RBI Act — Issue of Bank Notes (Section 22)

Pick up any rupee note and you will find the Governor's promise to pay the bearer the sum stated, guaranteed by the Central Government. That single line is the visible face of a statutory monopoly. Section 22 of the Reserve Bank of India Act, 1934 vests in the Reserve Bank the sole right to issue bank notes in India, displacing the patchwork of presidency-bank and government issues that preceded it. Sections 22 to 28 then build the full architecture of note issue: a dedicated Issue Department, fixed denominations, a Central-Government-approved design, the legal-tender guarantee, and the power to withdraw notes from circulation. For judiciary and CLAT-PG aspirants this cluster is fertile ground, because it sits at the meeting point of banking law, constitutional property rights and the two great demonetisation litigations of Jayantilal Ratanchand Shah (1996) and Vivek Narayan Sharma (2023). This chapter works through the section text, the supporting provisions and the case law with the precision an answer script demands.

The text of Section 22 and the sole right to issue

Section 22 sits in Chapter III of the Reserve Bank of India Act, 1934, the chapter headed "Central Banking Functions". Sub-section (1) provides that the Bank "shall have the sole right to issue bank notes in India", and may, for a period fixed by the Central Government on the recommendation of the Central Board, issue currency notes of the Government of India supplied to it; the provisions of the Act applicable to bank notes apply, unless a contrary intention appears, to such Government currency notes as if they were bank notes. Sub-section (2) completes the monopoly: "On and from the date on which this Chapter comes into force the Central Government shall not issue any currency notes."

Two ideas are doing the work here. First, exclusivity: no other bank, corporation or person may put paper money into circulation. Second, a transitional bridge: when the Bank began operations on 1 April 1935 the existing Government of India currency notes did not vanish overnight; the Bank was authorised to keep issuing them for a fixed period until its own notes took over. The phrase "sole right" is the operative monopoly grant, and it is the foundation on which every later provision in the chapter rests. It also explains why the one-rupee note, when it exists, is constitutionally peculiar — it is issued by the Government of India, not the Bank, and is therefore not a "bank note" within Section 22 at all, a point we return to under the regulation of currency chapter.

Why a single issuer? The history behind the monopoly

Before 1935, India's paper currency was a layered affair. The Paper Currency Act, 1861 had centralised note issue in the Government of India, ending the earlier presidency-bank issues, and successive Paper Currency Acts governed the management of that issue. When the Hilton-Young Commission (the Royal Commission on Indian Currency and Finance, 1926) recommended a central bank, a core argument was that note issue and monetary management should rest in one independent institution rather than the treasury. The Reserve Bank of India Act, 1934 carried that recommendation into law, and Section 22 is its concrete expression: the new central bank, not the executive, would be the single issuer.

The rationale matters for examinations because it frames the constitutional questions that follow. A monopoly over the money supply is a sovereign function partly delegated to a statutory body. That is why design and legal-tender status remain tethered to the Central Government (Sections 25 and 26), while the mechanics of issue are entrusted to the Bank. The reader should connect this to the broader scheme set out in the functions and powers chapter, where note issue appears as one of several classic central-banking functions alongside banker to the government and lender of last resort. For the establishment of the institution itself, see the establishment of the RBI chapter.

Section 23: the Issue Department and the separation principle

Section 23 requires that the issue of bank notes "shall be conducted by the Bank in an Issue Department which shall be separated and kept wholly distinct from the Banking Department". The assets of the Issue Department are not liable for any liability of the Banking Department. This separation is not cosmetic. It reflects the classical model, derived from the Bank Charter Act, 1844 in England, of ring-fencing the note-issue function so that the value of the currency is protected by a dedicated pool of assets and cannot be drained to meet the central bank's ordinary banking liabilities.

Practically, the Issue Department holds the backing assets against which notes are issued, and bank notes are issued only in exchange for other bank notes, or for coin, bullion or securities permitted by the Act to form part of the Reserve (Section 23). The Banking Department, by contrast, conducts the Bank's commercial and central-banking business — accepting deposits, lending, acting as banker to the Government and to banks. The two-department structure is a recurring multiple-choice favourite: candidates should be able to state that note issue is conducted exclusively through the Issue Department and that its assets are insulated from Banking Department liabilities.

Section 24: denominations and the ten-thousand-rupee ceiling

Section 24 fixes the denominational values of bank notes. As amended, sub-section (1) provides that bank notes shall be of the denominational values of two, five, ten, twenty, fifty, one hundred, five hundred, one thousand, five thousand and ten thousand rupees, or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify. The crucial examinable fact is the statutory ceiling: the maximum denomination of a bank note under Section 24 is ten thousand rupees. A note of, say, fifty thousand rupees cannot be issued without amending the Act.

Sub-section (2) allows the Central Government, on the Central Board's recommendation, to direct the discontinuance of issue of bank notes of any denominational value. This is the routine, denomination-level analogue of the more dramatic demonetisation power in Section 26(2). Note also that the Section 24 list is the source of the standard examination trap that asks for the "highest denomination the RBI can issue" (ten thousand) as opposed to the highest in current circulation (which has varied over time and is an administrative, not statutory, matter).

Section 25: who decides what a note looks like

Section 25 provides that the design, form and material of bank notes shall be such as may be approved by the Central Government after consideration of the recommendations made by the Central Board. The drafting allocation is deliberate and frequently tested: the Bank (through its Central Board) recommends, but the Central Government approves. The final say on what a note looks like — the figures, the watermark, the security features, the languages on the reverse — rests with the executive, not the central bank.

This is the statutory answer to the popular but inaccurate claim that "the RBI alone decides everything about currency". It does not. Section 22 gives the Bank the sole right to issue; Section 24 lets the Government fix denominations; Section 25 makes design and form a matter of Central Government approval; and Section 26 makes legal-tender status a Central Government guarantee with a Central-Government-triggered withdrawal power. The note-issue function is thus a shared sovereign exercise, with the Bank as the operating arm and the Government holding the constitutive levers. Aspirants should be able to map each design/denomination/tender decision to the right section.

Section 26: legal tender and the Government guarantee

Section 26(1) is the heart of the note's value. It declares that every bank note shall be legal tender at any place in India, in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government. "Legal tender" means a creditor is bound to accept it in discharge of a debt; the Central Government guarantee is the sovereign backing that the printed "I promise to pay the bearer" line expresses. The guarantee, importantly, runs from the Government and not merely from the Bank, which is why demonetisation litigation has always carried a constitutional-property dimension.

Section 26(2) is the demonetisation power. It provides that the Central Government may, on the recommendation of the Central Board, by notification in the Gazette, declare that, with effect from a specified date, any series of bank notes of any denomination shall cease to be legal tender save to the extent and subject to conditions specified in the notification. The interpretive battles over the words "any series" and the requirement of a Central Board recommendation are the spine of the 2016 demonetisation case discussed below. For the wider treatment of the monetary and currency-management framework, see the regulation of currency chapter, and contrast the reserve-requirement machinery in the cash reserve ratio chapter.

Demonetisation of 1978 and Jayantilal Ratanchand Shah

The 1978 demonetisation was effected not under Section 26(2) but by a separate statute, the High Denomination Bank Notes (Demonetisation) Act, 1978, which withdrew the legal-tender character of one-thousand, five-thousand and ten-thousand rupee notes. Section 26A was inserted into the RBI Act to declare that these high-denomination notes shall cease to be legal tender. The constitutional challenge reached the Supreme Court in Jayantilal Ratanchand Shah v. Reserve Bank of India (1996), decided on 9 August 1996.

The petitioners argued that the extinguishment of the value of their notes, and the restricted window allowed for exchange, amounted to compulsory acquisition of property without adequate compensation and violated their fundamental rights. The Court accepted that a bank note represents a chose in action — a debt due from the State — and that property includes such debts. But it upheld the 1978 Act. The restricted exchange period was held reasonable in light of the Act's object: to stop the circulation of high-denomination notes, often associated with unaccounted wealth, as quickly as possible. If the exchange window were open-ended, the very purpose of demonetisation — flushing out black money — would be defeated, because transferees could keep presenting notes indefinitely. The case is the foundational authority that demonetisation is a legitimate exercise of legislative and economic policy and is not, by itself, an unconstitutional confiscation of property.

The 2016 demonetisation: Vivek Narayan Sharma v. Union of India

The November 2016 withdrawal of five-hundred and one-thousand rupee notes was, unlike 1978, carried out under Section 26(2) of the RBI Act through a Gazette notification. The validity of that exercise was decided by a Constitution Bench of five judges in Vivek Narayan Sharma v. Union of India on 2 January 2023, by a 4:1 majority. The bench comprised Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian and B.V. Nagarathna.

The principal statutory question was whether the power under Section 26(2) to demonetise "any series of bank notes of any denomination" could extend to all notes of a denomination, or whether "any series" limited the power to a particular numbered series within a denomination. The majority held that the word "any" in the phrase "any series" must be read expansively to mean "all", so the Central Government's power was wide enough to withdraw the legal-tender status of entire denominations. The majority also held that the centre-initiated process did not, on the facts, violate Section 26(2), that there had been adequate consultation between the Bank and the Government, and that the doctrine of proportionality was satisfied given the stated objectives of curbing fake currency, terror financing and black money.

Justice B.V. Nagarathna dissented. While she did not doubt the bona fides of the measure, she held that demonetisation of the entire series of a denomination at the instance of the Central Government had to be done through plenary legislation (as in 1978) or at least by an Ordinance, and not by a mere executive notification on the Government's own initiative under Section 26(2); on the proper reading, the power under Section 26(2) is to be triggered on the Bank's recommendation and "any series" cannot mean "all series". The split makes this the single most important modern authority on the note-issue chapter, and aspirants should be able to state both the majority's expansive reading of "any series" and Nagarathna J.'s narrower, process-focused dissent.

Sections 27 and 28: re-issue, and the limits of recovery

Section 27 obliges the Bank not to re-issue bank notes which are torn, defaced or excessively soiled. The provision keeps the quality of circulating currency high and underlies the Bank's clean-note policy, under which soiled and mutilated notes are withdrawn and destroyed rather than recirculated.

Section 28 governs the unhappy situation of lost, stolen, mutilated or imperfect notes. The key proposition — and a recurring examination point — is that no person is, as of right, entitled to recover from the Central Government or the Bank the value of any lost, stolen, mutilated or imperfect bank note. The Bank may, however, with the previous sanction of the Central Government, prescribe the circumstances and conditions subject to which the value of such notes may be refunded as a matter of grace. This is the statutory basis of the Reserve Bank of India (Note Refund) Rules, under which holders of soiled or mutilated notes may claim partial or full value depending on the area of the note presented. The doctrinal point to carry into an answer is the contrast: legal tender confers a right to tender the note, but a damaged note confers no enforceable right to recover its value — refund is discretionary and a matter of grace, not entitlement.

Section 31: the reach of the monopoly over demand instruments

The monopoly in Section 22 would be hollow if private parties could circulate close substitutes for currency. Section 31 closes that gap. It provides that no person in India other than the Bank or, as expressly authorised by the Act, the Central Government shall draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand; and no one other than the Bank or the Central Government may make or issue any promissory note expressed to be payable to the bearer of the instrument.

The object is to prevent the issue of privately created bearer instruments that would, in substance, function as currency and undermine the central bank's exclusive note-issue right. This is why an ordinary cheque, though a bill of exchange, is permissible — it is payable to order or to a named person, not "to bearer on demand" in the prohibited sense, and the banking exceptions in Section 31 accommodate normal banking instruments. For examination purposes, Section 31 should be remembered as the provision that protects the Section 22 monopoly against bearer demand-instrument substitutes, and as a bridge into negotiable-instruments law.

Section 33 and the minimum reserve system

Section 33 prescribes the assets that must back the note issue. The assets of the Issue Department against which bank notes are issued must consist of gold coin, gold bullion, foreign securities, rupee coin and rupee securities, together with such bills of exchange and promissory notes as are eligible. Historically, India followed a proportional reserve system, under which a fixed proportion of the note issue had to be held in gold and sterling. By the Reserve Bank of India (Amendment) Act, 1956, this was replaced with the minimum reserve system.

Under the minimum reserve system, the Bank is required to maintain a minimum reserve of two hundred crore rupees, of which not less than one hundred fifteen crore rupees must be in gold coin and gold bullion, with the balance in foreign securities. Beyond that minimum, there is no statutory ceiling tied to a reserve proportion, freeing the Bank to expand the note issue in line with the needs of the economy. These two figures — 200 crore total and 115 crore in gold — are among the most frequently asked numerical facts from this chapter, and should be memorised. The contrast between the discredited proportional system and the current minimum reserve system is the conceptual core of Section 33.

Section 39: the duty to supply currency and small coin

Section 39 turns the note-issue right into a public duty. It obliges the Bank to issue rupee coin on demand in exchange for bank notes and currency notes, and to issue bank notes or currency notes on demand in exchange for coin which is legal tender. The Bank is also obliged, in exchange for currency notes or bank notes of two rupees or upwards, to supply notes or coin of smaller value, subject to conditions the Central Bank may impose, so far as the Bank is able to do so. In short, the holder of currency has a statutory right to convert between notes and coin and to obtain smaller denominations.

This provision rounds out the chapter's logic. Section 22 confers the exclusive right to issue; Section 39 imposes the corresponding obligation to make the currency usable and exchangeable for the public. Together they capture the dual character of the note-issue function as both a monopoly privilege and a public service. The Bank's currency-distribution machinery — currency chests, issue offices and arrangements with scheduled banks — operates to discharge this Section 39 obligation across the country.

The constitutional dimension: notes as property and policy

Three constitutional threads run through the note-issue chapter. First, a bank note is a chose in action — a debt due from the State, carrying the Central Government's guarantee under Section 26(1). When that guarantee is withdrawn by demonetisation, the holder's property in the note is affected, which is why both Jayantilal Ratanchand Shah and Vivek Narayan Sharma engaged property and equality arguments. The courts have consistently held that demonetisation does not amount to unconstitutional confiscation provided a reasonable mechanism for exchange or deposit is afforded.

Second, the courts apply a deferential standard to monetary and economic policy. Both demonetisation judgments stress that fiscal and monetary measures are matters on which the executive and legislature command wide latitude, and judicial review is confined to legality and gross arbitrariness rather than the wisdom of the policy. Third, the 2023 majority's reading of "any" as "all" in Section 26(2) is a textbook illustration of purposive statutory interpretation, while Nagarathna J.'s dissent illustrates the competing structural concern that a sweeping power to extinguish the entire currency stock should rest on legislation, not executive notification. For the institutional setting in which these powers are exercised, the reader should consult the hub on the Banking Regulation Act and RBI Act and the chapter on the capital and constitution of the Bank.

Exam takeaways and revision grid

Reduce the chapter to a grid. Section 22 — sole right to issue bank notes; Central Government barred from issuing currency notes once Chapter III commenced. Section 23 — Issue Department, separated from the Banking Department, its assets insulated. Section 24 — denominations; maximum ten thousand rupees. Section 25 — design, form and material approved by Central Government on the Central Board's recommendation. Section 26(1) — legal tender, guaranteed by the Central Government; Section 26(2) — demonetisation power over "any series". Section 26A — high-denomination notes ceasing to be legal tender (1978). Section 27 — no re-issue of torn or soiled notes. Section 28 — no right to recover lost/stolen/mutilated notes; refund as grace. Section 31 — only RBI/Central Government may issue bearer demand instruments. Section 33 — minimum reserve of 200 crore, of which 115 crore in gold. Section 39 — duty to supply coin and smaller denominations.

On case law, pair the two demonetisations precisely: 1978 was by separate statute (the High Denomination Bank Notes (Demonetisation) Act, 1978), upheld in Jayantilal Ratanchand Shah v. RBI (1996); 2016 was under Section 26(2) by notification, upheld 4:1 in Vivek Narayan Sharma v. Union of India (2023), with the majority reading "any series" as "all" and Justice Nagarathna dissenting on the process and the scope of the power. Holding these distinctions — statute versus notification, and the meaning of "any series" — is what separates a full-marks answer from a partial one.