CASE NO.: Appeal (civil) 3698 of 2006 PETITIONER: Ganesh Bank, Kurundwad Ltd. and Ors. RESPONDENT: The Union of India and Ors. DATE OF JUDGMENT: 28/08/2006 BENCH: ARIJIT PASAYAT & C.K. THAKKER JUDGMENT:
J U D G M E N T
(Arising out of SLP (C) No. 7188 of 2006)
ARIJIT PASAYAT, J.
Leave granted.
The present appeal is directed against the judgment and
order dated 5.4.2006 passed by a Division Bench of the
Bombay High Court in Writ Petition No.337/2006 questioning
Notification dated 7th January, 2006 issued by the
Government of India, Ministry of Finance imposing a
moratorium in respect of the appellant-Ganesh Bank of
Kurundwad Ltd. (hereinafter referred to as “Bank”) for a period
of three months from the date of order upto and inclusive of
6th April, 2006. Amongst others, the said Bank was directed
not to grant any loan or advances or incur liability without the
permission in writing of the Reserve Bank of India (in short the
‘RBI”). Further, withdrawal of sums not exceeding 5,000/- by
a Savings Bank or Current Account holder was permitted with
a further relaxation of amount not exceeding Rs.10,000/- or
the actual balance whichever is less in the event of certain
difficulties such as medical treatment, higher education and
obligatory expenses like marriage etc. Challenge was also
made to the appointment of two Directors on the Board of
Directors of the Bank.
Further Challenge was made to the Notification dated
9.1.2006 proposing a scheme of amalgamation of the Bank
with Federal Bank, another private sector commercial bank
and to the order dated 24.1.2006 sanctioning amalgamation of
Bank with Federal Bank.
It is to be noted that along with the said writ petition filed
by the Bank, another writ petition (WP(C) No. 160/2006) was
filed by one Mr. Sunil Mahadev Chavan.
The background facts in which the writ petitions were
filed are essentially as follows:
Appellant Bank was founded sometimes in the year 1920
and is having a banking license given by the RBI. It has some
32 branches situated principally in districts of Kolhapur and
Sangli of Maharashtra and the adjoining Belgaum District of
Karnataka. It has around 1,75,000 depositors in the rural
areas of these three districts.
It was carrying on its activities smoothly, and it incurred
losses only once and that was in the financial year 2004-05.
That was also for the reasons which were beyond its control,
viz (i) the value of the government securities, wherein it had
made deposits, went down, and (ii) the provisioning norms set
up by the RBI were made more stringent by it. It was on this
background that it was shocked to receive the order of
moratorium in the morning of 8th January, 2006. It led to
unnecessary long queue at its Dadar branch, Mumbai, though
there was no run on the bank any time in the past or even on
that day as such. Thereafter, the issuance of the moratorium
and the decision of the RBI to take further steps was duly
advertised. The RBI appointed two directors of its own on the
Board of Directors of the appellant-Bank on 7th January,
2006. The RBI then notified the proposed scheme of
amalgamating the appellant-Bank with the Federal Bank on
9th January, 2006. The appellant-Bank objected to it by filing
its objections on 23rd January, 2006, yet a decision was taken
by the RBI and the Central Government on 24th January, 2006
sanctioning amalgamation of the appellant-Bank with the
Federal Bank.
An interim order was passed by the High Court in
W.P.337/2006 by which operation of the order dated
24.6.2006 was stayed and status quo was directed to be
maintained. The order was challenged by the RBI and Federal
Bank before this Court.
By Order dated 30.1.2006 this Court directed that the
petitions were to be heard and decided early by the High
Court. However, the interim order was left undisturbed.
Before the High Court the principal submissions of the
writ petitioners were two-fold, namely that the order dated 7th
January, 2006 imposing moratorium and then the order dated
7th January, 2006 appointing two Directors are both mala fide
to suit the convenience of Federal Bank, ultra vires the power
of the RBI and the Central Government and, therefore, bad in
law, illegal and void. Similarly, the other submission of the
writ petitioners was that the subsequent framing of scheme of
amalgamation on 9th January, 2006 and the decision to
sanction the amalgamation taken on 24th January, 2006 are
motivated and pre-planned decisions for the benefit of the
Federal Bank, mala fide and ultra vires the powers of the
Central Government and the RBI. It was further submitted
that both these decisions are not justified on facts and have
been arrived at without taking into consideration the relevant
materials. As far as the first decision imposing the moratorium
is concerned, it was submitted that there were no good
reasons to impose the same and, as far as the decision to
amalgamate is concerned, it was submitted that the said
decision was arrived at without considering the proposals of
four other banks which were better placed and had made
better offers.
As against these submissions of the writ petitioners, the
stand of the RBI and the Central Government was that the
Bank was in serious financial difficulties and therefore, the
moratorium had to be imposed. The moratorium was fully
justified on the facts of the case. The decision to amalgamate
the appellant Bank with the Federal Bank was arrived at in
full compliance with the statutory requirements and after
considering relevant materials on record as well as the
suggestions and objections from the appellant-Bank and all
concerned, and after examining the proposals from the four
other banks. It was, therefore, submitted that there is no
reason to interfere with the decisions arrived at by the RBI and
the Central Government which essentially were for benefit of
the depositors. It was submitted that the interest of the
employees was taken care of and the interest of the
shareholders obviously came last.
According to the High Court the following two questions
were to be adjudicated:
“(A) Whether the decision dated 7th January,
2006 of the Central Government imposing
moratorium and to appoint two directors was
mala fide, ultra vires the powers of the Central
Government and the RBI, bad in law and void
and unjustified on facts?
(B) Whether the notification dated 9th
January, 2006 containing the proposed
scheme of amalgamation and the decision to
sanction the amalgamation dated 24th
January, 2006 were mala fide, ultra vires the
powers of the Central Government and the RBI
and unjustified on facts?”
Taking note of the factual background the High Court
held that the inference drawn by RBI was a positive inference
and cannot be termed to be perverse. The High Court felt that
it is the discretion of the decision maker where two views are
possible and if the regulatory body arrived at a conclusion on
the basis of facts and figures before it and points out that it
has been warning the Bank for last over three years it will not
be proper for the High Court to substitute its judgment for
that of the RBI. Therefore, it was held that the decision of the
RBI to impose the moratorium was neither unjustified nor
against the provisions of Section 45(1) of the Banking
Regulation Act, 1949 (in short the ‘Act’). It was noted that the
RBI is an expert body to regulate the banking activities and its
judgment based on the factual scenario cannot be substituted
by the High Court, may be because another view of the matter
was possible. The High Court held that the allegation of mala
fides was not substantiated. It was also of the view that while
dealing with the question of mala fides, the following questions
were also to be dealt with:
“(i) The first one is non-consideration of any
scheme for reconstruction before going for
amalgamation.
(ii) The second is with respect to proposing
amalgamation with Federal Bank on 9th
January, 2006 itself.
(iii) The third facet is not considering the
proposal of other banks.
(iv) The fourth is in respect to an adequate
opportunity under Section 45(6) and (7) of the
Act.”
After considering the rival submissions, the High Court
held that the allegations were mala fides and were not
established. Accordingly, the writ petitions were dismissed.
The stands taken before the High Court were re-iterated
by learned counsel appearing for the appellant and the
respondents.
Learned counsel for the appellants submitted that the
undue and unseemly haste with which the order of
moratorium dated 7.1.2006 was passed is a clear indication of
mala fides. Moreover, full and correct facts were not placed by
the RBI before the Central Government, in particular, facts
regarding bank balances with the RBI and other banks and
cash at hand amounting to Rs.36.62 crores were not placed
before the Central Government. Actual figure of those liquid
assets were Rs.119 crores as against total deposits of
Rs.217.43 crores which is 55% against required 25% as per
RBI norms. This was indicative of the bank’s strong liquidity
position. Total assets of the bank as on 31.3.2005 were
Rs.235.44 crores as against total liabilities of Rs.220.45
crores. Therefore, the assets were exceeding the liabilities by
Rs.14.99 crores. Even as on 31.12.2005, the assets were
exceeding the liabilities by Rs.17.70 crores. The net loss in the
year 2004-05 on which great stress was laid by the RBI and
the Central Government was on account of notional/book
entry loss with respect to additional provision for Non
Performing Assets (in short the ‘NPAs’) and depreciation in the
value of Government securities. In respect of Urban
Cooperative Banks, the RBI has relaxed provisional norms up
to 5 years in respect of depreciation in the value of
Government securities. However, the same was denied to the
Bank. Majority advances of the banks were given to the
priority sector namely Agricultural advances to which
Securitisation Act is not applicable. Therefore, relaxation was
necessary to be given. The RBI had granted permission to the
Bank to open three new Branches after being satisfied that the
Bank was in a sound financial position. Several awards were
given to the Bank for exercising banking services. There was
no complaint from any depositor, customer or shareholder and
the Bank has not defaulted in payment of taxes or other
government dues.
When objections were called for by the RBI regarding
amalgamation within a span of 15 days in January, 2006, out
of the total objections received by RBI, 97.49% of the
customers/depositors objected to moratorium and/or
amalgamation of the Bank and have opted for independent
entity of the Bank.
The factual scenario indicates that the proposal for
amalgamation with the Federal Bank was circulated and in a
pre-determined manner the proposal was ultimately approved
on 24.1.2006. The draft scheme of amalgamation was sent to
the Central Government to be operative w.e.f. 27.1.2006.
When the appellant-Bank approached the High Court on
24.1.2006 and the copy of the writ petition was served on the
RBI and the Central Government, the Notification of
amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself
so that it could be argued before the High Court that the
appellant Bank was no longer in existence on 25.1.2006. The
exercise of power under Section 45 of the Act was done solely
for the purpose of favoring the Federal Bank. Though Section
36(AB) of the Act empowers the RBI to appoint Additional
Directors there is no provision which empowers RBI to direct
that no decision of the Board of Directors would be valid
unless it is approved by the Directors appointed by the RBI.
The entire exercise was pre-conceived under the garb of
exercise of statutory authority. There was a systematic plan to
amalgamate the appellant-Bank with the Federal Bank. The
entire proceedings are thus vitiated by malice in law. The
rejection of the proposal of Saraswat Bank is vitiated on
account of misunderstanding of Section 56(zb) of the Act and
on account of a failure to consider the interest of shareholders
whose interest would continue to be of paramount importance.
On account of heavy floods there was temporary disruption of
banking activities and this aspect has not been considered.
The fact that Federal Banks’ Board Meeting was
preponed from 11.1.2006 to 8.1.2006 is a pointer to the fact
that they were very much in know of things to gain under
advantage.
The data given by the RBI relating to some other
amalgamation i.e. in cases of Global Trust Bank and Nedgundi
Bank have no relevance as in those cases there were large
scale complaints of fraud.
In response, learned counsel for the respondent No.4 i.e.
Federal Bank submitted as follows:
The procedure, process and yardsticks envisaged under
Section 45 of the Act for the amalgamation of a financially
unviable bank with a stronger bank, cannot be the same as
are applicable to a tender process. It is submitted that when
acting under Section 45 of the Act, the primary consideration
must be of public interest. Under the said provision, the RBI
has the statutory duty and responsibility to act swiftly and
decisively to protect interests of depositors and public
confidence in the banking system. In contrast, when awarding
a tender, it is primarily commercial considerations that must
be the selection process. It is, therefore, submitted that it is in
public interest not to interfere on commercial consideration
with a decision made under Section 45 so long as it
safeguards depositors’ interests and public confidence in the
banking system in an emergent situation.
The respondent No.4-Federal Bank is a financially strong
bank with high net worth, large capital funds and huge
amount of deposits with more than adequate capital to Risk
Weighted Assets Ratio (in short the ‘CRAR’). Its net worth is
about Rs.897 crores and its capital is about Rs.85 crores It
has deposits to the tune of Rs.16,448 crores and its CRAR at
11.34%, exceeds the Reserve Bank of India requirement of 9%.
It has a very low percentage of NPA with its Gross NPAs being
5.17% and Net NPA being 1.41%. As of 31st December, 2005
Federal Bank has recorded a profit of Rs.174.48 crores. The
contrast on each of these parameters with the appellant-Bank
is striking. On each parameter, the performance of the
appellant-Bank is abysmal in comparison to Federal Bank.
It is also pertinent to note that Section 45 of the Act does
not contemplate or require the consent of either the transferor
or the transferee bank, although both are given an opportunity
to lodge their objections/suggestions to the draft scheme,
before a final decision is taken.
It was submitted that Federal Bank was not privy to any
information from RBI regarding the status of the appellant-
Bank or any proposal to impose a moratorium at any time
prior to 7.1.2006 when for the first time the order of
moratorium and the RBI’s press release was placed on RBI’s
website.
It was also submitted that allegations of complicity based
on the advancement of the date of Federal Bank’s Board
Meeting from 11.1.2006 to 8.1.2006 are completely
unfounded. It was submitted that Federal Bank had indeed
vide its Notice dated 29.12.2005 originally scheduled the said
Board Meeting for 11.1.2006 at Kochi, but this date was found
to be inconvenient to several directors. Instead, 8.1.2006 was
found to be a more convenient date for the meeting, since
firstly many of the directors were congregating at Kochi for the
wedding of the son of one of Directors on that date, and
secondly, one other director, an NRI was scheduled to attend a
meeting at the PMO on 7.1.2006. The said director would also
have found it convenient to attend the Board Meeting, if it
were to be held on 8.1.2006. In view thereof, for bona fide
reasons and in good faith, the said Board meeting was
rescheduled for 8.1.2006 vide notice dated 4.1.2006.
Certain aspects which have been noted by the High Court
to dismiss the appellant’s writ petition need to be noted to
test how for the conclusions are correct.
The first is whether there were “good reasons” for the RBI
to apply to the Central Government for the moratorium which
led to the impugned order dated 24th January, 2006, the
concept of “good reasons” contemplated under Section and as
to how the RBI justifies its decision on the basis of the
yardstick applied by it. As far as the appellant bank is
concerned, its case is that it is a small commercial bank and
the only year in which it had made losses was for the financial
year 2004-05. That was because of the value of the
Government securities going down and the provisioning norms
being made more stringent by the RBI. According to the RBI’s
application to the Central Government, the net worth of the
petitioner bank had become negative and so also CRAR had
become negative and was at 5.83.
As against this stand of the RBI, it was pointed out on
behalf of the appellant-Bank that Annexure-I to RBI’s
application under Section 45(1) dated 4th January, 2006
contained the key financial positions of the Bank. Clause 8
thereof dealt with the NPAs. It was pointed that the net NPAs
had gone down from 10.59% to 8.32%. It was also pointed out
that the Bank had done good resource mobilization in the
meantime and its paid up capital had gone up from Rs.1.52
crore to Rs.1.82 crore.
In para 5 of the letter, the RBI wrote to the Additional
Secretary, Ministry of Finance that infusing fresh capital did
not appear to be feasible. There was reluctance on the part of
the shareholders and directors to merge with the stronger
Bank. It was therefore imperative to make immediate
arrangement to protect the interest of the depositors to merge
with another bank. It is for this purpose that the moratorium
was proposed under Section 45(1)
In the counter affidavit filed before the High Court, it was
stated on behalf of RBI that in June 1998, the Chairman of
the appellant Bank was advised that old private sector banks
having present net worth of Rs.5 lakhs should attain the level
of Rs.50 crores within a period of 3 years On 12th January,
1999, the appellant -Bank sent the plan to augment resources
up to Rs.20.08 crores over the period of 5 years. At on 31st
March, 2002 its net worth stood at only Rs.6.62 crores and its
paid up capital as on 31st March, 2005 was Rs.1.82 crore. It
was further stated that as per the Bank’s Balance Sheet as on
31st March, 2005, it had reported the net loss of Rs.5.97
crores. In view of the deteriorating financial position, further
meetings were held on 12th August, 2005, 26th August, 2005
and 12th September, 2005 to point out the major concerns of
RBI vis. low paid up capital of Rs.182 crore, high level of gross
NPAs (18.04%) and net loss of Rs.5.97 crores. On 14th October,
2005 the bank was asked to submit a detailed plan for capital
augmentation. It is on the background that the moratorium
was imposed on 7th January, 2006.
Appellants’ stand was that since deposits with the Bank
were Rs.92 crores, it was irrational to insist that it should
have capital funds of Rs.50 crores. It was however pointed out
that the Bank was consistently increased its capital and it
stood at Rs.2.95 crores by 5th January, 2006 which included
Rs.1.13 crore in the form of share application money. It was
nothing but a part of share capital. Again, as far as NPAs are
concerned, they had gone down from 14.10% to 9% and, as far
as loss of Rs.5.97 crores is concerned, it is because of the
change in the provisioning norms.
High Court noted that the Bank had paid up capital of
Rs.1.82 crores only, high gross NPAs at 18.04% and net loss of
Rs.3.97 crores. It was in these circumstances that the RBI had
to decide as to whether the depositors of the Bank required
any protection. RBI had been monitoring the financial position
of the Bank since June 1998 and since December 2003 the
Bank had been placed under monthly monitoring as provided
under Section 27 of the Act. According to High Court,
expression “good reasons” under Section 45(1), primarily
relates to interest of the depositors and the interest of the
Bank. This is because the primary objective of the Act is
protection of the interest of depositors as against the primary
objective of the Company Law which is to safeguard the
interest of shareholders. This is what is specifically stated in
the Objects and Reasons of the Act. On these facts, the RBI
was of the view that an appropriate action was necessary. It
could not be said that the decision was lacking in the absence
of good reasons. It is difficult to say that it was taken for the
benefit of the Federal Bank since these reasons go back to
December 2003 when Federal Bank was not in picture.
It has been submitted that a small bank like the
appellant cannot be expected to have the Capital Adequacy of
Rs.50 crores as advised in June 1998 and which was later on
revised to Rs.300 crores by circular dated 20th February
2004. Reference is made to Section 11(3)(i) of the Act which
provides that if a banking company has places of its business
in more than one State, it is required to have the aggregate
value of its paid-up capital and reserves at not less than Rs.5
lakhs. If that is the expectation, the RBI cannot insist on the
requirement of Rs.50 crores and then go on increasing it
further. Reliance is placed on the decision of this Court in
Assam Co. Ltd. v. State of Assam (2001 (4) SCC 202), which
lays down that a delegate cannot over-ride the Act either by
exceeding the authority or by making provision which is
inconsistent with the Act. On the other hand, stand of RBI is
that the language of Section 11(3)(i) is that in the case of such
a banking company, the aggregate value of paid-up capital and
reserves shall not be less than Rs.5 lakhs. Therefore,
insistence of Rs.50 crores or a higher amount cannot be said
to be erroneous. With globalisation, finance and banking in
rural areas also have to improve and it is from that point of
view that the RBI had expected the above referred
enhancement. That was expected from all similarly situated
banks and not merely from the appellant-Bank alone.
Reference is made to the expectations under the Basle
Committee on Banking Supervision, 1988 and the first
Narasimham Committee Report on Financial System, 1991
which recommended on the basis of the Basle Committee that
India also must conform to the international standards of
capital adequacy in a phased manner. Second Narsimham
Committee Report on Banking Sector Reforms of 1998 led RBI
to issue guidelines to revise the minimum paid-up capital for
the private sector banks.
The actual scenario shows that when the paid-up capital
of the Bank is so low, namely Rs.1.82 crore, its gross NPAs are
at higher level (8.04%), its net worth had turned negative and
the net loss is Rs.5.97 crores. There was nothing wrong on the
part of the RBI to expect an appropriate plan of capital
augmentation. The Bank has not been able to do that and it
was quite likely that it would land into difficulties.
The phrase “good reasons” in sub-section (1) of Section
45 is a term of wide amplitude and it will not be correct to
restrict it only to the actions mentioned under sub-section (2)
of Section 45 of the Act as is contended by the appellant. The
provision is concerned with preparing a scheme of
reconstruction or amalgamation which would become
necessary where the RBI is satisfied about the existence of
any of the four grounds mentioned in Section 45(4). Apart
from public interest and the interest of the banking system,
which are provided in sub-clause (a) and (d) thereof, Section
45(4) provides for the necessary action in the interest of the
depositors or with a view to secure proper management of the
bank which are grounds (b) and (c) in that sub-section.
Precursor to the framing of the scheme is the imposition of the
moratorium which is provided in sub-sections (1) and (2) of
Section 45. Existence of court proceedings, mentioned in
section 45(2), would certainly be one of the good reasons to
impose moratorium, but that certainly cannot be the only one.
Considering that object of the Act is protection of the interest
of the depositors, such an interpretation of the concept of
“good reasons” will have to be adopted, and not a narrow one.
It has been contended that there was a negative impact
when moratorium was imposed, and there were long queues at
four branches of the appellant Bank on 8th January 2006.
The RBI arranged to send an amount of Rs.2 crores to the
Bank from its Current Account to meet the depositors’
demands. The manager of the Appellant Bank’s branch at
Dadar has made an affidavit to state that he had not asked for
an amount of Rs.2 crores and yet it was sent by RBI. The
branch manager has further stated that depositors were
unhappy with the decision of RBI. These are all disputed
questions as rightly noted by the High Court. As far as the
views of the depositors are concerned, they are bound to vary
from person to person and no definite conclusion can be
drawn merely on the bank manager’s affidavit that people were
angry against RBI. Besides, no depositor has questioned
legality of the action. It can be said that the action of the RBI
is a pre-emptive action which it took considering the then
financial position of the appellant Bank and to prevent further
difficulties which were likely. It is not that when there is a run
on the bank then only RBI must intervene or that it must
intervene only when there are good number of court
proceedings against the concerned bank. The RBI has to take
into account the totality of the circumstances and has to form
its opinion accordingly.
The ultimate question is whether the inference drawn by
the RBI is a possible inference or is something which can be
said to be a perverse one. Even if two views are possible since
the regulating body has arrived at a conclusion on the basis of
the facts and figures before it, and it has pointed out that it
has been warning the appellant Bank for last over 3 years, it
will not be proper for the Courts to substitute their judgment
for that of RBI. In the circumstances, it cannot hold that the
decision of RBI to impose the moratorium was unjustified or
against the provisions of section 45(1) or such that one can
call it a perverse one and interfere with it. The RBI is an expert
body to regulate the banking activities. The moratorium has
been challenged on the ground of malafides also. This
challenge along with the challenge to amalgamation also on
the basis of malafides needs to be considered.
As far as the challenge to the appointment of two
directors on the Board of Directors of the appellant Bank is
concerned, the RBI has the necessary power under Section
36AB of the Act. In the circumstances, it cannot be faulted for
appointing the two directors.
That brings into focus the question as to whether the
decision of RBI to recommend a scheme for amalgamation on
9th January 2006 and the decision of the Government to
sanction the amalgamation on 24th January 2006 could be
said to be mala fide or bad in law. As far as this question is
concerned, it contains many sub-questions which are as
follows:-
(i) The first one is non-consideration of any
scheme for reconstruction before going for
amalgamation.
(ii) The second is with respect to proposing
amalgamation with Federal Bank on 9th
January 2006 itself.
(iii) The third facet is not considering the
proposal of four other banks.
(iv) The fourth is with respect to an adequate
opportunity under Section 45(6) and (7) of the
Act.
Now, as far as the first two questions of non-
consideration of reconstruction and proposing merger with
Federal Bank, the RBI has noted that the Bank was in
difficulties from 1990 and particularly from December 2003
when it was placed under monthly monitoring. RBI in its
application for moratorium to the Central Government dated
4th January 2006 had clearly stated that during the
discussion with the appellant-Bank, major shareholders and
directors had shown total reluctance to merge into the
stronger bank. In view thereof, it was imperative that
immediate arrangement to protect the interest of the
depositors was to be made through its merger with a bank
under Section 45 of the Act. RBI had, therefore, made an effort
and called upon the appellant-Bank, that if possible, to
explore the possibility of merger with another stronger bank. It
had also made an effort to impress that there should be
infusion of fresh capital. That was not coming. There could be
a reconstruction by bringing in more money or by narrowing
the size of the appellant-Bank which did not appear to be
feasible. The only option left was that of amalgamation.
When a moratorium is imposed, RBI was duty bound to
prepare a scheme either of reconstruction or of amalgamation
under Section 45(4) with any other banking institution. Thus,
RBI had to give a scheme. Federal Bank had responded
immediately and unconditionally. The fact that the appellant-
Bank was put under moratorium was advertised on web site
on 7th January 2006 itself. It is at that stage that Federal
Bank promptly gave its proposal on 8th January 2006. The
Federal Bank gave three reasons in its letter to RBI which were
as follows:-
(i) Ganesh Bank of Kurundwad Ltd. has 32
branches situated in Western Maharashtra
and Belgaum area of Karanataka. Our
presence in this area is very minimal and
adding up of the branches of Ganesh Bank of
Kurundwad Ltd. will enable us to have
significant presence in the area.
(ii) Ganesh Bank of Kurundwad Ltd. has mot
of the branches in the agricultural heartland
which would enable us to augment our credit
disbursal to agricultural sector.
(iii). Small size of Ganesh Bank of Kurundwad
Ltd. ensures that there will not be any
difficulty in the merger process between our
bank and them.
Thereafter it stated as follows:-
We also inform our unconditional acceptance
to make full payment to depositors and that we
will not demand any regulatory forbearance.”
Thus, the Federal Bank was ready to honour full
liabilities of the depositors and did not ask for any
concessions. Therefore, on the basis of a standard scheme, the
opinion of the appellant-Bank was sought on 9th January
2006 with respect to merger in Federal Bank. The scheme was
described as a “cut and paste scheme” and of RBI’s action as a
regulator in the interest of the depositors was highlighted.
It appears that the action of the RBI was based on the
finding about the negative net worth and CRAR of the
Appellant-Bank, its inability to infuse fresh capital and the
continued existence of a high level of NPAs. It has been rightly
pointed out that once it was decided to amalgamate by reason
of Section 45 of the Act, the RBI had to move with utmost
expedition. This is of paramount importance to prevent erosion
of the confidence of the depositors. Once such confidence is
lost it becomes difficult to revive the confidence and the
credibility.
This Court had occasion to deal with need for expedition
in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and
Ors. (1962 (Supp.) 3 SCR 632) and Reserve Bank of India and
Ors. v. Timex Finance and Investment Co. Ltd. and Ors. (1992
(2) SCC 344). It is not in dispute that there were long queues
and on 8.1.2006 the one branch of the appellant-Bank
actually faced cash shortage and had to draw its funds with
the RBI protecting the interest of the depositors because
during such period there are severe restrictions on the ability
of the depositors to operate their bank accounts. Therefore,
with a view to protect the interest of the depositors, the RBI
has to act expeditiously to identify another bank prepared to
take over the appellant-Bank and keeping in view the
background principles governing merger and amalgamation
RBI had to act with expedition. The factual scenario does not
show that there was any undue haste or mala fides involved.
Under Section 45 of the Act, the primary consideration is
public interest. There is an underlying object of acting swiftly
and decisively to protest interests of depositors and ensure
public confidence in the banking system. The emergent
situation which warrants action with expedition cannot be lost
sight of while deciding the legality of the action.
It is brought on record that Federal Banks’ strength lay
on the fact that it is a strong bank with huge net worth, large
capital funds and huge amount of deposits with more than
adequate CRAR. Its net worth is about Rs.897 crores, capital
is around Rs.85 crores, and deposits to the tune of Rs.16,448
crores. Its CRAR (11.34%) exceeds the RBI requirement (9%)
and percentage of NPAs (Gross and Net) is (5.17% and 1.41%
respectively). For the accounting period ending 31st December,
2005 its profit is Rs.174 Crores.
As observed by this Court in Bari Doab Bank Ltd. v.
Union of India and Ors. (1997 (6) SCC 417) the provisions of
Section 45 of the Act provide adequate opportunity of a
representation and no additional opportunity is required to be
given. The objection filed by the appellant-Bank was duly
considered. In fact, certain objections were raised and
comments of the RBI on them were forwarded to the Central
Government along with the final recommendations. The RBI
was of the view that the proposal received from the Federal
Bank was best under the circumstances and, therefore, the
same appears to have been accepted.
At this juncture it is to be noted that offer of Federal
Bank was an unconditional offer, whereby it proposed to take
over the responsibility of any regulatory forbearance. Three
reasons given by the Federal Bank to take over the appellant’s
Bank were considered cogent reasons and, therefore, RBI’s
decision cannot be faulted. As rightly contended the offers
received from the City Bank, Standard Chartered Bank were
neither comprehensive nor unconditional. In fact, they were
not concluded offers, since they were both dependent upon a
request for due diligence and in certain instances regulatory
forbearances. Ratnakar Bank’s offer was not accepted as it
was itself an ailing bank.
Learned counsel for the appellants has highlighted that
Sarastwat Bank’s offer was an equally good offer if not better
and should have been accepted. It has been pointed out by
learned counsel for the respondents that Saraswat Bank is a
Multi State Co-operative Bank and its functioning is governed
by Multi State Cooperative Societies Act, 2002 (in short ‘2002
Act’). The legal opinion available to the RBI was that it was not
feasible or permissible to amalgamate a commercial bank with
a cooperative Bank by reason of the provisions of the Act as
well as 2002 Act. The RBI was of the view that such
amalgamation is not possible under Sections 17 and 18 of the
2002 Act as also Section 56 (zb) of the Act. It was pointed out
that Saraswat Bank cannot be considered to be a banking
company for the purpose of Section 45(4) to 45(15) of the Act.
In order to be a banking company within the meaning of the
Act, the entity in question must be a company. Section 56(zb)
of the Act excludes the applicability of Section 45(4) to 45(15)
so far as cooperative banks are concerned. It was pointed out
that even if it is conceded for the sake of argument that legally
amalgamation is permissible it could have taken a very long
time to get requisite clearance from several other agencies
under the 2002 Act and could not have gone through
expeditiously. It is also pointed out that an amalgamation of
Multi State Cooperative Bank is subject to far less regulatory
control of the RBI especially in relation to non banking
matters. There is no dispute that the application made by
Saraswat Bank was duly considered by the RBI.
The scope of Judicial review in administrative matters
has been the subject matter of consideration before this Court
in several cases.
There should be judicial restraint while making judicial
review in administrative matters. Where irrelevant aspects
have been eschewed from consideration and no relevant aspect
has been ignored and the administrative decisions have nexus
with the facts on record, there is no scope for interference.
The duty of the court is (a) to confine itself to the question of
legality; (b) to decide whether the decision making authority
exceeded its powers (c) committed an error of law (d)
committed breach of the rules of natural justice and (e)
reached a decision which no reasonable Tribunal would have
reached or (f) abused its powers. Administrative action is
subject to control by judicial review in the following manner:
(i) Illegality: This means the decision-
maker must understand correctly the
law that regulates his decision-making
power and must give effect to it.
(ii) Irrationality, namely, Wednesbury
unreasonableness.
(iii) Procedural impropriety.
One of the points that falls for determination is the scope
for judicial interference in matters of administrative decisions.
Administrative action is stated to be referable to broad area of
Governmental activities in which the repositories of power may
exercise every class of statutory function of executive, quasi-
legislative and quasi-judicial nature. It is trite law that
exercise of power, whether legislative or administrative, will be
set aside if there is manifest error in the exercise of such
power or the exercise of the power is manifestly arbitrary (See
State of U.P. and Ors. v. Renusagar Power Co. and Ors. (AIR
1988 SC 1737). At one time, the traditional view in England
was that the executive was not answerable where its action
was attributable to the exercise of prerogative power. Professor
De Smith in his classical work “Judicial Review of
Administrative Action” 4th Edition at pages 285-287 states the
legal position in his own terse language that the relevant
principles formulated by the Courts may be broadly
summarized as follows. The authority in which discretion is
vested can be compelled to exercise that discretion, but not to
exercise it in any particular manner. In general, discretion
must be exercised only by the authority to which it is
committed. That authority must genuinely address itself to the
matter before it; it must not act under the dictates of another
body or disable itself from exercising discretion in each
individual case. In the purported exercise of its discretion, it
must not do what it has been forbidden to do, nor must it do
what it has not been authorized to do. It must act in good
faith, must have regard to all relevant considerations and
must not be influenced by irrelevant considerations, must not
seek to promote purposes alien to the letter or to the spirit of
the legislation that gives it power to act, and must not act
arbitrarily or capriciously. These several principles can
conveniently be grouped in two main categories: (i) failure to
exercise a discretion, and (ii) excess or abuse of discretionary
power. The two classes are not, however, mutually exclusive.
Thus, discretion may be improperly fettered because irrelevant
considerations have been taken into account, and where an
authority hands over its discretion to another body it acts
ultra vires.
The present trend of judicial opinion is to restrict the
doctrine of immunity from judicial review to those classes of
cases which relate to deployment of troupes, entering into
international treaties, etc. The distinctive features of some of
these recent cases signify the willingness of the Courts to
assert their power to scrutinize the factual basis upon which
discretionary powers have been exercised. One can
conveniently classify under three heads the grounds on which
administrative action is subject to control by judicial review.
The first ground is ‘illegality’ the second ‘irrationality’, and the
third ‘procedural impropriety’. These principles were
highlighted by Lord Diplock in Council of Civil Service Unions
v. Minister for the Civil Service (1984 (3) All.ER.935),
(commonly known as CCSU Case). If the power has been
exercised on a non-consideration or non-application of mind to
relevant factors, the exercise of power will be regarded as
manifestly erroneous. If a power (whether legislative or
administrative) is exercised on the basis of facts which do not
exist and which are patently erroneous, such exercise of power
will stand vitiated. (See commissioner of Income-tax v.
Mahindra and Mahindra Ltd. (AIR 1984 SC 1182) . The effect
of several decisions on the question of jurisdiction has been
summed up by Grahame Aldous and John Alder in their book
“Applications for Judicial Review, Law and Practice” thus:
“There is a general presumption against
ousting the jurisdiction of the courts, so that
statutory provisions which purport to exclude
judicial review are construed restrictively.
There are, however, certain areas of
governmental activity, national security being
the paradig, which the courts regard
themselves as incompetent to investigate,
beyond an initial decision as to whether the
government’s claim is bona fide. In this kind of
non-justiciable area judicial review is not
entirely excluded, but very limited. It has also
been said that powers conferred by the Royal
Prerogative are inherently unreviewable but
since the speeches of the House of Lords in
council of civil Service Unions v. Minister for
the civil Service this is doubtful. Lords
Diplock, Scaman and. Roskili appeared to
agree that there is no general distinction
between powers, based upon whether their
source is statutory or prerogative but that
judicial review can be limited by the subject
matter of a particular power, in that case
national security. May prerogative powers are
in fact concerned with sensitive, non-
justiciable areas, for example, foreign affairs,
but some are reviewable in principle, including
the prerogatives relating to the civil service
where national security is not involved.
Another nonjusticiable power is the Attorney
General’s prerogative to decide whether to
institute legal proceedings on behalf of the
public interest.”
(Also see Padfield v. Minister of Agriculture, Fisheries and
Food (LR (1968) AC 997).
The court will be slow to interfere in such matters
relating to administrative functions unless decision is tainted
by any vulnerability enumerated above; like illegality,
irrationality and procedural impropriety. Whether action falls
within any of the categories has to be established. Mere
assertion in that regard would not be sufficient.
The famous case commonly known as “The Wednesbury’s
case” is treated as the landmark so far as laying down various
basic principles relating to judicial review of administrative or
statutory direction.
Before summarizing the substance of the principles laid
down therein we shall refer to the passage from the judgment
of Lord Greene in Associated Provincial Picture Houses Ltd. v.
Wednesbury Corpn. (KB at p. 229: All ER p. 682). It reads as
follows:
“It is true that discretion must be
exercised reasonably. Now what does that
mean? Lawyers familiar with the phraseology
used in relation to exercise of statutory
discretions often use the word ‘unreasonable’
in a rather comprehensive sense. It has
frequently been used and is frequently used as
a general description of the things that must
not be done. For instance, a person entrusted
with a discretion must, so to speak, direct
himself properly in law. He must call his own
attention to the matters which he is bound to
consider. He must exclude from his
consideration matters which are irrelevant to
what he has to consider. If he does not obey
those rules, he may truly be said, and often is
said, to be acting ‘unreasonably’ . Similarly,
there may be something so absurd that no
sensible person could even dream that it lay
within the powers the authority. . . . In
another, it is taking into consideration
extraneous matters. It is unreasonable that it
might almost be described as being done in
bad faith; and in fact, all these things run into
one another.”
Lord Greene also observed (KB p.230: All ER p.683)
“..it must be proved to be unreasonable
in the sense that the court considers it to be a
decision that no reasonable body can come to.
It is not what the court considers
unreasonable The effect of the legislation is not
to set up the court as an arbiter of the
correctness of one view over another.”
(emphasis supplied)
Therefore, to arrive at a decision on “reasonableness” the
Court has to find out if the administrator has left out relevant
factors or taken into account irrelevant factors. The decision of
the administrator must have been within the four corners of
the law, and not one which no sensible person could have
reasonably arrived at, having regard to the above principles,
and must have been a bona fide one. The decision could be
one of many choices open to the authority but it was for that
authority to decide upon the choice and not for the Court to
substitute its view.
The principles of judicial review of administrative action
were further summarized in 1985 by Lord Diplock in CCSU
case as illegality, procedural impropriety and irrationality. He
said more grounds could in future become available, including
the doctrine of proportionality which was a principle followed
by certain other members of the European Economic
Community. Lord Diplock observed in that case as follows:
“.Judicial review has I think,
developed to a stage today when, without
reiterating any analysis of the steps by which
the development has come about, one can
conveniently classify under three heads the
grounds on which administrative action is
subject to control by judicial review. The first
ground I would call ‘illegality’, the second
‘irrationality’ and the third ‘procedural
impropriety’. That is not to say that further
development on a casebycase basis may
not in course of time add further grounds. I
have in mind particularly the possible
adoption in the future of the principle of
‘proportionality’ which is recognized in the
administrative law of several of our fellow
members of the European Economic
Community.”
Lord Diplock explained “irrationality” as follows:
“By ‘irrationality’ I mean what can by now
be succinctly referred to as Wednesbury
unreasonableness’. It applies to a decision
which is to outrageous in its defiance of logic
or of accepted moral standards that no
sensible person who had applied his mind to
the question to be decided could have arrived
at it.”
In other words, to characterize a decision of the
administrator as “irrational” the Court has to hold, on
material, that it is a decision “so outrageous” as to be in total
defiance of logic or moral standards. Adoption of
“proportionality” into administrative law was left for the future.
These principles have been noted in aforesaid terms in
Union of India and Anr. v. C. Ganayutham (1997 [7] SCC 463).
In essence, the test is to see whether there is any infirmity in
the decision making process and not in the decision itself. (See
Indian Railways Construction Co. Ltd. v. Ajay Kumar (2003 (4)
SCC 579).
Looked at from the aforesaid angle, the judgment of the
High Court does not suffer from any infirmity to warrant
interference. The appeal is dismissed.