Alarmed over the menace of the fake Indian currency notes spreading its tentacles in India, the government has issued a directive to the Reserve Bank of India [Get Quote] to withdraw from circulation the notes of 1996 and 2000 series.

A top finance ministry official had said that the directive was issued on the basis of the reports by the forensic science laboratory of the note presses at Nashik and Dewas that the security features introduced in 2005 to fight the menace have not yet been breached successfully, though crude attempts were noted to breach some of them.

Soon after the finance ministry directive, the RBI on Thursday said that it is phasing out old currency notes in the denomination of Rs 1,000 and Rs 500 of 1996 and 2000 series and replacing them with new ones with added security features.

RBI spokesperson Alpana Killawala said in Mumbai that the public will not be put to any inconvenience by the phasing out of these notes, which merely means that these currency notes would not be reissued after they are deposited with the banks.

These notes will be replaced with 2006, Mahatma Gandhi series notes, which have more security features, she said.

Initially, only Rs 1,000 and Rs 500 are being phased out, which may be extended to other currency notes of old series as well.

When asked whether these notes are being phased out because of the problem of counterfeiting, Killawala said that the replacement of old currency notes with new ones is an exercise followed by central banks all over the world.

The spokesperson made it clear that these notes are not being withdrawn, as is being speculated in some circles. Withdrawal of notes basically means that a currency note will no longer be a legal tender after a stipulated date.

She said no target date has been put for phasing out of these notes, as it all depends on when they are deposited with banks. As such, notes which are not deposited with banks will continue to be legal tenders in the hands of the public.

The phase-out calendar

A finance ministry official said that the RBI has already drawn up the calendar for withdrawing other old series notes in phases but the exercise has to coincide with and depends upon the issue of the new series with new security features.

Except for the Rs 1,000 denomination notes, that were first introduced in 2000, dates have been fixed for starting a phased withdrawal of the old notes of all denominations.

The official said the RBI has quietly put into operation withdrawal of the notes in a phased manner, starting with Rs 500 denomination notes of the 1996 series since January. Also, notes of Rs 100 and Rs 10 denomination that are of prior to 1996 series are being withdrawn since July. The following is the timetable from when some currency notes will be phased out: Rs 500 of 2000 series starting January 2009, Rs 100 of 1996 series from July 2009, Rs 50 prior to 1996 from January 2009, 1996 series from July 2009, Rs 20 prior to 2000 from January 2009 and 2000 series from July 2009 and Rs 10 notes of 1996 from January 2009.

Fake currency menace

The finance ministry official said the exact figure of the fake currency notes in circulation is not available but a sharp increase in the value of such notes seized over the years shows that the menace continues unabated.

Analysis of the material used in the fake currency note showed that the paper used in the counterfeited currency was not the same as in the genuine currency notes.

Paper-based security features are incorporated at the time of manufacture of paper and these include the security threat, water mark, fluorescent fibres and physical and chemical characteristics of the paper.

A part of the special currency paper is manufactured indigenously at Hoshangabad in Madhya Pradesh but its production capacity is very low and as such most of the paper is imported from countries like Britain, the Netherlands, Germany, Italy and France. The finance ministry official said that an exclusive agreement has been signed with the paper mill not to disclose India's security features to any third party and not to supply to any other party the paper with India-specific security features.

The currency paper security

Care is taken while transporting the paper and this is done only through vessels certified by the state-run Shipping Corporation of India [Get Quote] to ensure there is no pilferage.

Before the shipment is sent, a team of officers from the finance ministry and the press units inspects the paper and ensures destruction of defective paper, used dyes and mould covers.

The print-based security features that have been introduced to prevent anybody producing similar notes include anti-photocopying feature, optical variable ink, see through effect and intaglio printing, the official disclosed.

The Department of Economic Affairs has taken several other initiatives to make the Indian currency notes more secure. These include revamp of Hoshangabad's Security Paper Mill and setting up of a new security paper mill in a joint venture with a leading security paper manufacturer with a capacity of at least 6,000 tonne a year. The Expression of Interest has already been invited and the proposals received are under examinations.

Once these efforts fructify in the next two to three years, the capacity will increase by 10,000 tonne which will cut down dependence on import of the bank note paper by about 75 per cent.

The Bank Note Press at Dewas has also been given the target of producing 250 tonne of intaglio ink by next year as against the present output of 112 tonne. The total requirement of intaglio ink is 1,000 tonne.