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Observing that the Banking Regulation Act applies to multi-state co-operative banks, the Supreme Court on Thursday (September 3) held that the Reserve Bank of India's power to supersede the Board of Directors of a multi-state co-operative bank extends beyond the six-month limit prescribed under Article 243ZL(1) of the Constitution.

“…the power of RBI to supersede BoD of a multi-State co-operative bank under Section 36AAA (1) of BR Act is not circumscribed by the 6-month limit prescribed in Article 243ZL (1) of the Constitution.”, observed a bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, while affirming the Bombay High Court's judgment which had refused to interfere with the RBI's decision to supersede the board of directors of the Abhyudaya Co-operative Bank Limited ('Bank') beyond the six-month limit prescribed under Article 243ZL (1) of the Constitution.

Before the Supreme Court, the Appellants (superseded board members) argued that the RBI's power to supersede the Board was subject to the six-month ceiling under Article 243ZL(1) of the Constitution. Rejecting this contention, the Court held that the third proviso to Article 243ZL(1) expressly makes the BR Act applicable to multi-State co-operative banks.

“…the third proviso by making the provisions of BR Act also applicable, in case of a multi-State co-operative bank enlarges the scope of main Article that is Article 243ZL(1), instead of restricting its scope, therefore, the same is not a proviso but is an independent provision. The words “shall also apply” employed in third proviso to the said Article makes it abundantly clear that provisions of the BR Act are applicable to the multi-State co-operative bank.”, the Court said.

Background

The bank was initially incorporated as a co-operative society under the Maharashtra Co-operative Societies Act, 1960 and was converted into a bank in 1965 with the RBI's permission. It was declared a Scheduled Bank in 1988 and subsequently became a multi-State co-operative bank pursuant to RBI directions for amalgamation with banks in Gujarat and Karnataka.

The appellants were elected as members of the Board of Directors in May 2019 for a statutory term of five years.

On November 24, 2023, the RBI, exercising powers under Section 36AAA(1) and (2) read with Section 56 of the BR Act, superseded the Board for one year and appointed an Administrator.

The RBI cited deterioration in the Bank's financial health to a dangerous level, the need to protect depositors and prevent the Bank from collapsing, and the necessity of professional management to restore its financial position.

The directors challenged the supersession before the Bombay High Court. During the pendency of the proceedings, their statutory term expired on May 24, 2024.

The RBI subsequently extended the supersession for another year on November 18, 2024 and further extended it on November 7, 2025.

The High Court dismissed the superseded board members challenge, holding that Section 36AAA continued to operate and was not rendered redundant by Articles 243ZL and 243ZT of the Constitution.

Decision

Affirming the High Court's judgment, the judgment authored by Justice Aradhe relied upon the constitution bench judgment of Pandurang Ganapati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd. which categorically held that, by virtue of the third proviso to Article 243ZL (1), the provisions of BR Act shall also apply to a multi-State co-operative society carrying on the business of banking.

RBI's regulatory powers cannot be diluted upon the expiry of six month period

The Court held that since the third proviso of Article 243 ZL (1) of the constitution makes the Banking Regulation Act applicable to the multi-state co-operative banks, thus, by applicability of a doctrine of incorporation the provisions of the BR Act are implicitly incorporated into Part IXB of the Constitution insofar as it pertains to multi State co-operative bank. Moreover, noting that the RBI is bestowed with the responsibility to regulate the banking system in the country, where the interest of the depositors and the discipline of the banking system is paramount, the Court said that authority of the RBI to regulate the banking system could not be curtailed by an artificially truncated period of six months.

“To read the third proviso to Article 243ZL(1) as excluding multi-State co-operative banks from the reach of the BR Act and thereby confining the RBI's regulatory hand to a rigid six-month period, ill-suited to the time genuinely required to nurse a distressed bank back to health, would be to subordinate the protection of depositors and the discipline of the banking system to a truncated and overly technical reading of a constitutional proviso. Such a construction would defeat the very object which impelled the Parliament to enact a third proviso, namely, to ensure that co-operative societies carrying on the business of banking remain, notwithstanding their co-operative character, subject to the specialised, continuous and expert regulatory oversight of the RBI under the BR Act.”, the Court said.

“…the construction which sub serves the object of protecting depositors and preserving financial discipline in the banking system must be preferred over one which would fragment regulatory authority and expose multi-State co-operative banks to a supervisory vacuum upon the expiry of an artificially truncated period. It is this need to preserve, rather than dilute, the RBI's regulatory reach over multi-State co-operative banks that lends both textual and purposive coherence to the scheme of Article 243ZL. Therefore, the inevitable conclusion is that provisions of BR Act apply to multi-State co-operative banks.”, the Court added.

RBI's superseding order can be extended beyond the Board's statutory tenure

The Court rejected the argument that the RBI's power to extend supersession would come to an end upon expiry of the original Board's statutory tenure. It observed that once the Board is superseded, it ceases to exist and its powers vest in the Administrator.

“Once the BoD stands superseded, the Board ceases to exist and all its powers vest in the Administrator…the order of supersession passed under Section 36AAA(1) of BR Act can be extended beyond the term of office for which the BoD of a multi-State co-operative bank had originally been elected.” the Court said.

State Government consultation not necessary

The Court also rejected the contention that the RBI was required to consult the State Government before superseding the Board.

It held that the relevant proviso requiring consultation applies to co-operative banks registered with the Registrar of Co-operative Societies of a State and does not extend to multi-State co-operative banks.

The Court accordingly concluded that the RBI's exercise of power under Section 36AAA was not invalid on the ground of absence of such consultation.

“Insofar as the submission made on behalf of the appellants that there has been a violation of proviso to Section 36AAA(1) of the BR Act on account of non-consultation prior to the order of supersession is concerned, it suffices to note that the requirement of consultation applies only to a co-operative bank registered with Registrar of Co-operative Societies of a State. The Bank, being admittedly a multi-State co-operative bank, does not fall within that category. Therefore, the aforesaid submission does not merit acceptance.”, the Court said.

As a result, the appeal was dismissed.

Cause Title: SANDEEP S. GHANDAT & ORS. VERSUS RESERVE BANK OF INDIA & ORS.

Citation : 2026 LiveLaw (SC) 895

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Appearance:

For Appellant(s) : Mr. Devadatt Kamat, Sr. Adv. Mr. Anandh Kannan N., AOR Mr. Revanta Solanki, Adv. Mr. Hruday Bajentri, Adv.

For Respondent(s) : Mr. Jaideep Gupta, Sr. Adv. Mr. Ramesh Babu M.R, Sr. Adv. Ms. Nisha Sharma, Adv. Ms. Tanya Chowdhary, Adv. Ms. Namrata Bhatnagar, Adv. Ms. Mukti Chowdhary, AOR Mr. Ninad Laud, Adv. Mr. Zubin Dash, Adv. Mr. Deb Ganapaty, Adv. Mr. Dcosta Ivo Manuel Simon, AOR Mr. Shrirang B. Varma, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Anandh Kannan N., AOR

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