Introduction:
Nationalization is the process of taking a private industry or private assets into public ownership by a national government or state, that is., taking over of privately owned corporations, industries, and resources by a government with or without compensation. Common reasons for nationalization include
· prevention of unfair exploitation and large-scale labour layoffs,
· fair distribution of income from national resources,
· to keep means of generating wealth in public control.
Why Banks were nationalized in India?
After independence, India adopted a socialist pattern of society as its goal. This means, in non-technical language, a society with wealth distributed as equitably as possible without making the Country a totalitarian State. The goal is purported to be achieved through democratic processes. With this aim in view, a mixed pattern of panning is evolved. The two sectors, private and public, are allowed in function independently of each other. The public sector is wholly owned and controlled by the Government. The private sector is regulated through a system of regulations, licenses, controls and legislative acts. The public sector is made to grow by nationalisation of industries and institutions.
The banking institutions are the custodians of private savings and a powerful instrument to provide credit. They mobilise the resources of the country by accepting deposits and channelize them for industrial and national development by granting advances. In 1955, the Imperial Bank of India was nationalised and its undertaking was taken over by the State Bank of India. As regards the scheduled banks, there were complaints that Indian commercial banks were directing their advances to the large and medium scale industries and big business houses and that the sectors demanding priority such as agriculture, small-scale industries and exports were not receiving their due share. This was one of the chief reasons for the imposition of school control by amending the Banking Regulation Act with effect from 1-2-1969.[1]
Although steps had been taken in January, 1969, by amending the Banking Regulation Act, for the purposes of imposing “social control” with a view to remedy the basic weaknesses of the Indian banking system and to ensure that banks would cater to the needs of the hitherto neglected and weaker sections of the community instead of big businesses and those connected with them, it was felt that the imposition of “social control” had not changed the position very much and there were complaints that the Indian commercial banks continued to direct their advances to large and medium scale industries and that sectors demanding priority such as agriculture, small – scale industries and imports were not receiving the attention due to them of the banks.
On 19th July, 1969 fourteen major banks viz., The Central Bank of India Ltd., The Bank of India Ltd., The Punjab National Bank Ltd., The Bank of Baroda Ltd., The United Commercial Bank Ltd., Canara Bank Ltd., United Bank of India Ltd., Dena Bank Ltd., Syndicate Bank Ltd., The Union Bank of India Ltd., Allahabad Bank Ltd., The Indian Bank Ltd., The Bank of Maharashtra Ltd., The Indian Overseas Bank Ltd., each having deposits of more than Rs. 50 crores and having between themselves aggregate deposits of Rs. 2,632 crores with 4,130 branches were nationalized and taken over. The nationalisation of the commercial banks was a “revolution” in the Indian banking system. This “revolution” did not merely signify a change of the ownership of these banks but it was the beginning of a co-ordinated endeavour to use an important part of the financial mechanism for the country’s economic development.
Therefore, the Government of India issued an ordinance “Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969” and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India.
Arguments for nationalisation of banks:
The reason for the sudden step was stated officially to be that “public ownership of the major banks will help most effectively the mobilization and development of national resources and its utilization for productive purposes in accordance with the plans and priorities.” The ordinance adopted expressly said that “in order to serve better the needs of development of the economy in conformity with the national policy and objectives.”
The purpose is to expand bank credit to priority areas which have hitherto been somewhat neglected. It also includes,
(i) The removal of control by a few,
(ii) Provision of adequate credit facilities to agriculture, small industry and exports,
(iii) The giving of professional bent to bank management,
(iv) The encouragement of new classes of entrepreneurs, and
(v) The provision of adequate training as well as reasonable terms of service for bank staff
· Efficiency issue:
Nationalisation will increase the efficiency of commercial banks as given below
(i) Deposits will increase because of increasing confidence in public sector bank. Increase in bank resources will lead to economics of scale.
(ii) The government can appoint experienced personnel to run and manage the banks.
(iii) Govt. has the countrywide administrative network. Hence, it can make suitable changes in the banking policies according to the prevailing trends in the economy.
(iv) Nationalised banks can have the main motive of public service.
(v) Public sector banks can give preference to priority sectors in advancing loans. Thus, nationalisation promotes efficiency.
· Integration issue:
Central Banks are established by the Govt, for overall monetary control in the economy and is not aiming at profit. But commercial banks are started mainly to earn profit. Thus, there are contradicting objectives between Central Bank and commercial banks.
In this situation, the Central Bank may find it difficult to implement its policies when the commercial banks oppose them. Therefore, in the interest of co-ordination and cooperation between them, commercial banks should be nationalised.
· Socialisation issue:
When a country aims at socialistic pattern of society, then the role of public sector undertaking should be extended in all spheres of the economy. To start and run the public sector undertaking Govt. requires enormous financial requirements.
Private commercial banks may obstruct such policies and may not finance public sector undertakings and above all they may discriminate against them. Therefore, the nationalisation of commercial banks will be necessary if the government wants to establish socialism.
Initially, a few leading industrial and business houses had close association with commercial banks. The directors of these banks happened to be the same industrialists who established monopoly control on the bank finance.
They exploited the bank resources in such a way that the new business units cannot enter in any line of business in competition with these business houses. Nationalisation of banks, thus, prevents the spread of the monopoly enterprise.
· Help to agriculture:
If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country like India where more than 70% of the population depends upon agriculture. Thus, for providing increased finance to agriculture banks have to be nationalised.
· Balanced Regional development:
In a country, certain areas remained backward for lack of financial resource and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced inter-regional development and remove regional disparities.
· Greater control by the Reserve Bank:
In a developing country like India there is need for exercising strict control over credit created by banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring about co-ordinated credit control. This necessitated the nationalisation of banks.
· Greater Stability of banking structure:
Nationalised banks are sure to command more confidence with the customers about the safety of their deposits. Besides this, the planned development of nationalised banks will impart greater stability for the banking structure.
Arguments against Nationalisation:
The various criticisms against nationalisation of banks can be summarised as follows:
· Political purpose rather than for Productive purpose:
The government has acquired the strength of a giant and there is the danger of using the financial resources for political purposes rather than for productive purpose.
· Beginning of state capitalism:
Such a drastic step of nationalisation of about 90% of the banking resources is wholly unnecessary, especially if we take into consideration the enormous powers vested in the Reserve Bank of India for controlling banks' resources.
It is considered as the beginning of state capitalism and not socialism in India.
· Scope for inefficiency:
Some are of the opinion that after nationalisation banks will degenerate to the level of agricultural co-operatives, which are known for their inefficiency and corrupt practices. Some fear that the officers who manage these big banks also have to bow down to the politicians in course of time.
· India's prestige abroad:
The political prestige of India in foreign countries was damaged by this act of nationalisation. Doubts are expressed especially in countries which are rendering large-scale financial assistance to India, about the assurances and promises given by the government with regard to freedom of foreign enterprise in India. This may adversely affect the foreign assistance which India was receiving then.
· Less attractive customer's service:
The nationalised banks are sure to join the ranks of other public undertakings which are known for their working to losses. Inefficiency, indecision, corruption, and lack of responsibility are the evils with which the government undertakings are suffering. A government bank may not care to attach importance to the customer service.
· Secrecy of customer's accounts:
In spite of the assurances given and provisions made in the Act, businessmen still fear about the maintenance of the secrecy of the customer's accounts. As such, they may be forced to withdraw their deposits and go to some bank in the private sector and foreign banks. Thus nationalisation of big Indian banks .will diverts some of the deposits of Indian banks to the foreign banks which is not at all desirable.
· Industry and trade may suffer:
Diversion of large sums of finances from the industry and trade to agricultural is sure to starve the large-sized industries and business for finance. We cannot ignore the fact that the big industries and business are providing employment to millions of people and largely contributing to the production of wealth. To starve them for finance simply because they are 'big' will be upsetting the job opportunities and production in these concerns.
R C Cooper Vs Union of India[2]
Facts:-
The petitioner holds shares in the Central Bank of India Ltd., the Bank of Baroda Ltd., the Union Bank of India Ltd., and the Bank of India Ltd., and has accounts-current and fixed deposit -with those Banks. He is also a director of the Central Bank of India Ltd. The petitioner claims a declaration that the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 8 of 1969 promulgated on July 19, 1969, and the Banking Companies (Acquisition and Transfer of Undertakings) Act 22 of 1969 which replaced the Ordinance with certain modifications impair his rights guaranteed under Arts. 14, 19 and 31 of the Constitution, and are on that account invalid.
In India there was till 1949 no comprehensive legislation governing banking business and banking institutions. The Central Legislature enacted the Banking Companies Act 10 of 1949 (later called "The Banking Regulation Act") to consolidate and amend the law relating to certain matters concerning banking.
There were in June 1969 14 commercial banks operating in India each having deposits exceeding Rs. 50 crores. Late in the afternoon of July 19, 1969 (which was a Saturday) the Vice-President (acting as President) promulgated, in exercise of the power conferred by cl. (1) of Art. 123 of the Constitution, Ordinance 8 of 1969 transferring to and vesting the undertaking of 14 named commercial banks in corresponding new banks set up under the Ordinance. The long little of the Ordinance read as follows "An Ordinance to provide for the acquisition and transfer of the undertakings of certain banking companies in order to serve better the needs of development of the economy in conformity with national policy and objectives and for matters connected therewith or incidental thereto." By S. 2 "banking company" was defined as not including a foreign company within the meaning of S. 591 of the Companies Act, 1956. An "existing bank" was defined by s. 2(b) as meaning " a banking company specified in column 1 of the First Schedule, being a company the deposits of which, as shown in the return as on the last Friday of June, 1969, furnished to the Reserve Bank under section 27 of the Banking Regulation Act, 1949, were not less than rupees fifty crores". In the Schedule to the Act were included the names of fourteen commercial banks which included The Central Bank of India Ltd., The Bank of India Ltd., The Punjab National Bank Ltd., The Bank of Baroda Ltd., The United Commercial Bank Ltd., Canara Bank Ltd., United Bank of India Ltd., Dena Bank Ltd., Syndicate Bank Ltd., The Union Bank of India Ltd., Allahabad Bank Ltd., The Indian Bank Ltd., The Bank of Maharashtra Ltd., The Indian Overseas Bank Ltd.
These banks are hereinafter referred to as the named banks. A "corresponding new bank" was defined in relation to an existing bank as meaning "the body corporate specified against such bank in column 2 of the First Schedule". By s. 2 (g) it was provided that the words and expressions used in the Ordinance and not defined, but defined in the Banking Regulation Act, 1949, had the meaning respectively assigned to them in that Act. Thereby the definitions of "banking" and "banking company" in s. 5 (b) and s. 5 (c) of the Banking Regulation Act were incorporated into the Ordinance. The principal provisions of the Ordinance were (1) Corporations styled in the ordinance "corresponding new banks" shall be established, each such corporation having paid up capital equal to the paid-up capital of the named bank in relation to which it is a corresponding new bank. The entire capital of the new bank shall stand vested in the Central Government. The corresponding new banks shall be authorised to carry on and transact the business of banking as defined in cl. (b) of s. 5 of the Banking Regulation Act, 1949, and also to engage in one or more forms of business specified in sub-s. (1) of s. 6 of that Act. The Chairman of the named bank holding office immediately before the commencement of the Ordinance; shall be the Custodian of the corresponding new bank. The general superintendence and direction of the affairs and business of a corresponding bank shall be vested in the Custodian, who shall be the chief executive officer of that bank.
The undertaking within or without India of every named bank on the commencement of the Ordinance shall stand transferred to and vested in the corresponding new bank. The expression "undertaking" shall include all assets, rights, powers, authorities and privileges, and all property, movable and immovable, cash balances, reserve fund investments and all other rights and interests arising out of such property as are immediately before the commencement of the Ordinance in the ownership, possession, power or control of the named bank in relation to the undertaking, including -all books of accounts, registers, records and all other documents of whatever nature relating thereto. It shall also include all borrowings, liabilities and obligations of whatever kind then subsisting of the named bank in relation to the under-taking. If according to the law of any foreign country, the provisions of the Ordinance by themselves do not effectively transfer or vest any asset or liability situated in that country in the corresponding new bank, the affairs of the named bank in relation to such asset or liability shall stand entrusted to the chief executive officer of the corresponding new bank with authority to take steps to wind up the affairs of that bank. All contracts, deeds, bonds, agreements, powers of attorney, grants of legal representation and other instruments of whatever nature subsisting or having effect immediately before the commencement of the Ordinance, and to which the named bank is a party or which are in favour of the named bank shall be of as full force and effect against or in favour of the corresponding new bank, and be enforced or acted upon as fully and effectively as if in the place of the named bank the corresponding new bank is a party thereto or as if they are issued in favour of the corresponding new bank. In pending suits or other proceedings by or against the named bank, the corresponding new bank shall be substituted in those suits or proceedings. Any reference to any named bank in any law, other than the Ordinance, or in any contract or other instrument shall be construed as a reference to the corresponding new bank in relation to it.
The Central Government shall have power to frame a scheme for carrying out the provisions of the Act, and for that purpose to make provisions for the corresponding new banks relating to capital structure, constitution of the Board of Directors, manner of payment of compensation to the shareholders, and matters incidental, consequential and supplemental. Corresponding new banks shall also be guided in the discharge of their functions by such directions in regard to matters of policy involving public interest as the Central Government may give.
On the commencement of the Ordinance, every person holding office as Chairman, Managing Director, or other Director of a named bank, shall be deemed to have vacated office, and all officers and other employees of a named bank shall become officers or other employees of the corresponding new banks. Every named bank shall stand dissolved on such date as the Central Government may by notification in that behalf appoint.
The Central Government shall give compensation to the named banks determined according to the principles set out in Second Schedule, that is to say,-
· where the amount of compensation can be fixed by agreement, it shall be determined in accordance with such agreement;
· where no such agreement can be reached, the Central Government shall refer the matter to the Tribunal within a period of three months from the date on which the Central Government and the existing bank fail to reach an agreement regarding the amount of compensation.
Compensation so determined shall be paid to each named bank in marketable Central Government securities. For the purpose of determining compensation, Tribunals shall be set up by the Central Government with certain powers of a Civil Court.
The Central Government shall have power to make such orders not inconsistent with the provisions of the Ordinance which may be necessary for the purpose of removing defects. Under the Ordinance the entire undertaking of every named commercial bank was taken over by the corresponding new bank, and all assets and contractual rights and all obligations to which the named bank was subject stood transferred to the corresponding new bank. The Chairman and the Directors of the Banks vacated their respective officers. To the named banks survived only the right to receive compensation to be determined in the manner prescribed. Compensation, unless settled by agreement, was to be determined by the Tribunal, and was to be given in marketable Government securities. The entire business of each named bank was accordingly taken over, its chief executive officer ceased to hold office and assumed the office of Custodian of the corresponding new bank, its directors vacated office; and the services of the administrative and other staff stood transferred to the corresponding new bank. The named bank had thereafter no assets, no business, and no managerial, administrative or other staff, it was incompetent to use the word "Bank" in its name, because of the provisions contained in s. 7 (1) of the Banking Regulation Act, 1949, and was liable to be dissolved by a notification of the Central Government.
R. C. Cooper presented a petition on the following grounds-
The petition was by a single shareholder and was not a representative petition on behalf of all, or of a majority of the shareholders of the four banks. No shareholders’ meeting had been called in any of the Banks, to authorize them to support the petitioner, or to file an independent petition. No Bank was a party to the petition and none had complained that their fundamental rights had been violated.
For reasons which do not appear from the judgment, the case was heard by a bench of 11 judges. The majority judgment delivered, declared the impugned Act void. In the majority judgment, it was observed that:
the Act is within the legislative competence of the Parliament;
but it makes hostile discrimination against the named banks from carrying on banking business, whereas other banks – Indian and Foreign – are permitted to carry on banking business, and even new banks may be formed which may engage in banking business;
it, in reality restricts the named banks from carrying on business other than banking as defined in Section 5(b) of the Act violated the guarantee of compensation under Article 31(2) in that it provides for giving certain amounts determined according to principles which are not relevant in the determination of compensation of the undertaking of the named banks and by the method prescribed amounts so declared cannot be regarded as compensation.[3]
Conclusion
A Critical Evaluation of the Judgment:
It is clear that the rights of the banks were decided in their absence and without hearing them. The petitioner came to court expressly stating that he did not challenge the Act as violating the Bank’s fundamental rights but as violating his own, and the court ended up by deciding that the Act violated the Bank’s fundamental rights under Articles 14, 19 and 31. If the petitioner wanted to base the violation of the Bank’s fundamental rights, he would have had to join the Banks as respondents to the petition. But his petition showed that, that was not his case and he did not join the Banks and parties to the petition. It is submitted that the majority judgment was rendered in violation of the principles of natural justice. However, it was necessary to hear the Banks before a final decision, affecting their rights, was arrived at, and the banks were not heard. It is submitted that the majority judgment is null and void because the Supreme Court has repeatedly held that any judgment affecting the rights of parties rendered in violation of the principles of natural justice is void.
The Act impugned in the Bank Nationalization case was a special Act for the acquisition of the banking business of the 14 banks, but the Act nevertheless expressly authorized the banks, whose banking business was acquired, to carry on non-banking business which they would be entitled to do, if necessary, by suitably altering their Memorandum of Association. In other words, unlike the Acts already considered, the acquisition was partial. If a challenge under erstwhile Article 19(1)(g) was open to the banks, the reasonableness of the provisions of the Act as to the time within which the compensation was to be paid would have arisen for the first time before the Supreme Court.
Bibliography
Books referred:-
TANNAN’S BANKING LAW AND PRACTICE IN INDIA.
Protection of Foreign Investment, Property and Nationalisation in India
- Hans Raj
Net source:-
· www.indiankanoon.org
· www. finance.indiamart.com
The Central Government shall have power to frame a scheme for carrying out the provisions of the Act, and for that purpose to make provisions for the corresponding new banks relating to capital structure, constitution of the Board of Directors, manner of payment of compensation to the shareholders, and matters incidental, consequential and supplemental. Corresponding new banks shall also be guided in the discharge of their functions by such directions in regard to matters of policy involving public interest as the Central Government may give.
On the commencement of the Ordinance, every person holding office as Chairman, Managing Director, or other Director of a named bank, shall be deemed to have vacated office, and all officers and other employees of a named bank shall become officers or other employees of the corresponding new banks. Every named bank shall stand dissolved on such date as the Central Government may by notification in that behalf appoint.
The Central Government shall give compensation to the named banks determined according to the principles set out in Second Schedule, that is to say,-
· where the amount of compensation can be fixed by agreement, it shall be determined in accordance with such agreement;
· where no such agreement can be reached, the Central Government shall refer the matter to the Tribunal within a period of three months from the date on which the Central Government and the existing bank fail to reach an agreement regarding the amount of compensation.
Compensation so determined shall be paid to each named bank in marketable Central Government securities. For the purpose of determining compensation, Tribunals shall be set up by the Central Government with certain powers of a Civil Court.
The Central Government shall have power to make such orders not inconsistent with the provisions of the Ordinance which may be necessary for the purpose of removing defects. Under the Ordinance the entire undertaking of every named commercial bank was taken over by the corresponding new bank, and all assets and contractual rights and all obligations to which the named bank was subject stood transferred to the corresponding new bank. The Chairman and the Directors of the Banks vacated their respective officers. To the named banks survived only the right to receive compensation to be determined in the manner prescribed. Compensation, unless settled by agreement, was to be determined by the Tribunal, and was to be given in marketable Government securities. The entire business of each named bank was accordingly taken over, its chief executive officer ceased to hold office and assumed the office of Custodian of the corresponding new bank, its directors vacated office; and the services of the administrative and other staff stood transferred to the corresponding new bank. The named bank had thereafter no assets, no business, and no managerial, administrative or other staff, it was incompetent to use the word "Bank" in its name, because of the provisions contained in s. 7 (1) of the Banking Regulation Act, 1949, and was liable to be dissolved by a notification of the Central Government.
R. C. Cooper presented a petition on the following grounds-
- that the Act was void for lack of legislative competence, since in any event a part of the Act fell within the exclusive competence of State legislature;
- that the Act deprived him of his office of Director of the Central Bank of India;
- that the Act made a hostile and arbitrary discrimination between banks as a result of which the value of his interest in shares had been substantially reduced and his right to receive dividends had ceased and he had suffered financial loss;
- that the Act was not passed for a public purpose and thus contravened the then Article 31(2);
- that the Act violated the then Article 31(2) because it did not lay down principles for determining compensation;
- that the petitioner did not challenge the Act on the ground that it violated the fundamental rights of the Banks, but on the ground that it violated his own fundamental rights guaranteed by Articles 14, 19 and 31.
The petition was by a single shareholder and was not a representative petition on behalf of all, or of a majority of the shareholders of the four banks. No shareholders’ meeting had been called in any of the Banks, to authorize them to support the petitioner, or to file an independent petition. No Bank was a party to the petition and none had complained that their fundamental rights had been violated.
For reasons which do not appear from the judgment, the case was heard by a bench of 11 judges. The majority judgment delivered, declared the impugned Act void. In the majority judgment, it was observed that:
the Act is within the legislative competence of the Parliament;
but it makes hostile discrimination against the named banks from carrying on banking business, whereas other banks – Indian and Foreign – are permitted to carry on banking business, and even new banks may be formed which may engage in banking business;
it, in reality restricts the named banks from carrying on business other than banking as defined in Section 5(b) of the Act violated the guarantee of compensation under Article 31(2) in that it provides for giving certain amounts determined according to principles which are not relevant in the determination of compensation of the undertaking of the named banks and by the method prescribed amounts so declared cannot be regarded as compensation.[3]
Conclusion
A Critical Evaluation of the Judgment:
It is clear that the rights of the banks were decided in their absence and without hearing them. The petitioner came to court expressly stating that he did not challenge the Act as violating the Bank’s fundamental rights but as violating his own, and the court ended up by deciding that the Act violated the Bank’s fundamental rights under Articles 14, 19 and 31. If the petitioner wanted to base the violation of the Bank’s fundamental rights, he would have had to join the Banks as respondents to the petition. But his petition showed that, that was not his case and he did not join the Banks and parties to the petition. It is submitted that the majority judgment was rendered in violation of the principles of natural justice. However, it was necessary to hear the Banks before a final decision, affecting their rights, was arrived at, and the banks were not heard. It is submitted that the majority judgment is null and void because the Supreme Court has repeatedly held that any judgment affecting the rights of parties rendered in violation of the principles of natural justice is void.
The Act impugned in the Bank Nationalization case was a special Act for the acquisition of the banking business of the 14 banks, but the Act nevertheless expressly authorized the banks, whose banking business was acquired, to carry on non-banking business which they would be entitled to do, if necessary, by suitably altering their Memorandum of Association. In other words, unlike the Acts already considered, the acquisition was partial. If a challenge under erstwhile Article 19(1)(g) was open to the banks, the reasonableness of the provisions of the Act as to the time within which the compensation was to be paid would have arisen for the first time before the Supreme Court.
Bibliography
Books referred:-
TANNAN’S BANKING LAW AND PRACTICE IN INDIA.
Protection of Foreign Investment, Property and Nationalisation in India
- Hans Raj
Net source:-
· www.indiankanoon.org
· www. finance.indiamart.com
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