RC Cooper V.

Union of India
AIR 1970 SC 564 : (1970) 1SCC 248
The Bank Nationalization Case:
A Turning point in the Interpretation of
Fundamental Rights.
 Ideological and Political Backgrounds

• Pandit Nehru had a firm belief that socialism was the

economic model most suited to India, and needless to
mention that after his demise, his daughter Mrs. Indira
Gandhi effectively continued the legacy of her father’s
belief.
• In fact, Fabian Socialism was popular in several
developing countries. State control of important
industries was seen as the means to achieve the
objective of the greatest good of the greatest numbers.
• After independence several states nationalized
transport undertakings; electricity was made a state
monopoly and the insurance sector was nationalized. In
the late 1960s, several refineries and oil companies
were nationalized.
The Initial Proposal For Nationalization.

• In fact, the proposal to nationalize banks was mooted by

AICC (All India Congress Committee) in the year 1948 itself.
• R.K Shanmugham Chetty, the first Finance Minister wanted
to nationalize the Imperial Bank but the suggestion was
dropped at the behest of Sardar Patel.
• In 1955, the Imperial Bank of India was taken over under the
State Bank of India Act, and four years later, seven of its
subsidiaries were also taken over. With this partial
nationalization, one third of commercial banking in the
Country had already come under the State Control.
• The RBI took a pro-active role in regulating the banking
sector and reduced the number of commercial banking
institutions from 566 in 1951 to 89 in 1969.
Opposition to Nationalization.
• There were some leaders who were not in favor of
nationalization when Indira Gandhi made up her mind to
nationalize 14 banks. They were of the opinion that the
amount of compensation (Initially estimated at Rs.85 crores)
could be used to stimulate the economy.
• Moraraji Desai, who was then the Deputy Prime Minister
and also the Finance Minister, was of the view that instead
of paying Rs. 85 crores as compensation, they could control
the banks and channel the credit to the social sectors by
amending the banking laws.
• The serious differences of opinions between both of them
resulted in the dismissal of Moraraji Desai as Finance
Minister on 17th of July 1969. The next day i.e. on 18th of July
1969, Moraraji Desai voluntarily resigned from the post of
Deputy Prime Minister of the Country.
The Promulgation of Ordinance.
• The President of India on July 19, 1969 promulgated
the ‘Banking Companies (Acquisition and Transfer of
Undertaking) Ordinance’ 1969, nationalizing 14 banks
having deposits exceeding Rs.50 crores. This was in
utter disregard to the existing Constitutional
conventions and norms which became the hallmark of
1970s as Parliament was about to start its monsoon
session just after 2 days.
• The ordinance, at one stroke, brought more than 75%
of the banking sector under State Control.
• All directors of the 14 nationalized banks would vacate
their respective offices but the services of other
employees were to continue with the nationalized
banks.
The Provision For Compensation
• The most shocking part of the ordinance was the second
schedule which spelt out the compensation to be paid. To
determine the quantum of compensation, two methods
were specified:
• Where the amount of compensation could be fixed by an
agreement, it would be determined in accordance with such
agreement;
• Where no such agreement could be reached, the Central
Govt. had to refer the matter to a Tribunal within a period of
3 months from the date on which the Central Government
and the existing bank failed to reach an agreement
regarding the amount of compensation.
• The compensation so determined was to be given not in
cash but in marketable Central Govt. securities payable after
10 years. This was the most unfair provision.
Filing of Petition by RC Cooper
• Less than 48 hours after the ordinance was
promulgated, R.C Copper, filed a petition in the
Supreme Court, through advocate Nani A
Palkhiwala.
• RC Cooper was then a director of the Central Bank
of India Ltd. He held shares in this bank, Bank of
India Ltd. And Bank of Baroda Ltd.
• This Writ Petition was filed on July 21, 1969 and the
interim application was heard on July 22, 1969; an
interim order restraining the removal of the
chairmen of the banks were granted.
Legal Issues
• There were several legal issues raised in this case, which can
be summarized as:
• Whether a shareholder could file a petition for violation of
his fundamental rights when the company in which the
shares are held had been taken over.?
• Whether the ordinance was validly promulgated?
• Whether the Banking Companies (Acquisition and Transfer
of Undertaking) Act, which replaced the Ordinance, was
within the legislative competence of the Parliament?
• Whether the said Act was violative of Articles 19(1)(f) and
31(2) – provisions pertaining to fundamental rights to
acquire, hold and dispose of property.?
• Whether the quantum or method adopted for payment of
compensation was valid?
Maintainability of the Petition
• The attorney General at first argued that the petition was not
maintainable. He contended that a shareholder, depositor or
director was not entitled to move the petition for infringement of
the rights of the Companies as the Fundamental right to business
was available only to citizens and not to Companies.
• The Supreme Court, rejecting the argument of the Govt. said that
RC Cooper had challenged the infringement of his own rights and
not of the bank of which he was the shareholder and director. The
Court held that an executive or legislative measure may impair
the rights not only of the Company but also of its shareholders.
The Court could grant relief if the State action impaired the right
of the shareholders as well as of the Company.
• The correct view was subsequently expressed in another
landmark judgment, Bennett Coleman & Co. V. Union of India, AIR
1973 SC 106.
• In the end, the petition filed by Cooper was held to maintainable.
Validity of Ordinance
• RC Cooper, through advocate Nani Palkhiwala, contended
using the language of Article 123 of the Constitution that
the President was not the sole arbiter on whether the
conditions necessitating an ordinance existed. He argued
that the Supreme Court had the power to annul the
Ordinance if it found that there were no circumstances
rendering it necessary for the President to take immediate
action.
• The attorney General argued that the Presidential
satisfaction under Article123 was purely subjective, and
could not be questioned in a Court of Law.
• However, majority did not deal with this interesting
question as the Ordinance had by then been replaced by an
Act of the Parliament which was eventually held to be
unconstitutional.
Legislative Competence of the acquisition Process.

• RC Cooper, challenged the legislative competence of the

Parliament to enact the acquisition Act. While conceding that
Parliament could validly legislate in respect of acquisition of that
part of the undertaking which related to the business of banking
as defined in section 5(b) of the Banking Regulation Act, 1949. He
contended that the competence in respect of any other business
carried on by these banks prior to the date of acquisition fell
within entry 26 of List II which says, “Trade and Commerce within
the State subject to the provisions of entry 33 of List III.” As a
corollary, the power to legislate in respect of acquisition under
Entry 42 of List III could be exercised by Parliament only for
effectuating legislation under any Entry falling in List I or List III of
the schedule VII. Palkhivala argued that Parliament had the power
to acquire only the banking business; other trading activities
could be acquired only by the respective State legislatures. He
contended that the power of acquisition under Entry 42 of List III
could not be exercised unless basic legislation was enacted under
Entry 45 of List I or Entry 26 of List II.
Legislative Competence of the acquisition Process….Continued…

• The attorney General on the other hand pushed for an expansive

construction to the term ‘banking’ as used in Entry 45 of List I.
• The majority rejected this plea of the attorney General and held
that if such an expansive construction is permitted then it would
create substantial ambiguity.
• However, they also expressly rejected the limitations suggested
by Palkhivala to the legislative competence f the Parliament
under Entry 42 of List III, and held that the power to legislate for
acquisition of property was exercisable only under this Entry, and
not as an incident of the power to legislate in respect of a specific
head of legislation in any of the tree lists.
• This was an important principle laid down by the Supreme Court.
The power to acquire property was held to be an independent
power and there was no need to have ant basic or separate
legislation under one of the Entries of List I or List II.
The Overruling of the ‘Mutual Exclusivity Theory’

• The most important legal contribution of this case was the

overruling of the ‘Mutual Exclusivity theory’ which was judicially
developed in the much talked-about case of ‘AK Gopalan v. State
of Madras AIR 1950 SC 27’
• At the outset, the stand taken by the Central Government was
that the Acquisition Act could not be tested for violation of all
fundamental rights, but only for the violation of Article31, which
specifically dealt with acquisition of property for public purpose.
This contention was based on the theory of ‘mutual exclusivity’ of
rights, propounded by the Supreme Court in ‘‘AK Gopalan v. State
of Madras AIR 1950 SC 27’
• The majority of the Supreme Court had held in this case that the
various fundamental rights operated in separate compartments
and were mutually exclusive – each article enacting a code
relating to protection of distinct rights. This theory was followed
for 20 years in various judgments till it was overruled in the
present Bank Nationalization Case.
Compensation: The Achilles’ heel of the Govt’s Case.

• Article 31(2) placed two major restrictions on the power of

the State to acquire private property: first, such acquisition
had to be for a public purpose and, secondly, compensation
had to be paid for them.
• The Bank Nationalization Case was not the first case where
the issue of compensation was fatal to the Government. In
‘State of West Bengal v. Bela Benerjee AIR 1954 SC 170’ the
Supreme Court interpreted the expression ‘Compensation ’
as used in Article 31(2) to mean ‘full indemnification’. The
Parliament responded to this judgment with the
Constitution (Fourth) Amendment Act 1955, thereby
clarifying that inadequacy of compensation could not be
used to challenge laws providing for acquisition of private
property.
Compensation: The Achilles’ heel of the Govt’s Case ……..Continued…….

• Despite this amendment, the Supreme Court, in P Vajravelu Mudaliar v.

Special Deputy Collector, Madras, AIR 1965 SC 1017 as well as some
other decisions held that the expression ‘Compensation’ in Article 31(2)
continued to mean ‘just equivalent’.
• However, the confusion was caused when the Court in State of Gujarat
v. Shantilal Mangaldas [1969] 3 SCR 341 held that the compensation
which was fixed or determined using the principles specified by the
legislature, was not open to challenge on the somewhat indefinite plea
that it failed to meet the standard of a just or fair equivalent. Going by
this judgment, only the principles for determination of compensation,
could be challenged as being irrelevant.
• The majority in the Bank Nationalization Case held that the Acquisition
Act was liable to be struck down as it failed to provide compensation
based on relevant principles. This test according to the majority, was
accepted by both P Vajravelu Mudaliar v. Special Deputy Collector,
Madras, AIR 1965 SC 1017 and State of Gujarat v. Shantilal Mangaldas
[1969] 3 SCR 341 .
Compensation: The Achilles’ heel of the Govt’s Case ……..Continued…….

• The majority observed that the Acquisition Act, instead

of valuing the entire undertaking as a provided for
determination of the value of only some of the
components, that constituted the undertaking. It also
prescribed different methods for valuing each such
component. This method, in the opinion of the
majority, was prima facie not relevant to the
determination of compensation for the whole
undertaking. In their view, it was an important principle
of valuation that the acquired property be valued as a
unit, and not as an aggregate of different components
constituting this unit. They felt that the Acquisition Act
was liable to be struck down purely on this ground.
Violations of rights to equality and to carry on business

• The Acquisition Act prohibited the nationalized banks

from carrying on banking business. This could not be
challenged as violating their right to carry on business
in banking; under the Constitution, the State could
always create partial or complete monopoly. But the
ban on banking business violated the right to equality
under Article 14. The Supreme Court observed that
while the fourteen banks were prohibited from doing
banking business, other banks, including foreign banks,
could continue to carry on banking business in India
and abroad. In the opinion of the Court, this was a
‘Flagrantly hostile discrimination’ that ‘impaired’ the
‘guarantee of equality’.
Violations of right to equality …........continued…

• The 14 banks were magnanimously permitted to carry on ‘non-

banking business’. As companies, the 14 banks were prohibited
from using the word ‘bank’ or ‘banking’ in their corporate name.
The nationalized banks found themselves in a pathetic situation.
They were deprived of their entire assets, including their
premises, their corporate name. The nationalized banks found
themselves in a pathetic situation. They were deprived of their
entire assets, including their premises, their corporate names,
their managerial and other staff and the pitiful compensation that
was payable was to be received after 10 years. The Court agreed
with Palkhivala’s submission that the Acquisition Act violated the
right to equality under Article 14 as it prohibited these 14 banks
from carrying on the business of banking, when other existent
banks as well as newly created banks could very well carry on this
business. Consequently, Court struck down section 15(2)(e) of the
Acquisition Act as unconstitutional by holding that ‘Flagrantly
Hostile Discrimination’ was being practiced.
OBJECT AND EFFECT TEST
• Another important point that was decided in this
case was the ‘effect test’. The assumption in AK
Gopalan’s case was that the object of the State
action alone had to be considered while examining
the infringement of guaranteed fundamental rights.
This assumption was held to be incorrect by the
majority who decided that the effect of laws on
fundamental rights could not be ignored. The
object and effect test also demonstrated the inter-
dependence of fundamental rights.
Nationalization Upheld.
• Contrary to popular belief, the Supreme Court upheld the right of
the Union and State Governments to nationalize banks, or, for
that matter any industry.
• However, while opposing nationalization Palkhivala raised an
extremely interesting argument. He argued that nationalization
was wholly irrational as it penalized efficiency and good
management. Section 36AE of the Banking Regulation Act, 1949
conferred power on the Central Government to acquire the
undertaking of banking companies that were badly managed but
the 14 nationalized banks had complied with all the directives of
the Reserve Bank of India.
• He contended that the banks which were nationalized were just
the opposite of those that were contemplated under the law to
be acquired. The Supreme Court merely said to this argument of
Palkhivala that, “We need express no opinion on this part of the
argument”
Re-enactment of the Bank Nationalization Act.

• After this decision, the Parliament re-enacted the

Bank Nationalization Act and an additional sum of
Rs.58 crores was paid to the 14 banks.
• According to some jurists, the entire controversy
could have been avoided in the first place even if an
extraRs.50 crores had been paid to the banks or if
more reasonable yardsticks to determine
compensation had been adopted.
Source of the Slides.

• The entire Information contained in the preceding

slides about this landmark judgment is almost a
brief and systematic reproduction of the narratives
mentioned in the book “Nani Palkhivala, The
Courtroom Genius, Soli J Sorabjee and Arvind P
Datar’.

Thank You !!