Case: Ganesh Bank of Kurundwad Limited &amp; Others Vs. Union of India Through Joint Secretary &amp; Others

2. The short facts leading to these petitions are this wise:Ganesh Bank of Kurundwad Ltd. was founded sometimes in the year 1920 and is having a banking license given by the Reserve Bank of India (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.The case of theis that it was carrying on its activities smoothly and that it incurred losses only once and that was in the financial yearThat was also for the reasons which were beyond its control, viz. (i) that 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 suddenly it was shocked to receive the order of moratorium in the morning of 8th January 2006. It led to unnecessary long queue at its branch at Dadar, 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 Reserve Bank of India thereafter appointed two directors of its own on the Board of Directors of theon 7th January 2006. The RBI then notified the proposed scheme of amalgamating the Petitioner bank with the Federal Bank on 9th January 2006. The Petitioner 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 Petitioner Bank with the Federal Bank. These decisions are challenged in these petitions.4. After the two petitions were filed, an interim order came to be passed on 27th January 2006 by this Court. The counsel for the Petitioners were heard and so also those for the Central Government, the RBI and the Federal Bank. This Court noted that whereas the moratorium was declared on 7th January 2006, within two days i.e. on 9th January 2006 the RBI proposed the name of Federal Bank to take over the Ganesh Bank. It was not known as to how any such scheme was drawn in such a short time. Similarly, when the Petitioner bank had made a representation on 23rd January 2006, the decision to amalgamate was arrived at on 24th January 2006. Prima facie, the Court felt that the steps taken were not appropriate and were taken in hurry. The Court therefore granted an interim injunction in terms of prayer (a)(iii) and (b)(ii) of the first petition thereby the operation and implementation of the order dated 24th January 2006 was stayed and the status quo, which existed prior to 24th January 2006, was restored. This Court, however, clarified that the moratorium will continue to operate and the two directors appointed by the RBI were also continued to function as the directors of the Petitioner bank.This order was challenged by the RBI and the Federal Bank in an SLP to the Apex Court. The Apex Court by its order dated 30th January 2006 directed this Court to hear and decide these petitions on a day to day basis. The interim order passed by this Court was however left undisturbed.6. Accordingly, the Respondents have filed their affidavits in reply and the Petitioners have filed their rejoinders. The Petitioners have amended their petitions also and further affidavits are filed by all the parties. The Respondents have relied upon the Reports of various Committees appointed by the Central Government and the RBI concerning the banking sector. A number of authorities were cited by the counsel appearing for all the parties. Thus, the pleadings were completed and thereafter the matter was heard from day to day from 14th February 2006 to 3rd March 2006. The parties sought time to file their written arguments which were filed by the Petitioners, the RBI and the Federal Bank by 9th March 2006. The matter is being decided thereafter.

Reasoning: 16. We quite see the concern of RBI to improve the banking sector even in rural areas. The submission of Mr.Salve was that larger the turnover, there are more economies of such large enterprise and there are better services. The profit margin goes down in terms of percentage, yet it goes up in terms of actual earning, while at the same time giving greater benefits to the customers. Having noted this concern of RBI, we have our doubts as to whether any such enhancement can be expected by an executive order. When the section speaks of not less than Rs.5 lakhs, it is difficult to say that such banks ought to have arranged a capital of Rs.50 crores and now Rs.300 crores. This is a small private commercial bank in rural sector and it is entitled to function in its own way. The performance of the Petitioner bank cannot be judged, therefore, on such a higherIn our view, court actions are only one factor to be considered for imposing the moratorium. The phrase "good reasons" in(1) is a wider term and it will not be correct to restrict it only to the actions mentioned under(2). Section 45 of the Act is concerned with preparing a scheme of reconstruction or amalgamation which would become necessary where the RBI is satisfied about the existence of either of the four grounds mentioned in section 45(4). Apart from public interest and the interest of the banking system, which are provided in(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 thatPrecursor to the framing of the scheme is the imposition of the moratorium which is provided in45(1) and (2). 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 narrowThe 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. In our view, this is a situation where two views are possible and if the regulating body arrives at a conclusion on the basis of the facts and figures before it and points out that it has been warning the Petitioner Bank for last over 3 years, it will not be proper for us to substitute our judgment for that of RBI. In the circumstances, we 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. Its judgment based on the facts before it cannot be substituted by us, merely because we may perhaps take another view of the matter. The moratorium has been challenged on the ground of malafides also. We will consider this challenge along with the challenge to amalgamation also on the basis of malafides.19. As far as the challenge to the appointment of two directors on the Board of Directors of the Petitioner Bank is concerned, the RBI does have the necessary power under section 36AB of the Act. In the circumstances, it cannot be faulted for appointing the two directors. We cannot therefore interfere into the impugned decision appointing the directors for any such reason. We make it clear that we decline to interfere with the decision imposing moratorium principally in view of the facts and circumstances of the case as narrated above and not because of failure of the Petitioner bank to meet the higher norms as set up by theour view, reconstruction certainly means strengthening the bank concerned. However, in the instant case, in view of the facts narrated earlier, and failure of theto augment its financial position, strengthening of the bank appeared to be clearly difficult if not impossible. In the circumstances, RBI had formed a value judgment as to what recourse it should take. We cannot fault with its decision not to go for reconstruction but to consider a scheme of amalgamation with Federal Bank.This was apart from the question of legality of any such merger of a commercial bank in a cooperative bank. Mr.Salve has submitted that a merger between a banking company and cooperative bank was not possible. Section 56 of the Act has made this Act applicable to cooperative societies subject to the modifications therein. While(a)(i) of this section makes a reference to a banking company to be construed as a reference to a cooperative bank, only those provisions of this Act would apply to a cooperative bank which are made applicable by section 56. In his submission,(zb) of this section is crucial inasmuch as it specifies that4 to 15 of section 45 do not apply to the cooperative banks whether transferor or transferee. Therefore, section 45(4), which empowers the RBI to prepare a scheme of amalgamation, does not apply to cooperative societies. Mr.Seervai, on the other hand, submitted that section 56 provides that the Act applies to cooperative societies unless the context otherwise requires. It further provides that reference to a banking company will be construed as a reference to a cooperative bank. Therefore, in his submission, a cooperative bank would be covered under section 45(15) of the Act. The interpretation placed by Mr.Seervai, however, does not explain the provision of(zb) which specifically omitsother than (1), (2) and (3) of section 45 from their application to cooperative societies. It is therefore difficult to see as to how the Petitioner bank could merge into a cooperative bank. In any case, at the level of the officers of RBI, they had an option, namely the proposal of a banking company to take over the liability of the Petitioner bank. In this scenario, if they opted for the same in the interest of the depositors to avoid any further controversy, they cannot bewe read anything more than what is specifically provided in thesenamely a personal hearing, it may become difficult to complete the process of amalgamation within the period of 6 months for which the moratorium under section 45(1) is to operate. The object of section 45 is to provide a relief to the depositors at the earliest where any such banking company lands into difficulty and is required to be either reconstructed or amalgamataed with other banking institution. Surely, the decision is required to be taken at the earliest. This is because the moratorium will be running in the meanwhile. Giving of a personal hearing to all such affected interests would delay the decision. What is contemplated is that their suggestions and objections must be shown due regard. That can be obtained by receiving such suggestions and objections and RBI giving its comments thereon. In our view, that is sufficient by way of compliance with principles of natural justice. That is also the view taken by a Full Bench of the Punjab and Haryana High Court in the case of Punjab Cooperative Bank v. Union 1 of IndiaAIR 2001 PunjabHaryana 1, where in para 42 it is observed as follows:"The process as contemplated under section 45 has to be computed within a period of 6 months. The grant of a right of oral hearing in every case may enable the concerned party to unduly obstruct and delay the proceedings with the result that the process of law may defeat the very purpose of it.In view of what is stated above, we do not find any substance in the objections either to the moratorium or amalgamation of the Petitioner bank with the Federal Bank on the ground of actual mala fides. A sufficient material has been placed before us to explain as to why moratorium became necessary. The Federal Bank has responded promptly thereupon. However, that itself cannot vitiate the reasons to impose the moratorium and it cannot be said that the moratorium was imposed for favouring the Federal Bank. A sufficient explanation has also been given as to why the other proposals were not accepted. The amalgamation cannot be either said to be malafide or in breach of any statutory provisions or arrived at without considering all relevant factors or in breach of principles of naturalis no quarrel with any of these propositions which are accepted propositions of law. In the facts of the present case, however, we are not impressed to accept the submissions either of factual malafide or of legal malafide.35. The second petition has been filed by an employee of Ganesh Bank. His grievance is that the service conditions will change. When we peruse the scheme, we find that the service conditions will remain as they are for a period of 3 years. Mr.Salveexplained that all necessary precautions for protecting the interest of the employees would be taken in view of the expectations of the Apex Court expressed inShephard v. Union of India(1987) 4 SCC 431.   There are some 250 employees of Ganesh Bank and though this is a petition by an individual employee, it is not filed in a representative capacity. On the other hand, the RBI had received letters from the employees supporting the amalgamation. Mr.Sawant raised two other points concerning day to day work. First is that the head office of Federal Bank is far away in Kerala and the employees will be required to go over there, may be occasionally. Surely, such an occasion will not arise for each and every employee and the Federal Bank will make provision for conveyance etc. in any such eventuality as per its rules. Mr.Sawant also expressed apprehension with respect to transfer to far off places. We are sure that the same will be avoided by the Federal Bank to the extent possible since it would like to have smooth relations with the employees. In fact, it should consider treating the registered office of Ganesh Bank as its regional office in the particular area wherefrom it may monitor functioning of the branches of the Petitioner bank. Mr.Sawant lastly submitted that most of these rural branches are conducting their affairs through the local language, i.e. in Marathi. The employees will find it difficult if there is any switch over. We expect the Federal Bank to take care of their apprehension and to continue the present practice which is in the benefit of the rural customers. It is a matter to be worked out with due cooperation of all concerned.36. Since the first petition is filed by the bank, it is more concerned with the interest of the shareholders. Their interest has been taken care of in Chapter IV of the proposed scheme which provides for rights and liabilities of the members of the transferor bank. It is no doubt true that there is a deferment of the amounts due to them for a considerable time on their shares, but in the scheme of the things it cannot be helped. The Petitioner bank knew for the last over 3 years that it was in difficulty and nothing prevented it from taking steps for merger on its own terms with a bank of its choice by following the provisions of the Companies Act. The report of the RBI shows that the directors of the bank are most reluctant to consider any such proposal. Now that all these things have come to a head, and when reconstruction is not feasible, RBI is applying the scheme which is uniform for all such situations. In fact, Mr.Salve preferred to it almost as a matter of policy wherein the scope of judicial review is very limited and particularly in economic decisions as held in BALCO Employees Union v. Union of 333 India(2002) 2 SCC 333.   The scheme having been uniformly applied, the shareholders cannot make a grievance.On the weight of the facts also, we do not think that the decision of the Respondents will be disturbed. We are conscious of the dicta in Anisminic Ltd. v. Foreign Compensation Commission1969 (1) All E.R. 208 that if the decision making body goes outside its powers or misconstrues the extent of its powers then too the courts can interfere. We are however unable to arrive at any such conclusion in the present case.39. In the circumstances, we answer both the points framed for determination in the negative. The challenge to the impugned orders cannot therefore survive.