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Legal Compliances of Demonetisation and its implications for Your Business

Legal Compliances of Demonetisation and its implications for Your Business

While the pros and cons of India’s demonetisation policy are open to debate, several legal compliances were introduced that impose heavy penalties on business entities in the event of their violation.

Demonetisation notification

The Central Government issued a notice under the RBI Act, 1934 that derecognized currency notes of denominations of Rupees 100, 500 and 1000 from the 8th of November, 2016. Currency holders were permitted to deposit these notes in Bank or Post Office Savings accounts till the 30th of December, 2016 and not after. A further grace period till March 31, 2017 for Indian residents and June 30, 2017 for non-residents was given via notices issued by the Central Bank. Only five regional offices of the RBI located at Mumbai, New Delhi, Chennai, Kolkata and Nagpur were notified to receive and exchange old currency notes. There was also a provision for appeal to the RBI’s Central Board within 14 days of rejection of the corresponding plaint.

According to the Specified Banknotes (Cessation of liabilities) Act 2017

  • False declarations would be punishable with a fine of Rupees 50,000/- or five times the value of the amount being deposited, whichever is more (Section 6).
  • Further, Section 5, prohibits the wilful holding, transfer or receipt of these old currency notes exceeding 10 in number (regardless of denomination).
  • Section 7 outlines the punishment for such prohibition by a penalty of Rupees 10,000/- or five times the value of currency held, whichever is more.
  • The only exceptions to Section 5 are the purposes of research or numismatics or the directions of a court arising from a pending case in that court.

Employees of a company or who held direct charge and/or responsibility for the currency conversion and failed to do so in the time specified would also be liable to prosecution under the Act.

According to notifications, the Reserve Bank does not have any provision for exchange of these Specified Bank Notes outside India. Although Persons of Indian Origin (PIO) are not allowed these services, NRIs can avail these facilities up to a limit of Rupees 25,000/-

Note that tax authorities were quite happy to accept tax payments in old currency notes during the demonetisation period.

Amendment to the Companies Act

A very important amendment was made in the Companies Act, 2013 and notified in the Official Gazette on 30th March, 2017 that makes it mandatory for companies to “disclose the details of the Specified Bank Notes” transacted during the period from the 8th of November to the 30th of December as reflected in the Company’s Balance Sheet in the following format: