A PROJECT ON

CONTROL OVER PUBLIC SECTOR BANKS

SUBMITTED TO:
MRS. KIRAN KORI
(FACULTY OF BANKING LAW)

SUBMITTED BY:
SIRSHENDU MAZUMDAR
ROLL NO. 152
SEMESTER

VII

DATE OF SUBMISSION 26TH SEPTEMBER, 2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR (C.G)

ACKNOWLEDGEMENTS

I, Sirshendu Mazumdar, feel myself highly elated, as it gives me tremendous pleasure to

come out with work on the topic Control Over Public Sector Banks. Words fail to express
my deep sense of glee to my teacher, Mrs. Kiran Kori who enlightened me with her beautiful
work on this topic. I would like to thank her for guiding me in doing all sorts of researches,
suggestions and having discussions regarding my project topic by devoting her precious time.
I thank H.N.L.U for providing Internet facilities. And lastly I thank my friends and all those
who have helped me in the completion of this project.

Thanking you,
Sirshendu Mazumdar
SEMESTER-VII
Roll No-152

TABLE OF CONTENTS

Acknowledgements.............................................................................. 1
List of Cases ...................................................................................3
List of statutes and acts ....................................................................3

1.
2.
3.
4.
5.
6.
7.

Introduction and Research methodology.............................................................4-5

Chapter 1 Public Sector Banks In India........................................................6-7
Chapter 2 Social Banking And Public Sector Banks.....................................8
Chapter 3 Control By The Government And The RBI...................................9-18
Chapter 4 - Duality Of Control Over Public Sector Banks .............................19-21
Conclusion.......................................................................................................22
References........................................................................................................23

TABLE OF CASES
Indian Cases

Angu Parameswari textiles (P) ltd v. Sri Rajam & Co, (2001) 105 Comp Cas 186.
Canara Bank v. Canara Sales Corporation and ors, AIR 1987 SC 1603.
2

D. Chandra Reddy v. Gowrisetty Prabhakar Rao, (1996) 6 Andh LD 281 (AP).

jagjivan Mavji v. Ranchhodas Maghaji, AIR 1954 SC 554.
OPTS Marketing Pvt. Ltd v. State of A.P., (2001) 105 Comp Cas 794.
Padmini Polymers Ltd v. Unit Trust of India, (2002) 101 Delhi LT 376.
S.V.Muzumdar and Ors v. Gujarat State Fertilizers Co. Ltd and Anr,

MANU/SC/0318/2005.
Sharda Aggarwal v. Additional Chief Metropolitan Magistrate, (1993) 78 Comp Cas

123.
V.Raja Kumari v. P.Subbarama Naidu and Anr, MANU/SC/0937/2004.

Table of Statutes

The Banking Regulation Act,

The Negotiable Instruments Act, 1881.

INTRODUCTION

At the end of March 2013, there were 26 public sector banks in India, comprising of state
bank of India and its 6 associate bank and 20 nationalized banks. The public sector banks in
India are regulated by statutes of parliament and some important provisions under section 51
of the banking regulation act, 1949.

Specifically the regulations are as follows:

1. State Bank of India is regulated by State Bank of India Act, 1955.
2. Subsidiary banks of state bank of India are regulated by state bank of India
(subsidiary banks) act 1955.
3. Nationalized banks regulated by Banking companies (acquisition and transfer of
undertaking) act, 1970 and 1980.
The statute also stipulate that the central government is mandate to hold a minimum
shareholding of 51% in nationalised bank and 55% in state bank of India(SBI).In turn, SBI
will hold 51% minimum shareholding in its subsidiaries. Another stipulation is that foreign
investment in any form cannot exceed 20% of the total paid-up capital of the public sector
banks.
Management of public sector bank is done by the Board of public sector banks compromising
of whole time directors- chairman, managing directors, executive directors, government
nominee director, RBIs nominee directors workmen and non workmen directors and other
elected directors.

RESEARCH METHODOLOGY

AIMS:
Through this paper the researcher aims at understanding the control and regulation over
public sector banking India under Banking Regulation Act, 1949. The researcher has tried to
understand as to what is meant by public sector banks and what are the regulatory bodies are
regulating it.
4

Also the objective of this paper is to study the difficulties which are faced due to duality in
control of public sector banks by the RBI and Government, while regulating the affairs of
public sector banks.
OBJECTIVES:
1. What are public sector banks?
2. How public sector banks are regulated?
SCOPE AND LIMITATIONS:
The scope of this research paper is to understand the concept of public sector banks and how
they are governed.
The researcher has limited herself to discussing the substantial law aspects of the paper which
are connected with Banking law and has kept the discussion of the procedural aspects at a
minimum.
METHOD OF WRITING:
The researcher has used both a descriptive and analytical method of writing in order to
understand the issues better. The researcher has also relied on case law, to get an in-depth
understanding of the topic.
SOURCES OF DATA:
The researcher has used secondary sources in order to obtain sufficient data for this project,
namely, books, articles and the internet.
CHAPTER: 1 PUBLIC SECTOR BANKING IN INDIA

After, independence, the Government of India launched economic planning in the country
since 1951. During the last six decades of the planning era, commercial banking has
undergone drastic transformation through several important developments/reforms and policy
measures introduced by the government.
Public Sector Banks

Public sector banks are the ones in which the government has a major holding. They are
divided into two groups i.e. Nationalized Banks and State Bank of India and its associates.
Among them, there are 19 nationalized banks and 8 State Bank of India associates. Public
Sector Banks dominate 75% of deposits and 71% of advances in the banking industry. Public
Sector Banks dominate commercial banking India. These can be further classified into:
1. State Bank of India
2. Nationalized banks
3. Regional Rural Banks

Evolution of Public Sector Banking Through Bank Nationalisation:

India marched towards the establishment/expansion of public sector banking through the
progressive nationalisation of commercial banks. There were three phases of bank
nationalisation:
Nationalisation of Imperial Bank of India in 1955 and its seven associate banks in
1959- 60.
Nationalisation of the 14 major commercial banks in 1969.
Nationalisation of 6 more commercial banks in 1980.
On July 1, 1955 the Government of India nationalised the Imperial Bank of India and
converted it into the State Bank of India. The establishment of the State Bank of India (SBI)
was a pioneering attempt in introducing public sector banking in the country. Later on in
1959- 60, seven subsidiary State Banks were also nationalised to form the SBI Group.
The SBI Group had its laudable objective of bringing rural orientation in Indian banking,
which it achieved with remarkable success. For a short period during December 1967 to June
1969, the Government of India pursued the policy of social control of banks aiming at an
equitable and purposeful distribution of credit towards developmental needs.For some
reasons, however, the government was not fully satisfied with the implementation of social
controls over banks in achieving the social goals.An idea was thus mooted that the social
ownership would serve a better purpose rather than mere social contracts to fulfill the
socially-desired objectives.
Eventually, on July 19, 1969, fourteen major Indian scheduled banks (with deposits of over
Rs. 50 crores) were nationalised by the government with a view to serve better the needs of
6

development of the economy in conformity with national priorities and objectives. These
fourteen nationalised banks are:
(1) The Allahabad Bank; (2) The Bank of Baroda (3) The Bank of India; (4) The Bank of
Maharashtra (5) The Canara Bank; (6) The Central Bank of India (7) The Dena Bank; (8) The
Indian Bank; (9) The Indian Overseas Bank; (10) The Punjab National Bank; (11) The
Syndicate Bank; (12) The Union Bank of India; (13) The United Bank of India; and (14) The
United Commercial Bank.
As a result, 85 per cent of the banking business in terms of deposits was brought under public
control. On April 15, 1980, six more Indian scheduled banks (with deposits of over Rs. 200
crores) were nationalised. These banks are:
(1) The Andhra Bank; (2) Corporation Bank; (3) The New Bank of India; (4) The Oriental
Bank of Commerce; (5) The Punjab and Sind Bank; and (6) Vijaya Bank.
In short, nationalisation of banks implied a bold and major economic step in the process of
banking reforms in the country. It has resulted in the evolution of public sector banking. With
the progress of Indian commercial banks, especially in the post-nationalisation period, the
importance of foreign banks has started diminishing. As an impact of nationalisation, the
structure of Indian commercial banks has radically changed. Apart from the phenomenal
growth of banking institutions in the country, government ownership and control over the
banking business also led to dynamic changes in the banking policies and to new strategies of
banking development during the almost two decades of post-nationalisation period.

CHAPTER: 2 - SOCIAL BANKING AND PUBLIC SECTOR BANKS

The compulsions of achieving social banking goals prompted the Govt, to introduce
guidelines in detail covering most aspects of day to day operation. All these were perhaps
justifiable under conditions of a somewhat overregulated and non-transparent system. But
over a period of time over-regulation had proved counter-productive. This has in effect killed
initiative and narrowed down the options available to both borrower and depositor. Worse

still, politicians and bureaucrats are known to misuse their powers and exert undue influence
on day to day decisions on loans and credit granted to clients1.
Lack of internal autonomy has restricted the freedom of each bank to effect recruitment,
placement, and promotion etc. of the right type of skilled personnel. While many banks have
adequate or even surplus staff in terms of numbers, there is dearth of staff of the right skills 2.
The restrictions on annual growth of the staff strength have been imposed uniformly on all
public sector banks. But there are practical difficulties of following "Straight Jacket formula"
which imposes uniform type of conditions for all banks which in fact have varying
requirements.
Public Sector Banks were created as instruments of social banking. Following adoption of
new economic policy, 'social' banking is sought to be replaced by 'profit' banking. Adoption
of strict and alien banking accounting norms has made the position difficult for a number of
PSB. Social lending per se cannot alter the profitability of the banks, Analytical study 3 of the
performance of the banks would provide the point what affected the performance are, Nonperforming Assets, Reconstitution of boards, Autonomy, Bank supervision, and profits and
profitability.

CHAPTER: 3 - CONTROL BY GOVERNMENT AND THE RBI

1 H.N.Agarwa1, A Potrait of Nationalised Banks (1979), p.36.

2 K.N. Subramanya, Modern Banking in India ( 1982), p. 75.
3 E Suraiya Commission, Report of the Banking Commission, Govt. of lndia (1 972).
8

Under the Banking Regulation Act, the RBI has wider power of overall control over the
management of banks4. These powers are spread over a number of sections of the act 5.
Section 10 6 was introduced to sub serve the purpose of social control. It also prescribed the
nature and composition of the board of directors who are responsible for the management of a
banking company.
The Central Government is empowered to make schemes 7 in consultation with the RBI for
the purpose of management by the board of directors, the appointment of Managing
Directors, the holding of board meetings and allied matters8. In All India Bank Officers
Confederation v Union of India9. In this case it was held that the object of section 9 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act 1970, which is regarding
Central Government's power to make a scheme for the constitution of the Board of Directors,
is to give the Boards a truly representative character so as to reflect the genuine interests of
the various persons manning or dealing with the bank as an industry and a commercial
enterprise. The Legislature has left it to the Central Government to devise a scheme providing
for appointment to the Board from among the specified categories either by election or by
nomination.
The discretion of the Central Government is however not an unrestrained discretion, but a
discretion which must be reasonably exercised so as to give effect to the true intent of the
Legislature as to the composition of the Board of Directors. What is postulated is such
election or nomination as would lend to the Board of Directors, its truly representative
character in consonance and harmony with the expanding, delicate, vital and significant role
of the national policy and objectives and economic development. The mode of election or
4 Sec.35,35A and 35B of the Banking Regulation Act, 1949.
5 Sections 12A, 35B, 36AA, 36AA(6) and 36AB of the Banking Regulation Act, 1949.
6 Section 10A of the Banking Regulation Act, 1949 deals with the Board of Directors to be constituted of persons
with professional or other experience.

7 This scheme for management is called "The Nationalised Banks (Management and Miscellaneous Provisions)
Scheme, 1970.

8 Sec.9 of the Banking Companies (Acquisition of Transfer of Undertakings) Act, 1970.

9 A.I.R. 1989 SC 2045
9

nomination, must therefore be as such as would be ideally suitable and appropriate to the
banking industry. The Central Government must in this regard act in consultation with the
RBI.
In exercise of its discretion, the Central Government cannot avoid election where election is
appropriate and feasible in respect of a particular category of persons. For the appointment of
representatives of depositors, farmers, workers, other than employees and artisans the
discretion is entirely that of the Central Government to choose the mode of representatives. In
the case of employees, election is the most logical, the most appropriate, the most democratic
and certainly the most advantageous form of representation. They are well identified, well
organized, well motivated and interested associates, and participants in the banking industry.
They are as much part of the bank as the management is.
The nationalization Act does not contemplate a management unmindful of the true and
legitimate interests of the employees. In a nationalized bank everyone is one as much as
employee, as he is an employer. There is no antithesis between the management and
employees. The traditional existence of management culture prior to nationalization is no
longer applicable and the true management culture is one that represents various interests of
all persons specified under section 9 as well as the larger and wider interests of national
economy as postulated in the preamble of the Act.
A. Nationalised Banks and its Management
Nationalised banks are managed by the board10 of Directors having 15 nominated members,
including two full-time directors of whom one is the Managing Director. The Board is
composed of two whole time directors, including the M.D., one Director each representing
the employees and officers of the Bank, one director, who is a chartered accountant of 15
years experience, three directors representing farmers, workers and artisans, one director,
who is an official of the RBI and another who is an official of the Central Government, two
directors from among the SEBI, NABARD, public financial institution etc. constituted under
any Central Act.
Two whole time directors are to be appointed by the Central Government 11 after consultation
with the RBI. All other persons are nominated by the Central Government. The directors
10 Provision is made for a smaller board than 15 members depending on the size, reserves and area of the
commercial bank.

10

representing the shareholders shall have specialized knowledge or practical experience in

respect of Agricultural and Rural Economy, Banking, Co-operation, Economics, Finance,
Law, Small Scale Industry or any other matter of special knowledge and practical experience
which would in the opinion of the RBI be useful to the new bank and represent the interests
of depositors or farmers, workers and artisans. These directors are to hold office during the
pleasure of the Central Government.
Every appointment, removal or reconstitution duly made and every election duly held under
this section shall be final and shall not be called into question in any court12.
B. Constitution of the Board of Directors
The composition of the Board of Directors of a scheduled bank shall consist of a whole time
Chairman or a whole time Director who shall be the Chairman of the Board of Directors 13.
The Banking Regulation Act has tried to tone up the administration and management of
banking companies and for this certain changes have been made in the earlier provisions,
including a major shake-up in 196814.
The RBI is empowered to remove any Director, C.E.O. or other officers or employee of any
banking company in public interest or in the interest of the depositors 15. The person so
removed shall be debarred by the Reserve Bank from taking any part in the management of
any banking company either directly or indirectly16. The Reserve Bank may appoint a suitable
person in this vacancy17.

11 Section 10B of the Banking Regulation Act, 1 949.

12 Sub-section (7) of section 10A of the Banking Regulation Act, 1949.
13Section 10B (sub-section 2 of B.R.Act 1949).
14 The Social Control Act, 1968.
15 Section 36AA, B.R.Act 1949.
16 Sub-section (4) of Section 36AA of B.R.Act, 1949.
17 Sub-section (6) of Section 36AA of B.R.Act, 1949.
11

The Reserve Bank also appoints additional directors on the board of the banking company in
the interest of the depositors18. The person so appointed holds ofice during the pleasure of the
Reserve Bank.19Prior permission of the Bank was made obligatory for the appointment, reappointment or termination of appointment of a Chairman, Managing or whole time Director,
Manager or Chief Executive Officer or varying their terms and conditions20.
The Banking Law (Amendment) Act, 1968 which introduced social control over commercial
banks has gone much ahead in the direction. It sought to streamline the managerial and
operational aspects with a view to diffusing economic power and checking the misuse of
bank credit by vested interests. For this purpose, it tried to induct a new management
professionally competent and social sensitive21.
According to Section 10A of the Banking Regulation Act, 1949 as amended in I968 not less
than 51% of the number of members shall consist of persons having special knowledge in one
or more of the areas such as Accountancy, Agriculture and Rural Economics, Banking,
Cooperation, Economics, Finance, Law, Small Scale Industry or any other special knowledge
which in the opinion of the RBI be useful in the banking cornpany. At least two of three
members must have special knowledge or practical experience in Agriculture or Rural
Economy, Cooperation or Small Scale Industries.
Section 10A provides for the appointment of persons having professional experience on the
Board of Directors. It also provides that all the existing banking companies should reconstitute their boards within three months from the date of commencement of the Act. In
T.S.Arurnugham v. Laxmi ViIas Bank ,Ltd.22the Board of Directors of the Bank decided to
co-opt Thiru S.T.Singaram as one of the Directors of the Bank to represent the management.
The said Shri.Singaram vacated his office of Directorship in the annual general meeting held
on 12th September 1979 on offering himself for appointment as elected Director and he was
18 Section 36AB of B.R.Act, 1949.
19 Sub-section (7) of Section 36AA of B.R.Act, 1949..
20 Section 10B (1A) of B.R.Act, 1949.
21 Section 10A as amended in 1968.
22 1993 Bank 5.435 (Mad).
12

elected as one of the Directors in the annual general meeting. On 24th April 1979, the Bank
also agreed to co-opt the petitioner as one of the Directors representing the officers of the
Bank.
The Reserve Bank expressed no objection to the Board of Directors. The Reserve Bank also
approved the amendment of the relevant provisions of the Articles of Association of the Bank
so as to increase the strength of the Board to 13 so that there would be representation in the
majority sector as contemplated under Section 10A of the Act and the rest would be
representing the officers of the Bank, etc. The Board of Directors of the Bank co-opted the
petitioner as one of the directors of the bank in the annual general meeting held in July, 1980,
In terms of the Articles, the petitioner and the director representing the clerical staff retired in
the annual general meeting held on August 23rd 1983. In the general meeting when the item
regarding the appointment of directors in the place of Shri-Singaram and the petitioner was
taken up, the general body decided that these vacancies need not be filled up for the present.
The petitioner filed the Writ Petition for issue of a writ of mandamus directing the Reserve
Bank. The Court held that the company law is a self-contained code and the provisions of the
company law shall be applicable to the first respondent bank and in so far as the appointment
of the directors is concerned the provisions of the Act shall prevail. Section 256(3) 23 of the
Companies Act provides that at the annual general meeting at which a director retires as
aforesaid, the company may fill up the vacancies by appointing the retiring director or some
other person thereto.
However in view of the fact that the Banking Regulation Act is also applicable, such
appointment of directors shall be consistent with the provisions contained under Section 10A
of the Act. Even though this section specifies the class of persons, who should represent, not
less than 2/3 of the directors of the company, such class of persons shall be appointed in
accordance with Section 25624 of the companies Act, that is it shall also consist of persons
who shall have knowledge or practical experience in respect of matters such as accountancy,
agricultural and rural economy, banking, economics, finance, law, small scale industries or
any other matter, which in the opinion of the Reserve Bank be useful to the banking company.

23 Sec.256 deals with ascertainment of directors retiring by rotation and filling of vacancies and Sec.256(3) refers to
filling up of the vacancy by appointing the retiring director or some other person.

24 ibid
13

The Court further held that under Section 35A, the Reserve Bank has power to issue
directions, which if it is satisfied that in the public interestor in the interest of banking policy
or to prevent the affairs of the banking company detrimental to the interest of the depositors
or in a manner prejudicial to the interests of banking company or to secure the proper
management of any banking company generally and the banking company shall comply with
such directions. These are the contingencies in which the Reserve Bank has the authority to
appoint directors. That apart, the Reserve Bank has no authority to issue any direction to the
banking company incorporated under the Companies Act with reference to the appointment
of any person as one of the directors of the Company. The power of the Reserve Bank is also
limited to the extent provided under Section 10A and 35A of the Act and the Reserve Bank
has no authority to go beyond the powers available under the aforesaid provisions.
Section 35A does not empower the Reserve Bank to issue directions to the banking company
to fill up vacancies caused by the retirement of a director by appointing any of the officers or
employees to the Board of Directors of the Bank. In the absence of any provision enabling
the officer representing the officers of the bank to be appointed as one of the directors, the
Reserve Bank has no authority to issue such directions. The appointment of a director can be
made only by following the procedure prescribed under Section 256 of the Companies Act,
except to the extent that is provided under Section 1OA(4) 25 of the Act. The Court held that in
these circumstances, no writ can lie and the writ petition was dismissed.
In U.P -Bank Employees Union v. State of U.P.26,where an officer of the State Government
was sent on deputation to bank as the Chief General Manager without RBI's approval. it was
held that the appointment was not invalid as under Section 35B(l)(b) the approval of Reserve
Bank is required only in case of the top executive of the Bank. The provisions of the
Companies Act relating to appointment of Chairman, Managing Director, whole-time
director, Manager, Chief Executive Officer, etc. of the banking companies are not applicable
to banking companies. In E.A.Poyya v. R.B.I.27, it was held that Section 35B of the B.R.Act
25 Sec.lOA(4) of the Banking Regulation Act, 1949 provides that if for the purpose of reconstituting the Board under
sub-section (3), it is necessary to retire any Director or Directors, the Board may, by lots drawn in such manner as may
be prescribed, decide which Director or Directors shall cease to hold office and such decision shall be binding on
every Director of the Board.

26 1985 Lab.I.C.337 (All) (FB).

27 A.I.R. 1966 Ker.6.
14

1949 does not violate Article 19(1) of the Constitution of India and the decision of the R.B.I.
being subjective cannot be challenged on the ground that it violates the principles of natural
justice28. A political board, an aggressive board or abusive board or no board at all are
frequent deficiencies in financial institution. The composition, role, responsibility and
accountability of the board influence bank's behaviour. Bank boards differ with the Country.
The Chairman and Director of the Banking Company appointed by the RBI shall not be
required to hold qualification shares in the banking company29. The management of the whole
affairs of the banking company shall be entrusted with the whole time director who is also the
Chairman of the company subject to the superintendence, control and direction of the board
of directors30. The Chairman must have special knowledge and practical experience of the
working of a banking company or of the SBI or any subsidiary bank or a Financial
institutions31.
Directors of a banking company other than the whole time Directors shall not hold office for
a period exceeding eight years 32. A Chairman or a whole time Director removed from office
shall cease to be a Director of a company and shall not be eligible to be appointed as a
Director either by election or by a co-option or otherwise for a period of four years from the
date of such removal33. If the office of the Chairman of a banking company is vacant the RBI
may appoint a person qualified34. No banking company shall employ a managing agent35.
C. Review of the Control by RBI
28 Refer 1965 (35) Com.Case 299.
29 Sec. L0C of the B.R.Act 1949.
30 Sec. 10B of the B.R.Act 1949.
31 Sub-section 39 of Sec. lOB of the B.R.Act 1949.
32 Sub-section 2A of Sec. 10A of the B.R.Act 1949.
33 ibid
34 Sec. 10BB of the B.R.Act 1949.
35 Sec. 10 of the B.R.Act 1949.
15

Under the above provisions, the RBI is vested with powers to do and undo the composition of
the board of directors and Chairman of any bank. As the opening words of Section 10A and
Section 10B indicate, these Sections override any Law for the time being in force. Section
10B overrides any contract to the contrary also. Section 10D elaborates the position by
providing that any appointment or removal of a director or Chairman under Section 10A,
Section B and Section BB of Section 10 shall be effective and he shall not be entitled to claim
compensation for the loss or termination of office notwithstanding anything contained in any
law or in any contract, Memorandum of Articles of Association.
Under Section 35B

36

of B.R.Act, amendments are made relating to appointments of

Managing Directors, etc. to be subject to previous approval of the RBI. No amendment

relating to maximum permissible number of directors, their appointment, re-appointment or
termination shall have effect unless approved by RBI. Explanation to this section provides
that any provision conferring any benefit or providing any amenity or perquisite during or
after the termination of the terns of office shall be deemed to be a provision relating to his
remuneration, If the RBI is satisfied that their continuing in office affects the interests of the
depositors, then they can be removed after giving them a reasonable opportunity to be heard.
An appeal can be preferred by them to the Central Government against the order of the
RBI37.T he decision of the Central Government shall be final. and cannot be called into
question in any court38.
D. Section 36AC to override other laws
Any appointment or removal of a Director, C.E.O. or other officer or employee in pursuance
of Section 36AA or section 36AB shall have effect notwithstanding anything to the contrary
contained in the Companies Act 1956 or any other Law for the time being in force or in any
contract or any other instrument.

36 According to the amended provisions of Section 35B - In the case of a banking company,- (a) no amendment of
any provision relating to the maximum permissible number of directors or the appointment or re-appointment of
termination of appointment or remuneration of a Chairman, Manager or Executive Officer, whether the provision be
contained in the company's memorandum or articles of association or in any agreement or resolution shall have effect
unless approved by the Reserve Bank. See Appendix VII.

37 Sub-section 2 of Sec.36AA of the B.R.Act 1949.

38 Sub-section 3b of Sect.36AA of the B.R.Act, 1949.
16

Section 36AA provides that the RBI has the power to remove any Chairman, Director,
C.E.O., any officer or employee of a banking company in the public interest or for preventing
the affairs being conducted in a manner detrimental to the interests of the depositors or for
securing proper management of a banking company. The Reserve Bank is required to give a
reasonable opportunity of making a representation before any order of removal is made under
this provision. The authority, which passes the order of dismissal, must apply its mind after
hearing the aggrieved party. During the course of the hearing, the authority might be able to
formulate the conclusions after noticing even the demeanour of the parties. Any person so
removed can file an appeal to the Central Government within 30 days. It was held in Union
of India v .E.K. Andrew 39 ,that the person must be granted personal hearing by the officer
hearing an appeal against the order removing him from service and that the order passed by
the R.B.I. or in case where an appeal has been filed before the Central Government is final.
But the order passed by the RBI or the Central Government under this section is subject to
judicial review and if the order passed is perverse, extraneous, arbitrary or in violation of the
principles of natural justice, the aggrieved person can file a petition under Art. 226 before the
High Court or under Article 32 before the Supreme Court.
E. Prohibition of Employment of Managing agent40
The principle underlying these provisions is to check unhealthy manipulations between two
or more banks by interlocking directorates. It will be seen that comprehensive provisions
have now been laid down with a view to preventing the employment of managing agents or a
manager whose remuneration is to be based upon the profits of the banking company. It also
lays down certain disqualifications41 for the employment of persons of a banking company.
The wordings of the provisions do not apply to the director of a banking company who is not
its employee and consequently in such cases the provisions of the Companies Act 1956 apply.

39 (1995) 95 Com.Case 537 (Ker).

40 Sec.10 of the B.R.Act, 1949. Also see Section 277 H of the Indian Companies Act 1913 which prohibited the
employment of a managing agent or whose remuneration took the form of a commission or share in the profits of the
company. These provisions are now incorporated in Section 10 of BRA 1949.

41 NO banking company shall be managed by a person, who is a director of any other company, not being a
subsidiary of the banking company or a company registered under Section 25 of the Companies Act, 1956.

17

Section 16 of the BRA 1949 provides for the prohibition of common directors. This Section
was amended and it provides that no banking company incorporated in India shall have as a
director in its board of directors any person who is a director of any other banking company42.
The powers conferred upon the Reserve Bank are draconian and many of these cannot be
challenged in a court. In many circumstances, the RBI exercised these powers under political
pressure leading to the opinion that the RBI is an extended arm of the Government. In
Corporate Bank v. D.S . Gowda43the Supreme Court observed that under the Banking
Regulation Act wide powers are conferred on the RBI to enable it to exercise effective control
over all banks. Any bank which commits a breach of the directives is liable to be penalised 44.
A bank can ignore the directive on pain of being penalised.
Participants in the survey opined that in the post-nationalisation period there has been little
change in the character of control of the Reserve Bank over the banking system. The
Department of Banking in the Ministry of Finance of the Government of India, in the
changed circumstances, is the policy formulating body in the fields of money and banking
and issues directives and guidelines to the PSB's through the RBI, the Central Bank of the
Country. Hence, the RBI just implements the policy that percolates from the Department of
Banking. The independence of the Reserve Banks in the matter of taking decisions in
monetary and credit affairs has virtually ceased and its position as an independent monetary
authority in monetary affairs has been Usurped. This conflict of dual control has posed
serious problem to the PSB's. They also suggested that if social objectives to be fulfilled by
the PSBs. are to be determined by the Government, the policy formulation and decision
making powers and the implementation of the policy decision should rest in the hands of the
guardian of the monetary system. The aim of central banking policy should be to uplift the
under-privileged class of society in rural India from subsistence existence to surplus
existence, from animal existence to human existence. Herein lies the summon of the
philosophy of responsibilities and obligations of the Reserve Bank towards the society in this
age of post nationalisation.
42 Sec. 16 states that "No banking company shall have in its board of directors more than three directors who are
directors of companies wherein among themselves are entitled to exercise voting rights in excess of 20% or the total
rights of all the shareholders of the banking company".

43 (1994) 5 SCC 2 13.

44 Sec.47A of B.R.Act, 1947.
18

The Banking Laws (Amendment) Act 1983 has amended Section 10B to provide that one of
the directors of the banking company shall be the Chairman of its board of directors and that
a Chairman whose term of office has come to an end in circumstances mentioned thereto
shall subject to the approval of the RBI continue in office until his successor assumes office.
Section 10BB has also been inserted to empower the RBI to appoint any person as the
Chairman of a banking company when the office of its Chairman remains vacant for a long
time and when in the opinion of the RBI the interests of the said banking company are likely
to be adversely affected by the said office so remaining vacant.
The Banking Regulation (Amendment) Act 1994 has amended Section 10B of the Act to
provide that the banking company shall have one of the directors who may be appointed on a
whole time or a part time as Chairman of its board of directors and where he is appointed on
a whole time basis as Chairman of its board of directors he shall be entrusted with the
management of the whole of the affairs of the banking company. If the Chairman is appointed
on a part time basis such appointment shall be with the previous approval of the RBI and be
subject to such conditions as the RBI may specify while giving such approval.
The management of the whole of the affairs of such banking company shall be entrusted to a
Managing Director who shall exercise his powers subject to the superintendence, control and
direction of the board of directors. Other provisions have been amended to provide
consequential amendments. Section 10C provides that a Chairman of a banking company (by
whomsoever appointed) and a director of a banking company (appointed by the RBI under
Section 10 A) shall not be required to hold qualification shares in the banking company. This
section provides that a Chairman appointed on a whole-time basis, or Managing Director or a
Director appointed by the R.B.I. is not required to hold qualification shares as required under
the Articles of Association of the Banking Company. Section 10A, Section 10B, Section 10
BB and 10 C purport to impose social control on banks. They do not apply to the SBI and the
20 nationalised banks.

19

CHAPTER: 4 - DUALITY OF CONTROL OVER PUBLIC SECTR BANKS

The RBI has general regulatory power on the management of the banking companies in
general and nationalized banks in particular. The Central Govt. also has some controlling
functions. It has been found over the years that the Central Govt. having two powers namely
power in the role of ownership and power in the role of a Controller and the RBI having its
own powers and control often may have conflicting interests. The ownership interest of the
Govt. and the controlling interest of the RBI may clash. In most of this conflict of interests,
RBI fails to have its legitimate say. This has weakened the management of the nationalized
banks consequently.
Another aspect is that at present, boards of public sector banks have nominees both of the
Government and of the RBI. The committee feels that as long as the Government owns the
banks it would be necessary to have a representative of the Government to take care of the
proprietorial concerns but there is no need for the representation of the RBI on the board to
avoid possible conflict of interest45.
The Government in consideration of the committee's views wants the R.B.I. to withdraw its
nominees from the boards of nationalised banks to ensure greater autonomy to the banks'
management. This has become necessary following the liberalization of banking industry
with the entry of additional private banks both Indian and foreign46.
According to the present thinking of the Finance Ministry the Government as the owner must
continue to exercise proprietary control and at the same time the Government has to ensure
full operational autonomy to the managements. After taking into account, the changes in the
banking industry, it is felt that bank managements including their boards should be held fully
accountable for their performance and to make this accountability effective and transparent,
the Government should not appoint its officers in the boards of banks47.
45 'No RBI nominees on bank boards" in The Indian Express (Mumbai), Sept.26, 1997. Also Autonomy Package for
banks in The Indian Express, Nov.7, 1 997.

46 C.Rangarajan3s key note address at the Bank economic conference, Indian Banking Second Phase of Reform, The
Hindu (Madras) 6~ Oct. 1997 titled "Greater autonomy to banks being considered".

47 Rajendra Singh, Autonomy for Indian Banks, Wadwa (Nagpur), May 24, 1 992.
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In the opinion of Economists and Financial experts, autonomy of banks has to be closely
linked to accountability over performance. It is also stated that the economic reforms
announced by the Government would not produce the desired results if political
considerations were allowed to influence fiscal processes. The then Central Finance Minister,
Dr. Manmohan Singh has also gone on record, saying that, "over centralization and excessive
Bureaucratization have proved to be counterproductive". In his view, the financial system in
the country has developed certain 'rigidities and weaknesses' that need to be urgently
addressed by ensuring greater competitive efficiency and operational flexibility48.
Some countries that are shifting to market economies have been moving boards of State and
enterprises towards greater autonomy and professionalism. But few Governments have
relinquished ministerial representation on the board. And they do not permit the board to hire
or sue the Chief Executive or allow it to exercise fully its authority without approval.
According to the Narasimham Committee, one factor contributing to the weakening
management system is the inability of banks to recruit their staff directly and the rigidity that
has prevailed in the system of reward and punishment. The committee therefore proposes that
instead of having a common recruitment system, banks should be free to make their own
recruitment of officers. There is thus in the committee's view no need for setting up a banking
service commission for centralized recruitment of officers nor for their recruitment as at
present is being done through the B.S.R.B. This recommendation is based on the assumption
that banks will set up objective, fair and impartial recruitment procedures. As regards clerical
staff the present system of recruitment through B.S.R.B. could continue but urged that the
appointment of the Chairman of these Boards should be left totally to the coordinating banks.
In emphasizing the need for greater functional autonomy, the Narasimham Committee called
for depoliticizing the appointment of Chairman & Managing Director of the banks and the
boards of the banks and ensuring security of tenure for the C.M.D. The Committee believes
that professionalism and integrity should be the prime consideration in determining such
appointments and while the formal appointments have to be made by Government, they
should be based on a convention of accepting the recommendation of a group of eminent
persons who could be invited by the Governor of the RBI to make recommendations for such
appointments. In 1969 when the banks were nationalized, the principles enunciated by the
Government stressed that all appointments would be based on professional merit. But over
48 As cited M.K.Veni, More Autonomy for Banks Suggested, Business Standards, Feb. 1 l(1994), Calcutta.
21

the years appointments came to be made on the basis of services rendered or favours
expected. The other recommendations of the Narasimham Committee are concerned with the
top management structure. All nationalized banks irrespective of their size have a similar type
of management sutured, namely, a board of directors. The Committee indicated that the
primary function of the board should be to lay down the broad financial policy of the bank
concerned and set corporate goals and review the performance. They should not get involved
in day to day operations.
According to the Narasirnharn Committee, regulations for the banking sector ought to be
framed only by the RBI and not by a multiplicity of Government bodies. From time to time
the relevance of the guidelines may be reviewed by an independent body with a view to
ensure greater independence and autonomy of banks, The reviewing authority could be a
quasi-autonomous body set up under the aegis of the RBI, but which should be separate from
its central banking function49.
Former RBI Governor S.Veniktaraman, disagreed with the recommendation that the
supervisory function of the RBI should be delinked from its regulatory function. According to
him, it is crucial to conduct "onsite" supervision rather than "off-site" regulation. The
complexity of functions in the banking system also demands that the sole responsibility for
the profitability and efficiency of banks must rest upon their managements. The latter ought
to be able to adapt to changing conditions and innovate strategies to steer through crisis
situations, which might place serious strains on bank profitability. Such strains might arise
out of policies prescribed by authorities outside the ambit of the banking sector.
However, it is crucial to ensure a right balance of autonomy and accountability. As the
National Confederation of Bank Employees has argued "accountability without autonomy is
tyranny and autonomy without accountability is anarchy".

49 Report of the Committee Financed Sector Reforms, 1991.

22

CONCLUSION

One of the biggest drawbacks of the Indian Banking system has been its lack of operational
flexibility. Almost every operation is subjected to some statutory control or Govt, guideline
such that even administrative matters are not considered to be within the purview of internal
management50. When the banks were nationalized and brought into public sector the
ownership was acquired by Government. Along with ownership the Govt. also took up
certain functions which involved direct intervention in management at the floor level. In due
course of time common rules and service conditions came to be induced for the purpose of
uniformity among the banks.
At the end of March 2013, there were 26 public sector banks in India, comprising of State
Bank of India and its 6 associate bank and 20 nationalized banks. The public sector banks in
India are regulated by statutes of parliament and some important provisions under section 51
of The Banking Regulation Act, 1949.
Management of public sector bank is done by the Board of public sector banks compromising
of whole time directors- chairman, managing directors, executive directors, government
nominee director, RBIs nominee directors workmen and non workmen directors and other
elected directors.
Now, the RBI has general regulatory power on the management of the banking companies in
general and nationalized banks in particular. The Central Govt. also has some controlling
functions. It has been found over the years that the Central Govt. having two powers namely
power in the role of ownership and power in the role of a Controller and the RBI having its
own powers and control often may have conflicting interests. The ownership interest of the
Govt. and the controlling interest of the RBI may clash. In most of this conflict of interests,
RBI fails to have its legitimate say. This has weakened the management of the nationalized
banks consequently

50 K.Kannan, Supervision and Regulation, 1 B A Bulletin (1994), p.60.

23

BIBLIOGRAPHY

Articles:

K.Srivinasan, Bouncing of cheques issued in companies, Corporate Law Adviser,

Vol 35, Oct (1) 1999.

'No RBI nominees on bank boards" in The Indian Express (Mumbai), Sept.26,
1997. Also Autonomy Package for banks in The Indian Express, Nov.7, 1 997.

C.Rangarajans ,key note address at the Bank economic conference, Indian

Banking Second Phase of Reform, The Hindu (Madras) 6 Oct. 1997 titled "Greater
autonomy to banks being considered".
Books:

Tanna M.L.,Tannas Banking Lawand Practice In India, 23rd Edition 2010,Lexisnexis

Butterworths Wadhwa,Nagpur.
Dr. Myneni S.R.,Law Of Banking,2nd Edition 2014, Asian Law House, Hydrabad.
Dr. Singh Avtar,Laws Of Banking And Negotiable Instrument An Introduction,2 nd
Edition 2011,Eastern Book Company ,Lucknow.
Websites:

http://www.allbankingsolutions.co/Regulatory-Bodies-in-India-RBI-SEBI-

IRDA.shtml
http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=c5ee6a41-74904bdf-8d7c-74eddc14a5aa&txtsearch=Subject:%20Banking

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