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banking_law:notes:nationalisation

Nationalisation of Banks : Social Control

The following provision of the banking regulation Act deals with the subject of social control. The preamble of the amending Act 58 of 1968 reads as: “An Act further to amend the Banking Regulation Act, 1949” So as to provide for the extension of social control over banks and for matters connected there with or incidental thereto, and also further to amend the Reserve Bank of India Act, 1934, and the State Bank of India Act, 1955.”

The expression ‘Social Control’ in relation to banks and banking came into vogue since about December 1967. There were complaints to the bulk of bank advances were directed to the large and medium scale industries and big and established business houses and that the sectors demanding priority such as agriculture, small scale industries and exports were not receiving their due share/ it was also alleged that the directors of banks, who were mostly industrialists, influenced many banks in granting indiscriminate advances to such companies, firm or institutions, in which the directors were substantially interested. These and other alleged mismanagements of the banks, in view of certain critic justified their demand for nationalization of banks.

Banking sector before nationalisation

The banking system in India in the private sector had many basic weaknesses:

  1. There were complaints that the commercial banks were giving priority to large and medium scale industries and had neglected small scale industries.
  2. Exports from India, to earn valuable foreign exchange had not been given top priority by Banks.
  3. Small scale industries and imports were also neglected.
  4. Banks' top officials who were framing the policies were directing the funds to big and established business houses.
  5. Banks were under the control of mostly industrialists. They were influencing in advancing to companies, firms or institutions where the Bank directors were substantially interested. There were cases of credit given to hoarders, speculators etc.
  6. In some banks there were cases of mismanagement calling for immediate intervention by Government.
  7. Agricultural and rural sectors had been much ignored by the commercial banks.
  8. The Management of banks lacked professional expertise in many Banks.

Process of Nationalisation

The Government, thought that it would be advisable to allow the commercial bank to function in the private sector, but to impose such further controls and restrictions up on them would determine priorities for lending investment, evolve appropriate guidelines for management, promote a reorientation of the decision making machinery of banks and leave no opportunity in the hands of the bank management and directors to mismanage as alleged.

On 14-12-1967 the Deputy prime minister and minister of finance made a statement in the Lok Sabha declaring the views of the government and how it proposed to impose the social control. Two main steps were taken:

  1. setting up of a national credit council (sometimes shortly named as NCC) and
  2. introducing legislative controls by amending the Banking Regulation Act. National credit council was setup in 1967.

The National credit council did a commendable job in:

  1. assessing the credit demands from various sectors;
  2. identifying the priority sectors and their requirements;
  3. finding out ways and means to guarantee the optimum and effective use of the overall resources.

Nationalisation: The panacea, to cure the ills of the commercial banks, was nationalisation of these banks. This was done at two stages.

  1. By the Parliament passing the Banking Companies (Acquisition and Transfer of Undertaking Act 1970) which came into force from 19-7-1969. 14 Major commercial banks each having deposits of 50 crores and above were nationalised. The aggregate deposits were 2632 crores with 4130 branches.
  2. 6 more banks were nationalised on 15-4-1980.

Nationalisation of fourteen major banks

Within six month of the imposition of social control on Banks the central Government thought it fit not to continue the experiment in case of 14 major banks with effect from 19-7-1969 the banking companies (Acquisition and transfer of undertakings) Act 1969.

It nationalized the 14 major Indian Banks by providing that the whole of the undertakings of those banks shall be taken over by and become vested in 14 corresponding new corporate bodies established under that Act. These newly constituted corresponding banks now function in the public sector. The 14 old banking companies whose undertakings are thus taken over by the Government are free to carry on any business, if they wish to, out of the compensation payable to them under the Act.

The Nationalisation of banks was challenged before the Supreme Court (Rustom Cavasjee Cooper V. Union of India).

Nationalisation of six more banks on 15th April, 1980

The undertaking of these banks were transferred to six corresponding new banks under the banking companies (Acquisition and Transfer of undertakings) Act 1980.

In pursuance of the recommendations of the Banking Commission and the experience gained the Banking Regulation Act 1949 has been further amended by the banking laws.

The Act has been further amended by the banking public financial institutions and Negotiable Instruments laws (Amendment) Act 1988. (ActNo.68 of 1988). The amendment have been made effective from 30-12-1988.

Effect of Nationalisation

The result of nationalisation was very significant and impressive:

  1. There was a rapid expansion and dispersal of branches of banks in cities, urban towns, and semi urban and rural areas.
  2. There was a significant mobilisation of deposits.
  3. Banking facilities have been extended to the length and breadth of the country. There is banking habit growing in the people.
  4. Banking advances and loans are being given on priority basis.
  5. The infra-structure in management is capable of taking quick decisions and implement them down the line etc.

Conclusion

There is complete re-orientation in banking system after nationalisation. There is a shift from “class” banking to “mass” banking, “asset-based” lending to “production-based” lending and from “elite” banking to “social banking”.

Criticism

Many eminent persons and economists have opposed nationalisation, according to them:

  1. The commercial banks were significantly responding to the social control concept, in a spirit of cooperation.
  2. There could be some evils in the private sectors, but nationalisation was not a solution. This has only substituted one evil for another.
  3. There is no dynamism in public sector. There is room for corruption and favouritism. There is delay, there is lethargy in work. Service is poor. Evils in banks are rampant.
  4. Lack of competition in Banking has resulted in employees becoming public sector minded, quality of service has dropped down.
  5. Due to government restraints, bank officials are afraid of taking decisions. This has badly hit the customers.

The pros and cons of nationalisation have been recently studied by the Narasimhan Committee and many suggestions have been made. The latest trend is towards privatisation.

Bank nationalisation case

Rustom Cavasjee Cooper / R. C. Cooper1).

Writ Petition Nos. 298 and 300 of 1969 decided on 10/02/1970. Applications were filed under Article 32 of the Constitution of India. The majority Judgement, which was given by 10 out of the 11 Judges, was drafted by Justice J. C. Shah for himself and on behalf of the other 9 Judges. (Majority opinion) The dissenting order was drafted by Justice A. N. Ray. The Judgement was passed by a 10:1 majority. The judges were J.C. Shah, S.M. Sikri, J.M. Shelat, Vishishtha Bhargava, G.K. Mitter, C.A. Vaidialingam, K.S. Hedge, A.N. Grover, A.N. Ray, Jagmohan P. Reddy, I.D. Dua, J.J.

Facts of the Case

The then Acting President of India, Justice M. Hidyatullah, issued an Ordinance. The name of the Ordinance was ‘Banking Companies (Acquisition and Transfer of Property) Ordinance of 1969’. The features of the Ordinance were as follows:

  1. 14 banks in India were listed in the Ordinance which were going to be nationalized.
  2. These 14 banks had been selected on the basis of the amount of deposits that they held. That is, all of these banks held deposits of more than 50 crores, which was taken as the criterion to choose them to be nationalized.
  3. All the Directors of these 14 banks were asked to vacate their offices. However, apart from the Directors, the rest of the staff was allowed to continue in their jobs under the Government of India.
  4. The Second Schedule of the Ordinance was the most unconstitutional part. It talked about the compensation which was supposed to be paid to the banks which were being undertaken by the Government. The Ordinance mentioned two major ways of providing compensation to the aggrieved banks-
  5. When an agreement was reached at- When the amount to be paid as compensation was being able to be decided through an agreement, then it was alright.
  6. When no agreement could be reached at- When no agreement was being able to reached at, then, the dispute matter was supposed to be referred to a Tribunal, within three months from the date of the failure to reach to an agreement. Whatever compensation amount was to be decided by the Tribunal, was to be awarded in the form of Government Securities. These Government Securities were not redeemable immediately, but, 10 years after they were issued.
  7. Once the Ordinance had been passed, after two days when the Parliament started its monsoon session, immediately the Indira Gandhi Government formulated the ‘Banking Companies (Acquisition and Transfer of Property) Act, 1969’ and every provision was just the same as in the Ordinance.

Mr. Cooper was the then Director of the Central Bank of India Ltd. He held shares in Central Bank of India, Bank of Baroda Ltd. and Bank of India Ltd. He filed a Writ petition under Article 32 of the Constitution of India, before the Supreme Court of India, stating that his Fundamental Rights had been violated by the promulgation of the Ordinance. The Writ petition had been filed on the 21st of July, 1969 and the interim application had been heard on the 22nd of July, 1969. After hearing the interim application, the Court granted the injunction to stop the Directors from being vacated from their offices immediately.

Issues raised

The following issues had been raised by Mr. Cooper, through his advocate, Mr. Palkhiwala:

  1. Whether a shareholder could file a Writ petition for the violation of his Fundamental Rights, when the company in which he is a shareholder is acquired by the Government?
  2. Whether the Ordinance in question had been properly made or not?
  3. Whether the Act was within the jurisdiction of the Parliament to get formulated or not?
  4. Whether the impugned Act was violative of Article 19(1)(g) and Article 31(2) of the Constitution of India or not?
  5. Whether the method of ascertaining the compensation was valid or not?

Petitioner’s argument

  1. The petition was filed by Mr. Cooper in his individual capacity as a citizen of India and not as a representative of his company. Since a company is not a citizen within the ambit of the Indian Citizenship Act, 1955, so, it can’t claim any Fundamental Right under the Constitution, of which Mr. Cooper was eligible by virtue of being a citizen.
  2. According to Article 123, the President is empowered to pass any Ordinance, if he feels that there is an absolute necessity. The Ordinance was promulgated just two days before the monsoon session of the Parliament and so there was no necessity to promulgate the same. The Supreme Court was empowered to strike it down.
  3. It was stated that the Seventh Schedule contained the three Lists, which demarcated the limit of jurisdiction for both the Central as well as the State Governments. The Union List contained entries upon which only the Central Government was empowered to make laws, the State List contained entries upon which only the State Governments were empowered to make laws and lastly, the Concurrent List contained entries upon which both the Central and State Governments could make laws, subject to the Doctrine of Repugnancy. The Central Government was entitled to make laws on ‘banking’ only as defined under Section 5 (b) of the Banking Regulation Act of 1949, as Entry 45 of the Union List empowered it to do so. By virtue of Entry 42 of the Concurrent List, the Legislature was empowered only to make laws in order to effectuate Entry 45 in the Union List. The Parliament was not empowered at all to pass the impugned Act.
  4. At that time, Right to Property was considered to be a Fundamental Right under Article 19(1)(f), which was later omitted after the Judgement of Keshavananda Bharati’s case. The Right was officially recognized and so it was said that it violated Article 19 (1) (g) Article 31 (2) (the whole article has been repealed now) which dealt with compulsory acquisition of property.
  5. The Achilles’ heel of this whole Act was the provision for compensation. It was entirely ‘draconian’ and extremely irrational and illogical. The compensation, which would not be paid in cash, but, in Government securities, which in turn were payable after 10 years, was completely biased in its approach, with an aim to harass the public and also, to give an undue benefit to the Government.

Respondent's argument

  1. The petition was not maintainable, as the same was being filed to claim the Rights in the name of a company which does not fall under the definition of a citizen as per the Indian Citizenship Act, 1955.
  2. The power of the President to promulgate the Ordinance was completely subjective in nature, as the words ‘if he felt’ were used. He was not answerable to anyone for the reason of his actions done during his term of office. The argument of the invalidity of the Ordinance was condemned.
  3. The Court must understand that there was an obligation upon the State to achieve a socialistic society, with principles of egalitarianism and where no inequality existed. The Court should interpret the term ‘banking’ in the widest possible way, so as to include all the activities that could be included by the respondent.
  4. The Act was not violative of Article 19 (1) (g), as it fell within the ambit of Article 31 of the Constitution.

Ratio Decidendi

  1. The ‘Mutual Exclusivity Theory’ which had been practiced for 20 years till the case from A. K Gopalan Vs. State of Madras case was overruled. Just on the basis of technicalities, it can’t reject a petition which clearly shows that the Fundamental Rights of the citizens are being violated. Just because a Legislative action was also violating the Rights of the company didn’t mean that the Court was not having the jurisdiction to protect the Rights of the shareholder of the company as well. The Court also struck down the ‘Object’ test. It laid down the ‘Effect’ test. The Effect test would now look into the Effect of any particular legislative Act, rather than looking at the objective with which it had been formulated. If any Act of the Legislature, even at a remote stage, violated the Fundamental Rights of the citizens, then, it was liable to be struck down.
  2. The Ordinance had already been converted into an Act, so it was unnecessary for the Court to discuss the same. The Court said that the same had become a question for academicians to ponder upon.
  3. The Court rejected both the petitioner’s as well as the respondent’s arguments. The Court said that the term property included all the Rights, liabilities, assets, etc., which were associated with the property. The power of the Parliament to acquire any banking company was an independent power of the Parliament. It required no separate Legislation to be enacted first under List II and List III.
  4. The term ‘compensation’ is meant complete indemnification to the person, whose property was being acquired. Since it was frankly clear from the objectives of the Act that equal indemnification was not going to be provided and after applying the test of severability, as the Act was not independent enough to stand alone without the part in question, so it was liable to be struck down.
  5. The Act was not violative of Article 19(1)(g) as the State had the complete Right to partially or completely monopolise any business that it felt to.
  6. The Court discovered that the Act was in clear violation of Article 14 as banks carrying out banking activities within the country, other banks, including the foreign banks, had not been stopped from doing so. The Act to be ‘flagrantly practicing discrimination’ and thus, held it to be violative of Article 14.

Dissenting opinion

Justice A.N. Ray, J. gave the dissenting opinion:

  1. The only way in which the Ordinance passing power of the President could be challenged was on the basis of malafide and corrupt intentions. The fact that the Ordinance had been promulgated just two days before the session of the Parliament began, it indicated that the same had been passed legitimately, although in a haste.
  2. There was considerable speculation in the country regarding Government’s intention with regard to nationalisation of banks during few days immediately before the Ordinance.
  3. The reason is obvious that in matters of policy, just as Parliament is the master of its province, similarly the President is the supreme and sole judge of his satisfaction on such policy matters on the advice of the Government.
  4. He dismissed the petitions upon various other reasons and thus, declared the petitions to fail.
  5. A shareholder can’t approach the Court for the violation of his Rights, which at the end, were associated with a company, which by virtue of being a non-citizen, was not possessing the Right to claim Fundamental Rights.
  6. The ‘mutual exclusivity theory’, as propounded in the A. K. Gopalan case, was upheld by him.

He agreed with the majority

  1. That the impugned Act was not violative of Article 19 (1) (g) of the Constitution of India, inhibiting the freedom to carry on any trade or business.
  2. That the Parliament was competent enough to pass the impugned Act, related to the acquisition of banking.

Critical Analysis of the judgment

  1. The Supreme Court upheld the socialistic ideals of the Constitution by upholding the Government’s power to nationalise.
  2. The Court increased the ambit of the Fundamental Rights of the citizens by ruling that it was not binding upon the Supreme Court to reject the claim for enforcement of a shareholder’s Fundamental Rights, if in the process of violation of his Rights, the Rights of his company were also being violated.
  3. Even if the enforcement of Fundamental Rights of the shareholder would mean the enforcement of Rights of the company, it wouldn’t stop the Supreme Court from protecting the Rights of the citizens, even if in the process some unwanted enforcements were happening.
  4. It rejected the mutual exclusivity theory which had been propounded in the case of A. K. Gopalan Vs. State of Madras and that all the Rights were interlinked to one another and couldn’t be treated separately for the purposes of jurisprudence.
  5. In order to make any law upon the nationalisation of any subject, it didn’t mean that the Parliament would first have to make a separate law upon that subject and then move on to make the law regarding its nationalisation.
  6. It expanded the interpretation of the term property that was under Entry 42 of the State List.

Aftermath development

The Bank Nationalisation case is a landmark judgment for guiding the Parliament, as well as the Constitutional jurisprudence of the country for years to come. The Parliament, in order to strengthen its position, made the 25th Constitutional (Amendment) Act, in which the following points were noted-

  1. The word ‘compensation’ in Article 31(2) was replaced by the word ‘amount’. This meant that the Government is now not liable to pay an ‘adequate’ amount to the person whose property was being acquisitioned as earlier.
  2. Article 19(1) (g) was clearly detached from Article 31(2).
  3. Article 31C was added to the Constitution to remove all difficulties.
  4. Articles 14, 19 and 31 are not to be applied to any law enacted under the fulfilment of objectives laid down under Articles 39(b) and 39(c).
  5. Any law to give effect to Articles 39(b) & 39(c) will be immunized from Court’s intervention.
1)
AIR 1970 SC 564; 1970 SCR (3) 530


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