decision based on secret material, which – let alone the public – even the contested party has not been able to see and address.

It is worthwhile, at this point, to quote the Stanford Encyclopaedia of Philosophy’s definition of the rule of law (in particular, the following element):

1. A hearing by an impartial and independent tribunal that is required to administer existing legal norms on the basis of the formal presentation of evidence and argument;
2. A right to representation by counsel at such a hearing
3. A right to be present, to confront and question witnesses, and to make legal argument about the bearing of the evidence and the various legal norms relevant to the case; and
4. A right to hear reasons from the tribunal when it reaches its decision, which are responsive to the evidence and arguments presented before it.

One would think that this is basic; yet, spot how many of these basic principles have been violated by this one single line in the Court’s order reserving judgment. And one needs to ask oneself what legal value is carried by a judgment which appears to fall short of complying with even the minimum threshold of what the rule of law demands.

It is important to note that this wasn’t the only avenue open to the Court. As I have argued before in the context of the Rafale case, the Court could have simply refused to look at the decision-making process. That would arguably have been judicial abdication, but it would also have been, in a way, intellectually honest. What we have now is a halfway-house to nowhere, where the Court wants to retain its power to scrutinise government action, while at the same time in a way that nobody can scrutinise it for how it goes about that task. Much like the executive, the Court wants to eat its cake and have it too.

Constitutional Standards

A quick, concluding point about the applicable legal standards in this case. The Petitioners have argued that the standard of proportionality should apply, as demonetisation impacted numerous fundamental rights. The Attorney-General and the RBI have resisted this. What standard they prefer is somewhat ambiguous: it has shifted between no judicial review at all, and light-touch rationality review. The core of their case is that when it comes to the economy and to banking, substantial play in the joints must be accorded to the government.

Two points arise in response to this. The first is that we have, once again, that internal tension in the State’s submissions. If the decision to demonetise came from an independent recommendation of the RBI – and if the RBI is itself an autonomous, independent body that is meant to take its decisions on non-political bases, then there is no reason why its decisions can’t be subjected to rigorous scrutiny, at the very least, on the defined parametres that it is supposed to apply.

More importantly, however, the proportionality standard does not commit the Court to interventionist scrutiny. The four steps of the proportionality standard are flexible enough for the Court to accord greater deference on economic issues: from the rationality prong to the necessity prong, at each step, the Court can take into account that economic policy needs greater play in the joints, and thereby, lessen the burden of justification upon the State. The proportionality test, however, retains great value, because at all times it requires the State to justify its decision by giving due reasons. That is the minimum that should be expected of the State, within the context of the rule of law.

Conclusion

The history of the demonetisation case has already seen the unfortunate deployment of two recent judicial tools that inure to the benefit of the executive: judicial evasion and the sealed cover. As we await the final judgment of the Court – especially on the substantive and procedural issues outlined above – it remains to be seen whether the trinity will now be completed with a judgment that is deferential to the executive on questions of fourth branch independence, due process, and standards of judicial scrutiny – or not.

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*It is important to clarify that this post is not making an independent case for central bank autonomy. This author does not agree with the argument that institutions like central banks ought to be encased from democratic control. It is important to be clear, therefore, that this blog post is not a first principles argument for the separation between the RBI and the central government, but rather, an argument within the existing statutory and constitutional context. In any event, RBI independence affects only the section 26(2) part of the argument, and not the others.