AAP Tax Law

Sections 31, 32 and 33 of the RBI Act, 1934: Demand Bills, Penalty and Assets of the Issue Department

The Reserve Bank of India Act, 1934 regulates who may issue certain bearer instruments, how banknote issuance is backed by assets, and how the Reserve Bank maintains its Issue Department. Sections 31 to 33 address distinct subjects: restrictions on demand bills and notes, an omitted penalty provision, and the assets held against currency liabilities.

Section 31 - Issue of demand bills and notes

Section 31(1) generally prohibits any person in India, other than the Reserve Bank or the Central Government where expressly authorised by the Act, from drawing, accepting, making or issuing a bill of exchange, hundi, promissory note or undertaking to pay money payable to bearer on demand. It also prohibits borrowing, owing or taking up money on such bearer-on-demand instruments of another person.

The proviso preserves the ability to draw cheques or drafts, including hundis, payable to bearer on demand or otherwise, on a person's account with a banker, shroff or agent. Thus, the prohibition does not make ordinary bearer cheques drawn on a bank account unlawful.

Section 31(2) operates notwithstanding the Negotiable Instruments Act, 1881. It prohibits anyone other than the RBI or an expressly authorised Central Government from making or issuing a promissory note expressed to be payable to the bearer of the instrument. This restriction is not limited to notes payable on demand.

Section 31(3) and electoral bonds: A provision inserted in 2017 purported to permit the Central Government to authorise scheduled banks to issue electoral bonds. The Supreme Court held the Electoral Bond Scheme unconstitutional in Association for Democratic Reforms v. Union of India (15 February 2024). The 2017 enabling text and the Court's ruling must therefore be read together; it should not be treated as authority for a presently valid electoral-bond scheme.

Meaning of important terms

A bill of exchange is an unconditional written order directing a person to pay a certain sum of money. A promissory note is a written unconditional undertaking by its maker to pay a certain sum, as described in the Negotiable Instruments Act, 1881. A hundi is a traditional commercial instrument whose legal character depends on its terms and applicable law. Bearer on demand refers to an instrument payable to its holder upon presentation without a specified future maturity.

Section 32 - Penalty (omitted)

Section 32, formerly headed "Penalty", was omitted by section 9 of the Reserve Bank of India (Amendment) Act, 1974 (Act 51 of 1974), with effect from 13 December 1974. It should not be presented as a currently operative penalty clause. Whether a particular act attracts another penalty depends on the applicable law and facts.

Section 33 - Assets of the Issue Department

Section 33 prescribes the composition, minimum reserves, valuation and custody requirements for assets backing the Issue Department's liabilities. Under Section 23, the Issue Department is maintained separately from the Banking Department. Section 34 describes its liabilities, principally notes in circulation.

Section 33(1): Eligible backing assets

The Issue Department must hold assets with an aggregate value at least equal to its liabilities. The specified broad classes are gold coin, gold bullion, foreign securities, rupee coin and rupee securities. The detailed permissible forms are further governed by the succeeding subsections.

Section 33(2): Statutory minimum reserves

The aggregate value of gold coin, gold bullion and foreign securities must ordinarily be at least Rs. 200 crore, of which gold coin and bullion together must be at least Rs. 115 crore. These are statutory minimum backing requirements, not a statement that every note is individually redeemable for gold. Section 37 provides a limited mechanism, with prior Central Government sanction, concerning the foreign-securities requirement.

Section 33(3): Remaining eligible assets

The balance may consist of rupee coin, Government of India rupee securities of any maturity, qualifying promissory notes drawn by the National Bank for loans or advances under Section 17(4E), and eligible domestic bills of exchange or promissory notes under the specified provisions of Sections 17(2) and 18(1).

Section 33(4): Valuation

Gold coin and bullion are valued at no more than the prevailing international market price; rupee coin at face value; and securities at rates not exceeding prevailing market rates. These ceilings prevent an overstatement of the statutory backing assets.

Section 33(5): Location and custody of gold

At least seventeen-twentieths (85%) of the gold coin and bullion held as assets must be held in India. The gold is held in the custody of the RBI or its agencies, while the statutory proviso permits qualifying gold held in another bank, mint or treasury, or in transit, to be counted as assets.

Section 33(6): Foreign securities and drawing rights

Eligible foreign securities include specified balances with overseas principal monetary authorities and approved international financial institutions, subject to the statutory repayment period; qualifying foreign bills of exchange with at least two good signatures and maturity not exceeding 90 days; and specified foreign government securities maturing within 10 years. Drawing rights representing a liability of the International Monetary Fund are also covered. Eligibility is governed by the full wording of Section 33(6).

For practical understanding, the RBI's financial statements show the Issue Department's liabilities and corresponding assets separately. Section 33 establishes the legal framework for that backing; it does not set a fixed ceiling on the total number of banknotes issued.

Frequently asked questions

Can a private person issue a bearer promissory note?

Section 31(2) generally prohibits a private person from issuing a promissory note expressed to be payable to bearer, subject to the statutory exceptions for the RBI and expressly authorised Central Government.

Is Section 32 still in force?

No. Section 32 was omitted with effect from 13 December 1974.

Does the RBI have to back banknotes with gold alone?

No. Section 33 permits several classes of assets, while requiring the prescribed minimum holdings of gold and foreign securities.

What is the relationship between Sections 33 and 34?

Section 33 governs eligible backing assets, while Section 34 defines the Issue Department's liabilities.

Official legal and regulatory resources

Updated: 4 October 2026. The statutory text and any subsequent amendments, notifications and binding judgments prevail over this explanatory article.