Author: Suktika Bhattacharyya, Jogesh Chandra Chaudhuri law College, University of Calcutta
Introduction
The case Rustom Cowasjee Cooper Vs. Union of India; popularly known as the bank Nationalisation case holds a pioneering step in the evolution of Indian Constitutional and Banking law. Arising through the context of the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, by then Prime Minister Indira Gandhi resulting in the nationalization of 14 commercial banks of the country-this case shades light the complex interference between state’s power enacting economic reform and the protection of the fundamental rights.
The petitioner here being the director of the Central Bank of India and a great admirer of the emerging economies of Southeast Asia, challenged the ordinance to ensure that the rights of the shareholders were not usurped.
To the Point
What is Bank nationalization: While many other countries were switching to market-oriented policies, India at her post-independence felt inclined to socialist policies and the nationalization of banks was the consequence of this shift.
After surviving the wars with China (1962) and Pakistan (1965), the public finance of India becomes devastated entirely. Successively two droughts led to the condition of food shortage. Industry’s share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68% whereas agriculture received less than 2% of total credit. The decade 1960-70s was the last decade for India as the economic growth barely outpaced population growth and average incomes stagnated.Therefore, to gain control over resources, prevent bank failures, distribute credit equitably, examine monopolies, moderate the banking sector to meet the goal of % year plans Government took this initiative.
Until the enactment of the Banking Regulation Act, 1949, there was no such direction regarding the banking system. In this Act, section 5(b) defines ‘banking’ as “Accepting, for lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order, or otherwise. “The Act gives the RBI the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, merges and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties. In 1965, the Act was amended to include cooperative banks under its purview by adding Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But RBI controls the licensing and regulates the business operations. The RBI’s action of regulatory overreach led to a compliance burden than efficient governance. These powers have enabled the RBI to reorganize the entire banking structure in India and regulate the banking business. Even the State Bank of India, with seven subsidiaries, was able to amalgamate fifty crores in deposits each by mid-1969. In 1969, 14 banks were nationalized by the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 including Central Bank of India, Bank of Baroda, Union Bank of India, Punjab National Bank, United Commercial Bank, , Canara Bank, Dena Bank, Syndicate Bank, United Bank of India, Allahabad Bank, Indian Bank, Bank of Maharashtra, Indian Overseas Bank . These banks collectively held around 85% of the total banking assets at that time. Before nationalization these banks were sole private entities, and the need arose at the failure of private banks to fulfil the criteria set by the Government for the prediction of people’s interest. This attempt, primarily aimed at the equal wealth distribution to all sectors was credited with several loopholes. This case highlighted those.
Facts of this Case: The fact of this case i.e. the nationalization of the bank wasn’t very new to the countrymen as it was a priorly debated topic among the All India Congress Committee. Even Pandit Nehru was a believer in the concept of Fabian Socialism (for the progress of society it is necessary to exercise state control over certain industries.) The process of partial nationalization of the banking sector was initiated with the nationalization of the Imperial Bank of India in 1955.
Returning to this case, the day after the voluntary resignation of Moraji Desai from the post of Deputy Prime Minister, the then acting President Justice Hidayaytullah issued the aforesaid ordinance resulting in the transfer of the entire undertaking of the 14 banks (assets, liabilities, operation) to corresponding new government -owned banks, lose of control of the directors of those banks of management and operation without any prior notice or consultation to the shareholders or banks. As per the second schedule of the ordinance, the compensation to the bank will be given by agreement if the amount is able to be decided through so and if no agreement was able to be reached the disputed matter will be referred to a tribunal and the decided amount will be redeemable 10 years after the issuance as Government Securities.
Cooper being the shareholder of several banks filed a writ petition in the Supreme Court of India stating that the declaration by the Government is violative to the Fundemental Rights Under Articles 14, 19, and 31 of the Constitution. On 22nd July 1969, the Supreme Court issued an interim order in response to his petition, restraining the Union Government from dismissing the functioning of the bank’s boards of directors.
Abstract
The case of R.C. Cooper v. Union of India (1970), also known as the Bank Nationalisation, marks a watershed moment in Indian constitutional and banking law. It arose from the 1969 ordinance by the Indira Gandhi government nationalizing 14 major private banks, transferring their undertakings to the state without prior shareholder consent. R.C. Cooper, a shareholder and director, challenged the move on grounds of violation of Fundamental Rights under Articles 14, 19, and 31. The petitioner contended the ordinance lacked urgency under Article 123, exceeded legislative competence, and failed to provide just compensation. The Union countered by denying shareholder standing and defending the ordinance under Article 31A and legislative entries. In a 10:1 majority, the Supreme Court upheld the petition’s maintainability, ruled the ordinance unconstitutional for inadequate compensation, and introduced the “Effect Test,” departing from the earlier “Object Test.” This judgment influenced major constitutional amendments (25th Amendment), laid the foundation for the Basic Structure Doctrine (Kesavananda Bharati, 1973), and informed the Maneka Gandhi (1978) ruling linking Articles 14, 19, and 21.
The Proof
Issues raised: The Supreme Court in RC Cooper v. Union of India framed several issues for determination in the case-
Whether the writ petitions filed by the petitioners were maintainable.
Whether the Ordinance was invalid due to the non-existence of the conditions required under Article 123 for the exercise of the President’s power.
Whether the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, was within the legislative competence of Parliament.
Whether Articles 19(1)(f) and 31(2) of the Constitution are mutually exclusive or whether a law providing for the acquisition of property for public purposes could be tested for its validity on the ground that it imposed unreasonable limitations on the right to property.
Whether the provisions of the Act, which transferred the undertaking of the named banks and prohibited them from carrying on banking and non-banking business, impaired the freedoms guaranteed by Articles 19(1)(f) and 19(1)(g).
Whether the provisions of the Act violated the guarantee of equal protection under Article 14.
Whether the Act violated the guarantee of compensation under Article 31(2) of the Constitution.
Contention of the Petitioner: The counsel of the petitioner, Mr. A Palkivala contended that-
The writ petition is maintainable because the petitioner has filed it for enforcement of his Fundamental Rights and not that of the company. Since the Company is not a citizen within the context of the Indian Citizenship Act, 1955 and the Constitution of India, a company cannot claim the protection of those FR’s that are solely available to citizens of India.
The petitioners argued that the Ordinance was invalid because the conditions required for its promulgation under Article 123 were not met (The Barium Chemicals Ltd. And Anr vs The Company Law Board and Others & Nakkuda Ali v. M.F. DE. S Jayaratne) They contended that there was no immediate necessity or urgency to justify the exercise of the President’s power.
The petitioners contended that The three lists under Schedule VII of the Constitution Union, State & Concurrent List demarcate the area of operation of Union Parliament, State Legislature and areas where both can operate respectively. The Parliament can only legislate in the matters of “Banking” as defined in Section 5(b)of the Banking Regulation Act, 1949 by virtue of Entry 45 of List I. Further, the legislature by virtue of Entry 42 of List III can only make laws for effectuating laws under List I. Therefore, the Parliament did not possess the required valid competence to initiate the acquisition process.
The petitioners argued that the Act violated their rights under Articles 14, 19(1)(f), and 19(1)(g) by depriving them of their property and livelihood without adequate compensation. They also claimed that the Act imposed unreasonable restrictions on their right to carry on business.
The petitioners contended that the compensation provided under the Act was not just, fair, or adequate as required by Article 31(2) of the Constitution. The compensation was to be paid in government securities over ten years, which they argued was not an acceptable form of compensation.
The Act violates the guarantee of free trade mentioned under Article 301.
Contention of the Respondent: The Union of India, represented by the Attorney General, opposed the petitioners’ claims and put forward the following contentions:
The Union argued that the petitioners, as shareholders or directors of the affected banks, did not have a direct proprietary interest in the assets of the banks. They contended that the company, as a legal entity, was the proper party to challenge the acquisition, not the individual shareholders or directors.
The Union, relying upon the case of Bhagat Singh v. The King Emperor (1931) and Lakhi Narayan Das & Ors. V. The Province of Bihar (1950) argued that the President’s satisfaction regarding the need for immediate action was subjective and non-justiciable. They further contended that the President’s power under Article 123 was within the bounds of the Constitution, and there was no need for the Court to question the exercise of this power.
The Union argued that Parliament had the authority to legislate on banking under Entry 45 of List I (Seventh Schedule), and the power to legislate on property acquisition under Entry 42 of List III. The Union by focusing on the wide aspect of the term ‘Banking’ also contended that the acquisition of a banking company’s undertaking, including its assets and liabilities, was within Parliament’s competence.
The Union argued that the compensation provisions were within the legislative competence of Parliament and that the adequacy of compensation could not be judicially reviewed. The compensation provided under the Act was consistent with the principles established by the Banking Regulation Act, of 1949.
The Union contended that the classification of banks based on deposit size was rational and had a legitimate basis. They argued that the fourteen banks chosen for nationalization were selected based on their significant role in the economy, and the differentiation was not discriminatory.
Mentioning the case of A.K Gopalan v. State of Madras(1950), where a person, detained under the Preventive Detention Act, 1950, claimed that the Act contravened the provision of Article 19, 21, 22 of the Indian Constitution and the Court held that the Article 22 deals exclusively with the detention and the petitioner couldn’t demand the right under Article 19 as it was restricted under some reasonable grounds, the respondent contended that in this case the Act is not violative of Article 19(1) (g) and fell well within the ambit of Article 31 A.
Majority Judgment in this case: The Court on 2nd February 1970, holding the majority bench with Justice Shah for himself and on behalf of Grover, Vaidialingam, Mitter, Dua, Shelat, Hegde, Reddy, Sikri and Bhargava, JJ passed the verdict with justice A.N. Ray writing a dissenting opinion. (10:1)
The Court found the writ petition, maintainable as Cooper’s right as a shareholder & directors are directly affected, by observing the acquisition of property without impacting the individual rights of the petitioners, thereby giving them standing to challenge the Act.
The court held that the promulgation of the ordinance under Article 123 was valid but found it unconstitutional as the compensation provisions were not adequate.
The court rejected both the Petitioner’s & Respondent’s argument on legislative competence to acquire banking Companies. The court held that the term Property in itself constitutes the rights, liabilities, organization etc. that accrue to the property. The power to acquire property was held to be an independent power of Parliament and it required no separate legislation under List II or List III.
The Court found no evidence of arbitrary discrimination and hence the claim of violation of Article 14 wasn’t valid. The court held that the compensation provisions were inadequate and arbitrary. The compensation to be paid in government securities maturing over ten years was not just or fair. The Court ruled that the Act violated Article 31(2) because it failed to provide immediate and adequate compensation for the property acquired.
The Court introduced the “Effect Test”, rejecting the “Object Test”. Instead of focusing on the Act’s objective (e.g., public interest), the Court examined its actual impact on fundamental rights. This marked a departure from the mutual exclusivity theory in A.K. Gopalan v. State of Madras (AIR 1950 SC 27), which treated fundamental rights as isolated.
The Court found no violation of Article 301, as the Act’s restrictions were in the public interest and did not unduly impede trade and commerce.
Further Developments: The R.C. Cooper v. Union of India (1970) judgment was a landmark ruling with major constitutional and political ramifications.
In direct response to the Cooper judgment, Parliament passed the 25th Amendment to restrict judicial scrutiny of compensation laws which was included-
The word compensation in Article 31(2) was replaced by the word amount making it non-justiciable (i.e. courts could no longer test whether it was adequate or fair)
Detachment of Article 19(1) (g) from Article 31(2).
Introduction of Article 31C which protected laws implementing Directive Principles (Articles 39(b) and 39(c)) from the being challenged for violating Articles 14, 19, or 31.
Any law giving effect to Articles 39(b) & 39 (c) will be exempted from court’s intervention.
The Supreme Court ruled that Parliament cannot alter the “basic structure” of the Constitution, mentioning another landmark case of Kesavananda Bharati v. State of Kerala (1973)
The Court mentioned the Maneka Gandhi v. Union of India (1978) Cemented the “interrelationship” among Articles 14, 19, and 21, building on R.C. Cooper Case.
A new legislation namely the Banking Companies (Acquisition and Transfer of Undertaking) Act,1970 was passed to regulate the acquisition and undertaking of banks.
Conclusion
The R.C. Cooper v. Union of India (1970) judgment stands as a transformative moment in India’s constitutional jurisprudence. At its core, the case was not merely a challenge to bank nationalization but a powerful assertion of the individual’s fundamental rights against overarching state power. The Supreme Court’s decision to uphold the right of shareholders to challenge state action marked a significant shift from earlier doctrines that treated companies and individuals as separate entities in matters of rights enforcement. Critically, the Court’s adoption of the Effect Test over the traditional Object Test signaled a decisive move toward a more rights-conscious interpretation of the Constitution. The ruling also triggered a legislative backlash, notably the 25th Constitutional Amendment, which attempted to dilute judicial review in compensation matters and shield certain laws from fundamental rights challenges.
Moreover, by protecting both the ideals of socialism and fundamental rights, the case became a precedent for several other landmark cases in India.
FAQs
What is the R.C. Cooper v. Union of India case about?
Ans-The case challenged the constitutional validity of the 1969 ordinance by which the Indian government nationalized 14 major private banks. R.C. Cooper, a shareholder and director, argued that the nationalization violated his fundamental rights under Articles 14, 19, and 31 of the Constitution.
What was the Supreme Court’s verdict in the case?
Ans-In a 10:1 majority decision, the Court held the petition maintainable, declared the ordinance unconstitutional for providing inadequate compensation, rejected mutual exclusivity of Articles 19 and 31, Introduced the Effect Test, focusing on actual impact rather than legislative intent, found no arbitrary discrimination or violation of Article 14, Ruled the compensation unfair as it deferred payments for 10 years via government securities.
What were the constitutional consequences of this ruling?
Ans- In the aftermath of this case the 25th Amendment (1971) was passed to replace “compensation” with “amount” in Article 31(2), making adequacy non-justiciable, insert Article 31C, protecting laws giving effect to Articles 39(b) & (c) from being challenged under Articles 14, 19, or 31, Strengthened the path toward the Basic Structure Doctrine (Kesavananda Bharati, 1973), Influenced Maneka Gandhi v. Union of India (1978), cementing the unity of Articles 14, 19, and 21.
References
1 AIR 1970 SC 564; 1970 SCR (3) 530
2
ttps://www.orfonline.org/expert-speak/the-singa porean-who-took-indira-gandhi-to-court-53298
3 50 Years of Nationalization of Banks
4 Nationalization of Banks: History, Purpose, Benefits & More | UPSC Notes
5 Banking Regulation Act, 1949 – Wikipedia
6 Banking Regulation Act, 1949 – Wikipedia
7 R.C. Cooper v. Union of India: bank nationalisation case summary – iPleaders
8 RC Cooper v Union of India (1970): A
Landmark Case on Bank Nationalization and Property Rights – Lrnin
9 Nationalisation of Banks in India – SPUR ECONOMICS
10 R.C. Cooper v. Union of India: bank
nationalisation case summary – iPleaders
11 R.C. Cooper v. Union of India : bank nationalisation case summary – iPleaders
12 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
13 R.C. Cooper v. Union of India – Bank
Nationalization Case – Case Summary – Law Times Journal
14 1967 AIR 295, 1966 SCR 311, AIR 1967 SUPREME COURT 295
15 [1951] A.C. 66
16 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
17 R.C. Cooper v. Union of India – Bank Nationalization Case – Case Summary – Law Times Journal
18 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
19 (1931) 33 Bom LR 950 (Bombay)
20 [1950] SUPP SCR 102
21 R.C. Cooper v. Union of India : bank nationalisation case summary – iPleaders
22 R.C. Cooper v. Union of India – Bank Nationalization Case – Case Summary – Law Times Journal
23 RC Cooper v Union of India (1970): A Landmark Case on Bank Nationalization and Property Rights – Lrnin
24 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
25 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
26 R.C. Cooper v. Union of India – Bank Nationalization Case – Case Summary – Law Times Journal
27 Rustom Cavasjee Cooper & Ors. [RC Cooper] v. Union of India
28 RC Cooper v Union of India (1970): A
Landmark Case on Bank Nationalization and Property Rights – Lrnin
29 R.C. Cooper v. Union of India : bank nationalisation case summary – iPleaders
30 Kesavananda Bharati v. State of Kerala, (1973) 4 SCC 225; AIR 1973 SC 1461
31 Maneka Gandhi v. Union of India, (1978) 1 SCC 248; AIR 1978 SC 597
