Money is not merely an economic fact; in India it is a creature of statute. The very rupee in your pocket exists because Section 22 of the Reserve Bank of India Act, 1934 gives the Reserve Bank the sole right to issue bank notes, and Section 26 makes those notes legal tender guaranteed by the Central Government. The financial markets that move that money — the money market, the government-securities market and the capital market — are each governed by a distinct legal architecture and policed by distinct regulators. For the judiciary aspirant, "Money and Financial Markets" is where economics, constitutional law and statutory regulation meet: the proportionality of a demonetisation, the jurisdiction of SEBI over a hybrid instrument, the legal nature of a share, and the limits of delegated regulatory power. This chapter maps that terrain with the bare provisions and the leading judgments that examiners reward.

Economists define money by its functions — a medium of exchange, a measure of value, a store of value and a standard of deferred payment. The law, however, fixes money by command. In India the foundational instrument is the Reserve Bank of India Act, 1934. Section 22(1) confers on the Bank "the sole right to issue bank notes in India," and Section 22(2) bars the Government from issuing currency notes once the relevant chapter came into force, save for the one-rupee note and coins issued under the Coinage Act, 2011. Section 26(1) then declares that every bank note shall be legal tender at any place in India "in payment or on account for the amount expressed therein," guaranteed by the Central Government.

Legal tender is a juristic concept: it is currency a creditor is bound to accept in discharge of a debt. The corollary is that money is fundamentally a public-law construct — its value rests on sovereign guarantee, not on any intrinsic worth of the paper. This distinction between money as a legal command and the instruments that merely represent or transfer value (cheques, debentures, shares) runs through the whole of this chapter and explains why courts treat currency, negotiable instruments and securities under separate regimes. For the macro context in which money operates, see Basic Economic Concepts (GDP, GNP, NDP).

It is worth noticing how narrow the legal-tender obligation actually is. Section 26(1) compels acceptance of a bank note only in discharge of an amount already owed; it does not compel a trader to sell goods for cash, nor does it prohibit a creditor and debtor from agreeing on some other mode of payment. Coins are legal tender only up to limits fixed under the Coinage Act, 2011. The wider economic concepts of "money" — the monetary aggregates M0 (reserve money), M1 (narrow money) and M3 (broad money) used by the RBI to measure the money supply — are policy categories, not legal-tender categories. The aspirant should keep the two registers distinct: the law tells us what must be accepted as payment, while monetary economics tells us how much purchasing power circulates. The chapter that follows builds on the legal register, because it is statutory command and judicial review of that command that examiners test.

The RBI as Currency-Issuing Authority

The monopoly over note issue is structured, not absolute. Under Section 22, notes are issued through a separate Issue Department, and Sections 33 to 34 prescribe the assets — gold, foreign securities and rupee securities — against which notes must be backed under the "minimum reserve system" adopted in 1956 (replacing the older proportional reserve). Section 24 lists the denominations the Bank may issue, while higher denominations require Central Government sanction. The design ensures that note issue is disciplined by law rather than by executive convenience.

Crucially, the power to create money also implies the power to extinguish it. Section 26(2) provides that on the recommendation of the Central Board, the Central Government may, by notification, declare that any series of bank notes of any denomination "shall cease to be legal tender." This is the statutory hook for demonetisation, and it became the centre of one of the most significant economic-law decisions of the decade, discussed in the next section. The RBI's broader role as the apex bank — banker to the Government, banker's bank and lender of last resort — is developed in Indian Banking System and the RBI.

Demonetisation and the Constitutional Test

In Vivek Narayan Sharma v. Union of India (2023), a Constitution Bench of the Supreme Court tested the validity of the 8 November 2016 notification withdrawing the legal-tender character of Rs. 500 and Rs. 1000 notes. By a 4:1 majority the Court upheld the exercise. It held that the power under Section 26(2) extends to "all series" of notes of a denomination and is not confined to a particular series, rejecting the argument that the words "any series" cut down the power. The majority read the word "recommendation" as importing a genuine consultative process between the Central Board and the Government, and found that process had been substantially followed.

The decisive analytical move was the application of the doctrine of proportionality. The majority held that the measure bore a reasonable nexus to the legitimate aims of curbing black money, counterfeiting and terror financing, and that the means were not disproportionate to those ends. Justice B.V. Nagarathna, dissenting, held that where demonetisation is initiated by the Central Government rather than recommended by the Bank, it ought to have been done by legislation or at least by the Bank's independent recommendation, and that the centralisation of the proposal vitiated the process — though she expressly declined to unsettle completed transactions. Vivek Narayan Sharma is now the leading authority on the scope of Section 26(2) and on the judicial review of macro-economic policy through the proportionality lens.

Three doctrinal points from the judgment deserve emphasis for the examination. First, the majority distinguished the 2016 exercise from the demonetisations of 1946 and 1978, both of which had been effected by Ordinance and then by separate legislation precisely because, on the then-prevailing view, the executive notification route did not extend to all notes of a denomination; the Court held that the language of Section 26(2) is wide enough to cover all series, so no separate statute was constitutionally required. Second, the Court reaffirmed the limited scope of judicial review in matters of economic policy: it will examine the decision-making process and the proportionality of the measure, but it will not sit in appeal over the wisdom of the policy or the adequacy of the data before the Government. Third, the Court declined to grant individual relief on the failure of some citizens to exchange their notes within the window, treating that as a matter of executive discretion not amounting to a constitutional infirmity. Taken together, the decision is the modern template for how Indian courts review high-stakes monetary measures.

Monetary Policy and the Statutory Committee

Control of the quantity and price of money is the work of monetary policy, and since 2016 this too rests on an express statutory footing. The Finance Act, 2016 inserted Chapter IIIF into the RBI Act, creating a flexible inflation-targeting framework. Section 45ZA empowers the Central Government, in consultation with the Bank, to fix the inflation target once every five years; the target is currently 4% with a tolerance band of +/- 2%. Section 45ZB constitutes the six-member Monetary Policy Committee (MPC) — the Governor as ex-officio Chairperson, the Deputy Governor in charge of monetary policy, one Bank officer nominated by the Central Board, and three members appointed by the Central Government.

The MPC is statutorily charged with fixing the benchmark policy (repo) rate to achieve the inflation target. Section 45ZN provides that a failure to meet the target for three consecutive quarters triggers a duty on the Bank to report to the Government the reasons and the remedial action. This represents a deliberate legal shift from discretionary, Governor-centred policy to a rules-based, accountable, committee-driven regime — a structural reform examiners frequently contrast with the planning-era approach traced in Five-Year Plans and NITI Aayog.

The Money Market and Its Instruments

The money market is the market for short-term funds, typically of maturity up to one year, where surplus and deficit units in liquidity meet. Its instruments include Treasury Bills (T-Bills) issued by the Government for 91, 182 and 364 days; Commercial Paper (CP), an unsecured promissory note issued by creditworthy corporates; Certificates of Deposit (CDs) issued by banks; Call and Notice money for inter-bank overnight and very short-term lending; and Repos. The legal authority to regulate this market is concentrated in the RBI.

Section 45U of the RBI Act defines "derivative," "money market instruments," "repo" and "reverse repo," while Section 45W empowers the Bank to determine policy and issue directions to all agencies dealing in securities, money market instruments, foreign exchange and derivatives. Commercial Paper and Non-Convertible Debentures of short maturity are today governed by the Reserve Bank of India (Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year) Directions, 2024. Many money-market instruments are also negotiable instruments: under Section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means a promissory note, bill of exchange or cheque payable to order or to bearer — a regime that gives the holder in due course a title largely free of prior defects, and which underpins the transferability essential to a functioning money market.

The money market matters to the legal student for a further reason: it is the channel through which the monetary policy decided by the MPC actually reaches the economy. When the RBI changes the repo rate, it is in the call-money and repo markets that the change first bites, and from there it transmits to the rates banks charge their customers. Mismanagement at this short end can have systemic consequences, which is why the regulatory regime is unusually prescriptive about eligibility, credit rating and end-use of funds. Commercial Paper, for instance, may be issued only by entities meeting minimum net-worth and rating thresholds, and the proceeds may not be used for speculative purposes — conditions enforced through the RBI's directions under Section 45W rather than through ordinary contract law. The legal architecture of the money market is therefore best understood as delegated economic regulation: a statutory power vested in the RBI, exercised through master directions, and ultimately answerable to judicial review on the grounds canvassed in IMAI v. RBI.

The Government Securities Market

The market for sovereign debt — dated securities and T-Bills issued by the Union and the States — is the backbone of the Indian financial system because the yield on government paper sets the risk-free benchmark for all other rates. The legal framework was modernised by the Government Securities Act, 2006, which consolidated the law relating to Government securities and their management by the RBI, replacing the colonial-era Public Debt Act, 1944 (which survives only for State debt not yet covered).

The RBI manages public debt under Section 21 of the RBI Act and conducts open market operations (OMO) — the purchase and sale of Government securities to inject or absorb durable liquidity — under the dealing powers in Section 17(8). OMO and the Liquidity Adjustment Facility (the repo and reverse-repo corridor) are the principal instruments by which the policy rate set by the MPC is transmitted into market interest rates. Because Government borrowing, deficit financing and debt management are inseparable from this market, it should be read together with Public Finance and the Budget.

The Capital Market and SEBI

The capital market is the market for long-term funds — equity and long-dated debt — and is policed by the Securities and Exchange Board of India. SEBI began life as a non-statutory body in 1988 and was placed on a statutory footing by the Securities and Exchange Board of India Act, 1992. Section 11(1) declares it the duty of the Board "to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market." Section 11(2) enumerates its functions — regulating stock exchanges, registering intermediaries, prohibiting fraudulent and unfair trade practices, and prohibiting insider trading.

SEBI's teeth lie in Sections 11B and 11C. Section 11B empowers the Board to issue directions in the interests of investors or the orderly development of the market, and, after the 2002 and 2014 amendments, to levy disgorgement of unlawful gains. Section 11C confers wide investigative powers. The Securities Appellate Tribunal hears appeals under Section 15T, with a further appeal to the Supreme Court under Section 15Z on a question of law. This statutory machinery has generated the most important body of financial-markets case law, examined in the sections that follow.

Two features of the SEBI Act repay attention. First, the definition of "securities" is borrowed by reference from Section 2(h) of the Securities Contracts (Regulation) Act, 1956, and is deliberately inclusive — covering shares, scrips, stocks, bonds, debentures, derivatives, units of collective investment schemes and "such other instruments as may be declared" to be securities. This open-textured definition is what allowed SEBI to bring novel instruments such as OFCDs and collective investment schemes within its net. Second, SEBI exercises a tripartite character that examiners often probe: it is quasi-legislative (framing regulations such as the LODR and the PFUTP Regulations under Section 30), quasi-executive (registering and supervising intermediaries) and quasi-judicial (adjudicating violations and imposing penalties under Sections 15-I and 15J). The concentration of these functions in one body is constitutionally permissible because appeals lie to an independent tribunal and thence to the Supreme Court, preserving the separation of powers at the appellate stage even as it is fused at the regulatory stage.

What, in law, is a share? It is not money, nor is it ordinarily "goods." In R.D. Goyal v. Reliance Industries Ltd. (2003) 1 SCC 81, the Supreme Court held that a share or debenture, before allotment, does not answer the definition of "goods": a debenture is merely an instrument acknowledging a debt, and a share represents a bundle of rights (and, on allotment, an interest in the company) rather than a movable chattel capable of sale as a commodity. The decision matters because it locates securities within the company-law and securities-regulation regimes rather than the law of sale of goods.

The character of a share as an interest in a company, and not merely as a fungible asset, also surfaced in Vodafone International Holdings B.V. v. Union of India (2012) 6 SCC 613. There the Court held that the transfer of a single share of an upstream foreign holding company could not, on the language of Section 9 of the Income-tax Act, 1961 as it then stood, be treated as the transfer of a capital asset situate in India; Parliament had legislated expressly for indirect transfers elsewhere, and its silence could not be supplied by purposive construction. Though primarily a tax case — relevant to Taxation in India (Direct, Indirect, GST) — Vodafone is also a leading authority on the legal incidents of share ownership and corporate structure in cross-border finance.

The Reach of SEBI's Jurisdiction: The Sahara Case

The single most cited decision on the boundaries of capital-market regulation is Sahara India Real Estate Corporation Ltd. v. SEBI (2012) 10 SCC 603. Two unlisted Sahara group companies had raised over Rs. 24,000 crore from nearly three crore investors through Optionally Fully Convertible Debentures (OFCDs), claiming the issue was a private placement to "friends, associates and workers" and therefore outside SEBI's reach. The Supreme Court rejected the claim. It held that once an offer is made to fifty or more persons it is, under the proviso to Section 67(3) of the Companies Act, 1956, deemed a public issue, attracting the listing and disclosure obligations of Section 73 and SEBI's jurisdiction — irrespective of the issuer's listed status.

The Court held that SEBI's mandate to protect investors under Section 11 of the SEBI Act prevailed, and directed the companies to refund the entire amount with 15% interest, appointing a retired Supreme Court judge to supervise repayment. Sahara closed the "private placement" loophole through which large public fund-raising had escaped regulation and affirmed that substance, not the label affixed by the issuer, determines whether an offer is public. It remains the cornerstone authority on SEBI's investor-protection jurisdiction over hybrid instruments and unlisted public companies.

Several propositions of lasting importance flow from Sahara. The Court held that an OFCD is a "security" within the inclusive definition in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, and that the convertibility feature did not take it outside SEBI's regulatory net. It rejected the argument that, because the companies were unlisted, the listing-stage jurisdiction lay only with the Registrar of Companies under the Ministry of Corporate Affairs; the Court read the SEBI Act and the Companies Act harmoniously and held that the moment an issue is a public issue, SEBI's investor-protection jurisdiction under Section 11 and 11A is attracted concurrently. The judgment also gave a purposive construction to the first proviso to Section 67(3) — the "fifty or more persons" threshold — refusing to let the issuer escape by labelling crores of subscribers as a private circle of friends. The subsequent contempt and recovery proceedings, in which the principal promoter was detained for failure to comply with the refund directions, underscored that regulatory orders backed by the Court are not toothless. For the aspirant, Sahara is the leading illustration of substance-over-form reasoning in securities law.

Extraterritorial Reach and Fraud in the Markets

Financial fraud increasingly crosses borders, and the question whether an Indian regulator can reach conduct abroad arose in SEBI v. Pan Asia Advisors Ltd. (2015) 14 SCC 71. SEBI had debarred lead managers connected with the issue of Global Depository Receipts (GDRs) overseas, on the footing that the scheme defrauded the Indian securities market by manipulating the price of the underlying Indian shares. The Supreme Court upheld SEBI's jurisdiction, holding that where fraudulent conduct abroad has a proximate and substantial effect on Indian investors and the Indian securities market, the SEBI Act and the Prohibition of Fraudulent and Unfair Trade Practices Regulations can apply on the "effects" principle.

The decision is significant for confirming that the regulatory net follows the harm: a regulator's writ extends to conduct, wherever committed, that injures the market it is statutorily bound to protect. Read alongside Sahara, it illustrates the Court's consistent posture of giving SEBI's investor-protection mandate a purposive and effective construction rather than a narrow territorial one.

Virtual Currencies and the Limits of Regulatory Power

The newest frontier of "money" raises the oldest question of administrative law: how far may a regulator go without a legislative mandate? In Internet and Mobile Association of India v. Reserve Bank of India (2020) 10 SCC 274, the Supreme Court considered an RBI circular of 6 April 2018 directing regulated entities not to deal in, or provide services to persons dealing in, virtual currencies. The Court accepted that the RBI possessed ample statutory competence to regulate virtual currencies in the interests of the monetary and payment systems, and that VCs could not be held to be wholly outside its concern.

Yet the Court struck the circular down on the ground of proportionality. Applying the four-pronged test, it held that since the RBI had not itself found that the entities it regulates had suffered any loss or adverse effect from VC trading, an outright disconnection of the banking channel — which effectively crippled an otherwise lawful trade protected under Article 19(1)(g) — was disproportionate to the risk identified. IMAI v. RBI is therefore a twin authority: it affirms the breadth of the RBI's power over the monetary system while insisting that even a financial regulator must justify a rights-restricting measure as a proportionate response. It is the natural companion to Vivek Narayan Sharma in the proportionality jurisprudence on money.

The reasoning repays close study. The petitioners argued that virtual currencies are not "money," "legal tender" or even "goods," so that the RBI lacked competence to touch them at all. The Court declined to decide the contested taxonomy of crypto-assets, holding instead that the RBI's mandate to safeguard the integrity of the monetary, credit and payment systems is broad enough to let it concern itself with any phenomenon that could threaten those systems — competence was therefore present. The petition succeeded only on the second limb. Drawing on the proportionality standard articulated in earlier constitutional jurisprudence, the Court asked whether a less drastic measure could have achieved the regulator's object, and found that the RBI had reached for the most extreme tool — severing the banking lifeline of an entire trade — without demonstrating proportionate justification. The decision thus stands for a precise proposition: wide regulatory competence does not excuse a regulator from the discipline of proportionality when a measure restricts a fundamental right.

Payment Systems and Digital Money

The plumbing through which money now moves is itself a regulated domain. The Payment and Settlement Systems Act, 2007 makes the RBI the designated authority for the regulation and supervision of payment systems, requires authorisation under Section 4 before any person may operate a payment system, and gives statutory finality to settlement under Section 23. It is this Act that underpins the National Payments Corporation of India and platforms such as UPI, RTGS and NEFT.

The frontier is now the Central Bank Digital Currency (CBDC), the digital rupee. The Finance Act, 2022 amended Section 22 of the RBI Act so that a "bank note" includes a bank note issued in digital form, and added the definition of CBDC in Section 2 — placing sovereign digital money squarely within the RBI's note-issuing monopoly. The legal significance is that the digital rupee is legal tender backed by the same sovereign guarantee as the paper note, in deliberate contrast to private virtual currencies, which (after IMAI) are lawful to trade but enjoy no legal-tender status.

The Architecture of Financial Regulation

India follows a sectoral model of financial regulation rather than a single super-regulator. The RBI regulates banks, non-banking financial companies, the money market, government securities and payment systems; SEBI regulates the securities and capital markets; the Insurance Regulatory and Development Authority (under the IRDA Act, 1999) regulates insurance; and the Pension Fund Regulatory and Development Authority (under the PFRDA Act, 2013) regulates pensions. Co-ordination across these silos is achieved through the Financial Stability and Development Council (FSDC), a non-statutory body chaired by the Finance Minister, set up in 2010 to monitor systemic risk and macro-prudential supervision.

The judicial attitude to this architecture is one of deference on policy coupled with insistence on legality and proportionality. Courts will not substitute their own economic wisdom for that of an expert regulator — a theme running from Vivek Narayan Sharma through Sahara — but, as IMAI shows, they will police the outer limits of regulatory power where fundamental rights are engaged. For the aspirant, this balance between expert autonomy and constitutional accountability is the unifying thread of the entire subject. The hub for the full subject is at Indian Economy for Judiciary.

Frequently asked questions

Under which provision does the RBI have the sole right to issue currency notes?

Section 22 of the Reserve Bank of India Act, 1934 confers on the Bank the sole right to issue bank notes in India. Section 26(1) makes every bank note legal tender, guaranteed by the Central Government. After the Finance Act, 2022, the definition of bank note in Section 22 extends to notes issued in digital form (the CBDC / digital rupee).

Is demonetisation under Section 26(2) constitutional?

Yes. In Vivek Narayan Sharma v. Union of India (2023), a Constitution Bench by 4:1 upheld the 2016 demonetisation, holding that the power under Section 26(2) covers all series of a denomination, that 'recommendation' requires a genuine consultative process, and that the measure satisfied the proportionality test. Justice Nagarathna dissented on the manner in which the proposal originated.

What is the legal basis of the Monetary Policy Committee?

Chapter IIIF of the RBI Act, inserted by the Finance Act, 2016. Section 45ZA lets the Government fix the inflation target (presently 4% +/- 2%); Section 45ZB constitutes the six-member MPC chaired by the Governor; and Section 45ZN requires a report to Government if the target is missed for three consecutive quarters. It marks a shift to statutory, accountable inflation targeting.

Why is the Sahara v. SEBI case important for financial markets?

In Sahara India Real Estate Corporation Ltd. v. SEBI (2012) 10 SCC 603, the Supreme Court held that an OFCD offer made to fifty or more persons is a deemed public issue under the Companies Act, attracting SEBI's jurisdiction even for unlisted companies. It ordered refund of over Rs. 24,000 crore with 15% interest, closing the private-placement loophole and affirming SEBI's investor-protection mandate under Section 11.

Did the Supreme Court ban or permit cryptocurrency trading?

Neither fully. In Internet and Mobile Association of India v. RBI (2020) 10 SCC 274, the Court accepted that the RBI has wide power to regulate virtual currencies, but struck down its 2018 banking-channel circular as disproportionate under Article 19(1)(g), since the RBI had not shown that its regulated entities suffered harm. Crypto trading thus became lawful, but virtual currencies have no legal-tender status.

Are shares treated as 'goods' in Indian law?

Generally no. In R.D. Goyal v. Reliance Industries Ltd. (2003) 1 SCC 81, the Supreme Court held that shares and debentures before allotment are not 'goods' — a debenture is merely an acknowledgment of debt, and a share is a bundle of rights / interest in a company. Securities are therefore governed by company law and securities regulation, not the Sale of Goods Act.