NATIONALISATION OF

BANKS
BACKGROUND
The Twenty-fifth Amendment of the Constitution of India, officially known as The
Constitution (Twenty-fifth Amendment) Act, 1971, curtailed the right to property,
and permitted the acquisition of private property by the government for public use,
on the payment of compensation which would be determined by the Parliament and
not the courts.
 The amendment also exempted any law giving effect to the article 39(b) and (c) of
Directive Principles of State Policy from judicial review, even if it violated the
Fundamental Rights.
NATIONALIZATION
Nationalization is an act of taking an industry or assets into the public ownership of
a national government. Nationalization refers to private assets being transferred to
the public sector to be operated by or owned by the state.
India after independence started economic planning with social objective
1st 5 year plan was made in 1951
There were 430 commercial banks at that time, but they failed to help the objective
Banks were controlled by Business houses, failed to cater need of cottage industry ,
poor people etc.
the Reserve Bank was also not completely State owned until it was nationalised in
terms of the Reserve Bank of India (transfer to Public Ownership) Act, 1948.
NEED FOR NATIONALIZATION
Bank Failures and Liquidation/Consolidation of Smaller
Banks:
1948- worst years for the relatively larger banks-45 institutions
were closed down.
Bank deposits mobilised by commercial banks were largely lent
out to security based borrowers in trade and industry.
OBJECTIVES OF
NATIONALIZATION OF BANKS
Objectives of Nationalization
To eliminate concentration of economic power in few hands
To diverse the flow of bank credit towards priority sector consisting of agriculture
and and allied activities, small scale industries and small businesses.
To foster a new class of entrepreneur so as to create, sustain and accelerate
economic growth.
To professionalize bank managements.
To impart adequate training as also reasonable terms of service to bank staff
To extend banking facilities to unbanked rural areas.
PROCESS OF
NATIONALIZATION
On 19.07.1969, then Vice- President of India V.V.Giri (acting as
President) promulgated the Banking Companies (Acquisition and
Transfer of Undertakings) Ordinance 8 of 1969 in exercise of the
power conferred by Article 123(1) of the Constitution of India.
This Ordinance had the effect of nationalizing 14 private sector
banks having a deposit base of over INR 50 Crore and thereby
vesting the ownership of the private banks with the government.
The principal provision of this Ordinance was that every
undertaking (i.e. the 14 banks) would stand transferred and would
vest in the corresponding new bank which would be owned by the
government.
This included transfer of all assets, rights, powers, authorities and
privileges and all movable and immovable properties of the old
bank which would be vested in the corresponding new bank.
For this purpose, the Central Government was supposed to pay compensation
to the banks. The total amount of compensation could be determined by
consensus between the bank and the government.
However, if achieving consensus was not possible, the Central Government
would refer the matter to a Tribunal to determine the compensation payable in
marketable government securities which would mature post 10 years.
First bank to be nationalized was RBI on 1 January 1949.
Nationalization of Imperial Bank of India and its conversion into State Bank of India in July 1955.
Conversion of 8 major states associated banks into subsidiary banks in 1959.
Nationalization of 14 other Indian Scheduled banks in July 1969.
Nationalization of 6 more banks in April 1980.
Indian Bank merged into Punjab National Bank in 1955
At present, there are 27 commercial banks in public sector. Out of these, 19 banks are nationalized.
There are 297 scheduled banks (including foreign banks) and one non scheduled bank at the end of
December 2000.
Out of 297 scheduled banks, 223 banks are in public sector and accounts for about 82% of the total
deposits of scheduled banks.
LIST OF NATIONALIZED BANK
Allahabad Bank Oriental Bank of Commerce
Andhra Bank Punjab National Bank

Bank of Baroda Punjab & Sind Bank

Syndicate Bank
Bank of India
UCO Bank
Bank of Maharashtra
Union Bank of India
Canara Bank
United Bank of India
Central Bank of India
Vijaya Bank
Corporation Bank IDBI Bank
Indian Bank Dena Bank
Indian Overseas Bank ECGC
R.C. COOPER V. UOI
Facts:
on 21.07.1969, petitions challenging the competence of
the President to promulgate the Ordinance were filed in
the Supreme Court. The lead petitioner was one Rustom
Cavasjee Cooper, who was a director of the Central Bank
of India which was one of the nationalised banks and he
held shares in the Central Bank of India, Bank of Baroda
and the Union Bank of India.
However, before the petitions could be heard by the Supreme Court, a bill to
enact provisions relating to acquisition and transfer of undertaking of the
existing banks was introduced in Parliament and was enacted on 09.08.1969
as the Banking Companies (Acquisition and Transfer of Undertakings) Act 22
of 1969.
The long title of the Ordinance and the Act was identical and by Section
27(1) of the Act, Ordinance 8 of 1969 was repealed. This Act was to be
retrospectively applicable from 19.07.1969 and the 14 private banks were to
be nationalized as similar to the Ordinance.
PETITIONER'S CONTENTIONS
The Petitioners challenged the Constitutional Validity of the Ordinance and
consequently the Act on the following principal grounds:
That by enactment of the Act, fundamental rights of the petitioners guaranteed under
Articles 14, 19(1)(f), 19(1)(g) and 31(2) were impaired and therefore the act was
invalid. As far as the right to compensation under Article 31(2) was concerned, it
was contended that compensation means a “just equivalent” in money of the
property acquired and that the law providing for compulsory acquisition must aim at
a just equivalent in terms of compensation. Further, it was submitted that the Act
should be struck down for not satisfying the test of compensation under Art.31 (2)
and for not providing relevant principles for determining such compensation.
That the Act violated the guarantee of freedom of trade under
Article 301.
Lastly, it was contended that retrospective operation given to Act
22 of 1969 was ineffective, since there was no valid ordinance in
existence and further that the provision in the act retrospectively
validating infringement of the fundamental rights of citizens was
not within the legislative competence of the Parliament.
RESPONDENTS
CONTENTION:
the Learned Attorney General firstly contended that the petitions were not
maintainable because no fundamental rights of the petitioners were directly impaired
and the petitioner was only a director, shareholder and holder of deposit and current
account with the banks but was not the owner of the property sought to be
nationalised considering that a Company is a legal person, separate and distinct from
its individual members and that the property of the company is not the property of
the shareholders.
(2) Further, the Attorney General submitted that the condition of satisfaction of
President was purely subjective and the Union of India was under no obligation to
disclose the existence of circumstances of the necessity to take action.
(3) The Attorney General submitted that Parliament had the legislative competence
within Entry 45 of List I of the Seventh Schedule i.e. “banking” and within Entry 42
of List III i.e. “acquisition and requisitioning of property”.
(4) It was pleaded by the Attorney General that compensation under Article 31(2)
does not mean a “just equivalent” and that the courts could not determine the
adequacy or the reasonableness of the compensation. He also contended that there
was no infringement of the fundamental rights as claimed by the petitioners and
therefore the act was valid.
DECISION OF THE COURT:
Firstly, the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1969
was struck down as the act failed to provide compensation to the banks according to
relevant principles and therefore impaired the fundamental right under Article 31(2)
of the Constitution. Due to this striking down of the Act, the Court did not delve into
the issue as to whether the Act violated freedom of trade and commerce under
Article 301.
(2) It was held that the petitions would not fail on the ground that the shareholders
were not holders of the property and that jurisdiction would not be denied by the
court when the individual right of the shareholders were impaired and therefore the
preliminary objection raised by the Attorney General against the maintainability of
the petitions failed.
 Further, it was held that the Act was not violative of Article 19(1)(g) of the
Constitution of India, however, the act was held to contravene Article 14 of the
Constitution since the guarantee of equality was  impaired by virtually preventing
the banks from carrying on the non-banking business.
AFTERMATH
 By a majority of 10:1, the Supreme Court of India struck down the Banking
Companies (Acquisition and Transfer of Undertaking) Act, 1969 mainly on the
ground that the proposed compensation to be provided to the 14 banks failed the test
of Article 31(2).
Thereafter, the Banking Companies (Acquisition and Transfer of Undertaking) Act,
1970 was enacted by the Parliament but with inclusion of a specific amount of
compensation to be paid to each of the 14 banks.
This amount was clearly specified in Schedule II of the 1970 Act unlike the
impugned Act of 1969 which provided for Constitution of a tribunal by the Central
Government in case compensation could not be arrived at through consensus.
Therefore, notwithstanding the striking down of the Act of 1969, Nationalisation of
Banks prevailed and subsequently in 1980, 6 additional banks were nationalized.