Author: Neya Dharshini, SASTRA Deemed to be University
To the point
The RC Cooper vs UOI case talks about the problems and objections that arose during the nationalisation of 14 private banks in India. Those private banks were holding a widespread network in the Indian economy. Once they are nationalised, they start to dominate the whole banking sector due to their enormous size and strong networks with the other banks. Nationalisation of the banks means the transfer of the shares, money, control, and ownership of the bank into the hands of the Central Government. This nationalisation of banks will enable the Government to hold most of the shares in the other banks. In 1969, Indira Gandhi announced the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, which compels the nationalisation of banks. It became a problem for the shareholders who had shares in the private banks. Once the Government gets control of the banks, the compensation to the shareholders will be given after entering into an agreement with all of the shareholders. If the agreement passes, the compensation will be granted to the shareholders. If the agreement fails to pass, the validity of the agreement and the value of the compensation amount will be adjudicated by a tribunal. RC Cooper filed a writ in the Supreme Court, by invoking Article 32 of our Constitution, against the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance by stating that the ordinance oases by the Indira Gandhi Government is against Socialism, which is one of the Directive Principles of State Policies.
Abstract
Until 1949, there were no proper provisions or directions relating to scoping and regulating the banking sector and the businesses related to banking. In 1949, the Banking Regulation Act was enacted. Section 5(b) of the Banking Regulation defines the word banking. It says that banking means accepting money in any form from the public for the purpose of giving it back to them, with interest, in the future when they demand, or accepting the money as an investment and giving it back to them, with interest, in the future when they demand. The act was amended to bring the Board of Directors into the Banking Sector to have social control and responsibility over the banks. The chairman is essential to lead the Board. The Reserve Bank of India gave regulations to all the other banks regarding the appointment of the Chairman, the formation of the Board, proper management, social responsibility, and allocation of resources. In India, the process of nationalisation happened in two phases. The first phase was in 1969, when 14 banks that had more than Rs. 50 crores as deposits were nationalised then. The second phase happened in 1980. The banks that have deposits of more than Rs. 200 crores were nationalised. The main reason for the nationalisation of banks is to stop the moneylenders from exploiting the public masses by demanding huge amounts of unreasonable interest. In the deep rural areas, the banks for owned by the private sector, and so they could not have the benefits of the banking system. Once the banks are nationalised, those rural banks started to give the benefits of the banking sector to the public and prevented the practice of moneylending. When the benefits of the banking sector reach all geographical divisions, the purpose of social welfare is fulfilled, and this nationalisation prevents monopolies by the private sector, aiming to include all ranges of people financially. Even then, Financial Minister Morarji Desai strongly opposed the nationalisation of 14 banks. Desai said that if we nationalise the banks, we have to pay compensation to those banks, which will be around Rs. 90 crores. Rather than using the money to pay compensation, we can use it to improve the economy.
Use of legal jargon
Facts
The most unconstitutional move in the nationalisation of the banks was the compensation agreement. If the agreement passes, the compensation will be granted to the shareholders. If the agreement fails to pass, the validity of the agreement and the value of the compensation amount will be adjudicated by a tribunal, and if the tribunal orders compensation, it can be done within 10 years from the date of the tribunal’s order. Once the private banks are acquired by the Government, the directors should resign from their jobs; however, the staff can continue their employment under the Government. RC Cooper, who was the director of the Central Bank of India, also had shares in the Central Bank of India, Union Bank of India, Bank of India, and Bank of Baroda. He filed a writ petition under Article 32, contending that the ordinance passed is violating their fundamental rights. An injunction was passed not to dismiss the directors from the companies even after nationalisation.
Issues framed
Whether the act is formulated within the jurisdiction of the Parliament?
Whether the ordinance had been properly drafted?
Whether the method to provide compensation to the banks valid or not?
Whether a shareholder can file under Article 32 for the violation of fundamental rights when a company in which he holds shares is acquired by the Government?
Arguments of the Petitioner
Mr. Palkhivala represented the petitioner in this case. He contended that the ordinance was passed by invoking Article 123, but the ordinance does not fulfil the conditions given in Article 123, and so the ordinance is unconstitutional. Cooper also contended that the right of free trade conferred under Article 301 is violated by the nationalisation. Passing of this ordinance is violating the subjects that are listed under List III (concurrent list), which should be regulated by both the Central and State Governments, but in this case, it is done by the Parliament alone, and so it is unconstitutional. The petitioner also contends that the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance is violating Article 14, Article 19(1)(f), Article 19(1)(f), and Article 31. He also contended that Sections 11 and 26 of the Banking Companies (Acquisition and Transfer of Undertakings) Act are invalid as those sections do not fall under the scope of the Parliament. Mr. Palkhivala cited the cases Nakkuda Ali vs S Jayaratne and Barium Chemicals Ltd vs Company Law Board, in which the court held that the power of the President is conditional and he/she does not have the absolute decision-making power. This power can be invoked when there is an emergency; however, this ordinance was passed when there was no emergency, and so, the ordinance is absolutely vague and malicious.
Arguments of the Respondent
The Union Government argued that the nationalisation was done in the larger public interest and to include the rural sections in the financial sector. The nationalisation was done to align banking with the country’s planned economic development, a core aspect of the Directive Principles of State Policy under the Constitution. They contended that the Banking Companies (Acquisition and Transfer of Undertakings) Act was not violating Article 19(1)(f) since the act gives compensation for the acquired shares. The Union contended that the provision for compensation under the Act was adequate and valid under Article 31(2) (as it then stood before the 44th Amendment), which allowed the State to acquire property for a public purpose if compensation was paid. The Union contended that the shareholder cannot file a writ for the nationalisation of the banks since the rights of the company and the shareholders are different, and elaborated the corporate personality doctrine. They also contended that the judicial organ should not intervene in the process of economic policy. They can only interfere when there is a prima facie violation of the Constitution.
Judgment
The Court held that the Act was unconstitutional, primarily because it failed to provide for just compensation, thereby violating Article 31 (right to property, since repealed), and because it arbitrarily selected certain banks for nationalization, which was held to be violative of Article 14 (right to equality). Additionally, the nationalization amounted to an unreasonable restriction on the right to carry on business under Article 19(1)(g). The Court rejected the government’s argument that only the corporate entity’s rights were affected and held that shareholders do have the locus standi to challenge legislation that impacts their property and business interests. In a significant departure from earlier constitutional interpretations, the Court ruled that fundamental rights must be assessed based on the direct and indirect effects of the law, rather than its form. This decision overruled the earlier precedent set in A.K. Gopalan’s case, which had adopted a compartmentalized view of fundamental rights. The judgment thus expanded the scope of fundamental rights protections by applying what became known as the effect test, ensuring that laws passed under the guise of public interest or policy could still be struck down if they substantially infringed individual rights. Although the original Act was invalidated, the government later passed a revised version with constitutional safeguards, including proper compensation provisions, to lawfully proceed with the bank nationalization. This landmark ruling played a pivotal role in shaping Indian constitutional law, particularly concerning property rights, the interpretation of fundamental rights, and the judicial review of economic policies.
Conclusion
This case laid the foundation to understand the concept of nationalisation of the banks. This case is still being used as one of the important precedents in solving disputes arising in the banking sector. The usage of the effect test in the case helped to calculate reasonable compensation and make profits by acquiring the property. This case widened the scope of Article 31 of the constitution, and clearly explains the role & impact of Article 19 in the banking sector. This case upheld the ideals of socialism in the one hand, and the fundamental rights of the citizens on the other hand.
FAQs
When were banks first nationalised in India?
The first major bank nationalisation took place on July 19, 1969, when 14 major private commercial banks were nationalised by the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, which was later replaced by the Act of 1969.
What are the reasons for the nationalisation of the banks?
To serve the socialistic goals of the government.
To extend banking facilities to rural and underserved areas.
To ensure that credit flows to priority sectors, such as agriculture, small-scale industries, and the poor.
To reduce the concentration of economic power in the hands of a few.
Why is this case important in constitutional law?
The case marked a landmark shift in the interpretation of fundamental rights. The Court introduced the “effect test”, meaning that laws would be judged by their actual impact, not just their form. It also overturned the rigid compartmentalized approach of earlier judgments like A.K. Gopalan’s case.
