Each envelope contains the money equal to the 2 raised to the envelope number minus 1. The sentence "Each envelope contains the least number of currency notes possible" is only to misguide you. This is always possible for any amount!!! One more thing to notice here is that John must have placed money in envelopes in such a way that if he bids for any amount less than Rs.40000, he should be able to pick them in terms of envelopes.
First envelope contains, 20 = Re.1
Second envelope contains, 21 = Rs.2
Third envelope contains, 22 = Rs.4
Fourth envelope contains, 23 = Rs.8 and so on...
Hence the amount in envelopes is Re.1, Rs.2, Rs.4, Rs.8, Rs.16, Rs.32, Rs.64, Rs.128, Rs.256, Rs.512, Rs.1024, Rs.2048, Rs.4096, Rs.8192, Rs. 16384, Rs. 7233.
Last envelope (No. 16) contains only Rs.7233 as total amount is only Rs.40000.
Now as he bids for Rs.8456 and gives envelope number 4, 9 and 14 which contains Rs.8, Rs.256 and Rs.8192 respectively.
Envelope No 4 contains one Rs 5, one Rs 2, one Re 1.
Envelope No 9 contains two Rs.100 note, one Rs.50 note, one Rs.5 note and one Re.1 note.
Envelope No 14 contains eighty-one Rs.100 note, one Rs.50 note, four Rs.10 note and one Rs.2 note.
Hence the auctioneer will find only two Rs.2 notes in the envelopes.