Revisiting Bank Nationalization and the R.C. Cooper case

(This post takes you through the story behind Indira Gandhi's bank nationalization decision, and the litigation that followed)

19^th July marked exactly 51 years since Indira Gandhi’s bank nationalization ordinance. Indira Gandhi’s decision to nationalize 14 commercial banks was brought about on 19^th July 1969, which was a Saturday. Nationalizing 14 commercial banks through this ordinance brought more than 75% of India’s banking sector under direct State control. All assets, liabilities and paid-up capital of the 14 commercial banks were to vest directly with the Central Government. The ordinance was promulgated on a Saturday even though Parliament was scheduled to reconvene on Monday, 21^st July 1969 – which was less than 48 hours away.

The ordinance was also drafted in utmost secrecy. Only Indira Gandhi’s trusted officers were aware about the plan, and even the Cabinet Ministers were not kept in the loop. As Granville Austin notes in his book - Working a Democratic Constitution, Indira Gandhi’s Cabinet colleagues heard about the ordinance only once they arrived at the Cabinet Meeting, which was called to give rubber-stamp approval to the ordinance.[1] Even copies of the ordinance that had been circulated during the meeting were taken back, so that there were no leaks in advance.

After the Cabinet Meeting, the ordinance was taken to Acting President V.V. Giri for his assent. Interestingly, V.V. Giri, who was then the Acting President after the death of President Zakir Hussain, was going to demit office the next day. This was because he was contesting as a candidate in the upcoming Presidential elections.

Indira Gandhi announced her decision to the public through a radio broadcast in the evening. She stated that this decision was necessary for a larger social purpose, and was done to make banking facilities more accessible in rural areas. This was the first among many measures that Indira Gandhi undertook to facilitate greater State control over different sectors of the economy.

The events of 19^th July 1969 have an eerie resemblance with 8^th November 2016, when Narendra Modi shocked us all by announcing demonetization through a televised address. Akin to the bank nationalization decision, Modi’s Cabinet Ministers were informed about demonetization only in the Cabinet meeting that took place before the announcement. In fact, to prevent any leakage of information, the Cabinet Ministers were also prevented from bringing in their cellphones, and were not allowed to leave the meeting venue until Modi ended his television speech!

Be that as it may, there is one other common factor between demonetization and bank nationalization. Both were undertaken keeping in mind political considerations, along with other economic and social factors. In Indira Gandhi’s case, bank nationalization was a move that would establish her supremacy within the Congress, and prevent challengers like Morarji Desai from taking control of her party or Government. It is for precisely this reason that Morarji Desai was sacked as Finance Minister on 17^th July, which was two days prior to the promulgation of the bank nationalization ordinance.

The bank nationalization ordinance was severely criticized by other smaller political parties like the Swatantra Party and the Jan Sangh. They argued that bringing more than three-fourths of the banking sector under direct State control would cripple its growth in the long-run, and shall also lead to losses, corruption and red-tapism. While this was debated, preparations were already underway for challenging the ordinance before the Supreme Court. On Sunday, 20^th July 1969 (one day after the ordinance was promulgated), the legendary Nani Palkhivala took a flight to Delhi.

As Soli Sorabjee and Arvind Datar write in Nani Palkhivala: The Courtroom Genius, the writ petition to challenge the ordinance was drafted and finalized by Palkhivala a few hours after his arrival.[2] It was filed in the Supreme Court on Monday, 21^st July 1969, which was less than 48 hours after the ordinance had been promulgated. The petitioner before the Supreme Court was Rustom Cavasjee Cooper. 

R.C. Cooper was a Director and shareholder in the Central Bank of India. He was also a shareholder in Bank of Baroda and Bank of India Ltd. All of these 3 banks had been nationalized under the ordinance. The Supreme Court granted an interim order on Tuesday, 22^nd July, and restrained the Government from removing the Chairmen of all the banks which had been nationalized.

As the Supreme Court was seized of this petition, the ordinance was replaced by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969 (‘the Nationalization Act’) - which was passed in Parliament on 8^th August. The Supreme Court subsequently began hearing arguments on the unconstitutionality of the Nationalization Act, and the ordinance which preceded it. While Palkhivala advanced several arguments, let us briefly discuss two of his main arguments. Palkhivala first contended that the compensation that was being paid to erstwhile shareholders of the 14 banks was severely inadequate.

He argued that this was in violation of Article 31, under which the State had an obligation to pay full and adequate compensation while acquiring property. He also contended that the Nationalization Act violated Article 19(1)(f), which had conferred the right to acquire, hold and dispose off property. (Both Article 31 and 19(1)(f) were subsequently repealed through the 44^th Amendment in 1978).

Palkhivala’s other key argument was based on Article 14, where he contended that there was hostile discrimination against these 14 banks - as they were prevented from carrying on banking business after being nationalized. He argued that other banks which had not been nationalized were not subjected to this disqualification, and even foreign banks were allowed to carry on banking business.

After hearing arguments, the Court delivered its verdict on 10^th February 1970, which was less than 7 months after Indira Gandhi’s decision to promulgate an ordinance on a Saturday.[3] The majority opinion was delivered by Justice J.C. Shah. While Justice Shah upheld Parliament’s legislative power to nationalize banks as a whole, he concluded that the Nationalization Act failed to pass constitutional scrutiny.

He accepted Palkhivala’s argument on violation of Article 14, 19(1)(f) and 31. Significantly, the Court also overruled two principles laid down in A.K. Gopalan v. State of Madras (1950). In A.K. Gopalan, the majority led by Chief Justice Kania held that each fundamental right was mutually exclusive, and had to be looked at independently from other fundamental rights.

The majority also held that while determining whether a law violated any fundamental right under Part III of the Constitution, the Court would have to examine the object of the law, and not the effect that the law has on fundamental rights. Justice Fazal Ali did not agree with the majority, and took the view that every fundamental right is not a separate compartment, and that all fundamental rights are mutually interdependent. Justice Fazal Ali’s dissenting view was upheld 20 years later by the majority in R.C. Cooper.

The majority in R.C. Cooper overruled Chief Justice Kania’s view and conclusively held that fundamental rights were mutually interdependent, and not mutually exclusive. In other words, a law that was challenged as violative of 31 could also be violative of Article 19(1)(f), or Article 14, as none of these rights should be looked at as isolated compartments.

The majority also held that while examining whether a law violates fundamental rights, the Court shall have to scrutinize the effect that the law has on fundamental rights, and not the object that the State sought to achieve. Hence, two aspects of the Chief Justice Kania’s decision in A.K. Gopalan were overruled 20 years later, and the fundamental rights chapter was made permanently stronger.

This judgment laid down the foundation stone for Justice Bhagwati’s opinion in Maneka Gandhi v. Union of India,  where it was held that Article 14,19 and 21 formed a golden trinity, and that any law which is challenged under Article 21 should also meet the tests reasonableness under Article 14 and 19. This also paved the way for reading in unenumerated rights into Part III, such as the right to privacy and the right to food. Justice Fazal Ali’s dissent hence became the starting point for a more progressive interpretation of the fundamental rights chapter.

The decision in R.C. Cooper was however not unanimous. Justice A.N. Ray dissented from the majority and upheld the Nationalization Act. Ironically, three years later, Justice A.N. Ray was appointed as the Chief Justice of India by superseding Justices Shelat, Grover and Hegde, who were above him in the order of seniority. This was after Justice Ray held in favor of the Government in the Keshavananda Bharati case, and was the first instance where senior judges were superseded for the post of Chief Justice of India.

Following the decision in R.C. Cooper, the Central Government was forced to pass a fresh bank nationalization legislation in Parliament. This acquisition of the ownership of 14 banks has not been undone until today, despite severe criticism of the corruption and inefficiency that plagues the public sector banking system. Even the Modi Government does not seem to have any plan to undo all of the changes brought about in 1969, despite enjoying a majority in Parliament. Bank nationalization has hence effectively acquired a level of permanence in our economic polity.  

Another significant aspect to note here is the duration within which this judgment was delivered – which was less than seven months after Indira Gandhi decided to take the ordinance route. This can be contrasted with the situation we have in the Supreme Court as of today. The petitions challenging the constitutionality of the Citizenship Amendment Act, which was passed in December 2019, has not even been listed for a hearing. Even the challenge to the Article 370 amendment and the Jammu & Kashmir Reorganization Act, 2019 has met a similar fate, almost one year after they were passed in Parliament on 5^th August 2019.

While R.C. Cooper’s overruling of A.K. Gopalan still forms the pillar of our fundamental rights chapter, the speed and alacrity with which significant constitutional cases must be heard and adjudicated is another takeaway that we should remember. 

[1] Granville Austin, Working a Democratic Constitution: A History of the Indian Experience, Pg. 215.  

[2] Soli Sorabjee and Arvind Datar, Nani Palkhivala: The Courtroom Genius, Pg.60.

[3] The then Chief Justice of India, M Hidayatullah, could not be a part of the Bench as he was sworn in as the Acting President of India on 20^th July 1969. This was after V.V Giri demitted office as Acting President - to contest as a candidate in the upcoming Presidential elections.