New Delhi: The government is likely to amend the Reserve Bank of India Act to extinguish the validity of Rs500 and Rs1,000 notes printed before 9 November and a reference to this effect would be made in the upcoming budget.

As part of the demonetisation process, there would be a law to make Rs500/1,000 notes invalid and it can be made effective from 31 March, officials said.

“In 1978, when the currency was banned, the law to annul the validity came ahead. This time the government acted under 26 (2)," officials said.

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As per RBI Act section 26 (2), the central government, on the recommendation of the central board of RBI, 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.

Asked about the amount of money which did not get into the system, officials said, it would add to bottomline of the RBI and it would be in a position to pay the government in the form of higher dividend or special dividend. Banks have received Rs12 trillion demonetised currency notes as against Rs15.5 trillion.

The government expects Rs13 trillion to come back to banking system.

Higher dividend from the RBI due to cancellation of Rs500/1,000 notes may not be applicable until the RBI law is amended. Last week, Reserve Bank governor Urjit Patel had said it would not have any automatic impact on the central bank’s balance sheet as per the existing law.

“Actually, the withdrawal of legal tender characteristics status does not extinguish any of RBI’s balance sheet. Therefore, there is no implication on the balance sheet as of now. The question of a special dividend automatically does not arise as of now," Patel had said.

RBI has issued currency notes worth over Rs4.27 trillion to public through banks and ATMs following the demonetisation of old high value bills.

Consequent to the announcement of withdrawal of legal tender status of bank notes of Rs500 and Rs1,000 from the midnight of 8 November, 2016, the central bank made arrangements for exchange and/or deposit of such notes. Long queues for cash withdrawal have been witnessed outside banks and ATMs all over the country since 10 November. The banks were kept closed on 9 November, the day demonetisation came into effect.

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