Why is there now a 4-year jail term for keeping demonetised notes (that are worthless anyway)?

In the blink-and-miss game of new demonetisation rules that’s been on since November 8, the government seems to have reserved a strong punch for the end of the year.

Early on Wednesday, the Union cabinet cleared an ordinance which makes the simple act of holding on to demonetised Rs 1,000 and Rs 500 notes a criminal offence.

The penalty for keeping the old bills could result in a jail term of up to four years.

However, the reason for this drastic move was far from clear. The Union government itself kept mum and released no official statement, nor did it bother to explain why it was proposing a jail term for something as trivial as keeping old notes.

Without any clarity from the authorities, confusion reigned.

The first conundrum that faced everyone was why this: if the old Rs 1,000 and Rs 500 banknotes would anyway be worthless after December 30, why is keeping these worthless scraps of paper now a criminal offence?

Others pointed out that no matter the original demonetisation notification on November 8, the Union government could not unilaterally dissolve the promissory nature of a banknote. If simply holding on to old notes was illegal, though, how could someone go to the Reserve Bank of India and execute the promissory nature of the banned notes?

It is, therefore, still unclear why the government undertook such a drastic move. But here are three theories which attempt an explanation.

1. Providing a legal imprimatur on demonetisation

The promissory nature of a banknote is what might have prompted this move. While the November 8 demonetisation announcement ended the old notes’ status as legal tender, legally, the Reserve Bank of India would have had to honour the value of the scrapped notes even after the Union government’s December 30 deadline.

This ordinance does away with this provision, since the simple act of keeping old notes is now a crime.

In 1978, the Morarji Desai government had also issued a similar ordinance to end the government’s liability after Rs 1,000, Rs 5,000 and Rs 10,000 currency notes were demonetised.

While the earlier commentary had pointed out that the move was missing sufficient legal scaffolding, the Supreme Court has refrained from interfering in the Union government’s actions and had put the issue on the backburner.

For a detailed explanation of this, please read: Why a Parliamentary Act – or ordinance – is needed for demonetisation

2. Squeeze a dividend from the RBI

That a large section of so-called black money wouldn’t make it back to the formal system has been one of the frequently whispered about goals of demonetisation. Here, for example, the Economic Times says that the Union government expected as much as Rs 3 lakh crore to not return to the banking system, with black money hoarders expected to destroy their cash rather than risk creating a audit trail in a bank. This missing money would then be accounted for by the Reserve Bank of India handing the Union government a special dividend.

If such a plan existed, it had, by now, failed spectacularly. As of Wednesday, some press reports state more than 90% of the scrapped Rs 1,000 and Rs 500 notes had made it back to the formal system. Usha Thorat, a former deputy governor of the Reserve Bank of India, writes about speculation that notes returned have even exceeded the notes issued in the first place.

Could this ordinance then be a last ditch attempt to squeeze that chimerical dividend? The Bloomberg Quint does seem to think it’s a possibility:

Such an ordinance may also result in the reduction of liabilities on the RBI’s balancesheet and could give the central bank room to bring down its assets in a similar proportion. This, hypothetically, could allow the central bank to transfer a special dividend to the government.

For a more detailed explanation of this, please read: The law on cash that will not come back: Will the government get a big bonanza from the RBI?

3. End status as tender

With old notes currently still being accepted at banks and at some merchant outlets such as petrol pumps, there might have been a possibility of it still being used as tender even after the December 30 deadline. The Times of India quotes an anonymous official source to say that the new ordinance aims to end this. “Possession of old notes must be made illegal and punishable to ensure that no one is forced to accept scrapped currency as payment or wages,” the Times of India quoted the source saying.