Burning of Notes Amid Protests: Legal Provisions and Economic Implications

The term “money” as defined under Section 2(o) of the Nepal Rastra Bank Act, 2058 (2002) includes “all currency notes, postal/postal orders, money orders, cheques, drafts, traveller’s cheques, letters of credit, bills of exchange, promissory notes, credit cards, and other similar monetary instruments as prescribed by the Bank.”

For the purpose of this article, the focus remains specifically on paper currency notes in circulation within Nepal. Under Section 52 of the Act, Nepal Rastra Bank (NRB) holds the exclusive right (monopoly) to issue banknotes and coins, which are deemed legal tender in Nepal.

The Incident: Protest, Vandalism, and Currency Destruction

During the Zen Z protest on 8–9 September 2025, several prominent political leaders were attacked, and their residences vandalized. An ignition emerged when protesters discovered significant bundles of currency notes within these residences, as if they were being held like private banking vaults.

In a dramatic turn, large bundles of these notes were destroyed by fire set by the protestors themselves, reportedly as a symbolic act of agitation. While rumors persist that some individuals managed to retain bundles of these notes, preliminary assessments suggest that more than Arba worth of notes may have been destroyed.

This raises two critical questions:

1. How does legal provisions of Nepal regularize the treatment of destroyed paper currency?

2. What is the impact of such destruction on the overall economy and reserve position of Nepal?

Legal Basis of Issuance and Backing of Currency

According to Section 55 of the NRB Act, every banknote issued by NRB must be backed by specified assets. The provision mandates:

A) At least 50% of the security must consist of gold, silver, foreign currency, or foreign negotiable instruments.

B) The remaining 50% may consist of Nepalese coins, Government of Nepal securities, or promissory notes repayable within 18 months.

C) Alternatively, the ratio may be adjusted to 60% of A and 40% of B.

It must be noted that banknotes are primary liabilities of NRB (as inscribed on their face), whereas the backing assets remain secure in the Bank’s reserves. Thus, the destruction of currency notes in circulation does not diminish Nepal’s reserve position. Rather, the economic loss falls upon the holders of such destroyed cash.

Provisions on Defaced and Destroyed Currency

The NRB Act also provides guidance on defaced or destroyed currency:

1. Under Section 63, NRB is not obliged to accept any note of which more than 50% of its face has been torn, defaced, or mutilated, nor any counterfeit note.

2. Under Section 61, NRB retains the authority to declare, by public notice, that any note or coin shall cease to be legal tender.

Therefore, in the present situation, NRB has two potential courses of action:

1. Rejecting all defaced or destroyed notes, leaving the burden of loss entirely on the private holders.

2. Issuing a public notice to withdraw specific denominations (e.g., NPR 500 or NPR 1000) as legal tender, and possibly announcing an exchange or replacement program to mitigate public loss.

However, based on the sensitivity of the current political and economic environment, the likelihood of a large-scale replacement program appears limited.

Conclusion From a legal and economic point of view, the destruction of notes by fire does not reduce Nepal’s foreign reserve position. The reserves backing issued notes — comprising gold, foreign currency, and government securities — remains as it is with NRB. The immediate is to those individuals who held such large bundles of currency in their residences, the sources however is still a question.

In a nutshell, the burning notes may symbolize public anger and agitations, its economic impact is limited to the private wealth of note-holders. The rest is a history for Nepal and congratulations to Honorable PM Sushila Karki, the first lady PM of Nepal.

Article By: Rajesh Dulal

CA Final Level