Ganesh Bank, Kurundwad Ltd. And Ors vs The Union Of India And Ors

It was carrying on its activities smoothly, and it incurred losses only once and that was in the financial year 2004-05. That was also for the reasons which were beyond its control, viz (i) the value of the government securities, wherein it had made deposits, went down, and (ii) the provisioning norms set up by the RBI were made more stringent by it. It was on this background that it was shocked to receive the order of moratorium in the morning of 8th January, 2006. It led to unnecessary long queue at its Dadar branch, Mumbai, though there was no run on the bank any time in the past or even on that day as such. Thereafter, the issuance of the moratorium and the decision of the RBI to take further steps was duly advertised. The RBI appointed two directors of its own on the Board of Directors of the appellant-Bank on 7th January, 2006. The RBI then notified the proposed scheme of amalgamating the appellant-Bank with the Federal Bank on 9th January, 2006. The appellant-Bank objected to it by filing its objections on 23rd January, 2006, yet a decision was taken by the RBI and the Central Government on 24th January, 2006 sanctioning amalgamation of the appellant-Bank with the Federal Bank.

By Order dated 30.1.2006 this Court directed that the petitions were to be heard and decided early by the High Court. However, the interim order was left undisturbed.

As against these submissions of the writ petitioners, the stand of the RBI and the Central Government was that the Bank was in serious financial difficulties and therefore, the moratorium had to be imposed. The moratorium was fully justified on the facts of the case. The decision to amalgamate the appellant Bank with the Federal Bank was arrived at in full compliance with the statutory requirements and after considering relevant materials on record as well as the suggestions and objections from the appellant-Bank and all concerned, and after examining the proposals from the four other banks. It was, therefore, submitted that there is no reason to interfere with the decisions arrived at by the RBI and the Central Government which essentially were for benefit of the depositors. It was submitted that the interest of the employees was taken care of and the interest of the shareholders obviously came last.

After considering the rival submissions, the High Court held that the allegations were mala fides and were not established. Accordingly, the writ petitions were dismissed.

Learned counsel for the appellants submitted that the undue and unseemly haste with which the order of moratorium dated 7.1.2006 was passed is a clear indication of mala fides. Moreover, full and correct facts were not placed by the RBI before the Central Government, in particular, facts regarding bank balances with the RBI and other banks and cash at hand amounting to Rs.36.62 crores were not placed before the Central Government. Actual figure of those liquid assets were Rs.119 crores as against total deposits of Rs.217.43 crores which is 55% against required 25% as per RBI norms. This was indicative of the bank's strong liquidity position. Total assets of the bank as on 31.3.2005 were Rs.235.44 crores as against total liabilities of Rs.220.45 crores. Therefore, the assets were exceeding the liabilities by Rs.14.99 crores. Even as on 31.12.2005, the assets were exceeding the liabilities by Rs.17.70 crores. The net loss in the year 2004-05 on which great stress was laid by the RBI and the Central Government was on account of notional/book entry loss with respect to additional provision for Non Performing Assets (in short the 'NPAs') and depreciation in the value of Government securities. In respect of Urban Cooperative Banks, the RBI has relaxed provisional norms up to 5 years in respect of depreciation in the value of Government securities. However, the same was denied to the Bank. Majority advances of the banks were given to the priority sector namely Agricultural advances to which Securitisation Act is not applicable. Therefore, relaxation was necessary to be given. The RBI had granted permission to the Bank to open three new Branches after being satisfied that the Bank was in a sound financial position. Several awards were given to the Bank for exercising banking services. There was no complaint from any depositor, customer or shareholder and the Bank has not defaulted in payment of taxes or other government dues.

The factual scenario indicates that the proposal for amalgamation with the Federal Bank was circulated and in a pre-determined manner the proposal was ultimately approved on 24.1.2006. The draft scheme of amalgamation was sent to the Central Government to be operative w.e.f. 27.1.2006. When the appellant-Bank approached the High Court on 24.1.2006 and the copy of the writ petition was served on the RBI and the Central Government, the Notification of amalgamation w.e.f. 25.1.2006 was issued on 24.1.2006 itself so that it could be argued before the High Court that the appellant Bank was no longer in existence on 25.1.2006. The exercise of power under Section 45 of the Act was done solely for the purpose of favoring the Federal Bank. Though Section 36(AB) of the Act empowers the RBI to appoint Additional Directors there is no provision which empowers RBI to direct that no decision of the Board of Directors would be valid unless it is approved by the Directors appointed by the RBI.

In para 5 of the letter, the RBI wrote to the Additional Secretary, Ministry of Finance that infusing fresh capital did not appear to be feasible. There was reluctance on the part of the shareholders and directors to merge with the stronger Bank. It was therefore imperative to make immediate arrangement to protect the interest of the depositors to merge with another bank. It is for this purpose that the moratorium was proposed under Section 45(1) In the counter affidavit filed before the High Court, it was stated on behalf of RBI that in June 1998, the Chairman of the appellant Bank was advised that old private sector banks having present net worth of Rs.5 lakhs should attain the level of Rs.50 crores within a period of 3 years On 12th January, 1999, the appellant -Bank sent the plan to augment resources up to Rs.20.08 crores over the period of 5 years. At on 31st March, 2002 its net worth stood at only Rs.6.62 crores and its paid up capital as on 31st March, 2005 was Rs.1.82 crore. It was further stated that as per the Bank's Balance Sheet as on 31st March, 2005, it had reported the net loss of Rs.5.97 crores. In view of the deteriorating financial position, further meetings were held on 12th August, 2005, 26th August, 2005 and 12th September, 2005 to point out the major concerns of RBI vis. low paid up capital of Rs.182 crore, high level of gross NPAs (18.04%) and net loss of Rs.5.97 crores. On 14th October, 2005 the bank was asked to submit a detailed plan for capital augmentation. It is on the background that the moratorium was imposed on 7th January, 2006.

Appellants' stand was that since deposits with the Bank were Rs.92 crores, it was irrational to insist that it should have capital funds of Rs.50 crores. It was however pointed out that the Bank was consistently increased its capital and it stood at Rs.2.95 crores by 5th January, 2006 which included Rs.1.13 crore in the form of share application money. It was nothing but a part of share capital. Again, as far as NPAs are concerned, they had gone down from 14.10% to 9% and, as far as loss of Rs.5.97 crores is concerned, it is because of the change in the provisioning norms.

It is brought on record that Federal Banks' strength lay on the fact that it is a strong bank with huge net worth, large capital funds and huge amount of deposits with more than adequate CRAR. Its net worth is about Rs.897 crores, capital is around Rs.85 crores, and deposits to the tune of Rs.16,448 crores. Its CRAR (11.34%) exceeds the RBI requirement (9%) and percentage of NPAs (Gross and Net) is (5.17% and 1.41% respectively). For the accounting period ending 31st December, 2005 its profit is Rs.174 Crores.

(ii) Irrationality, namely, Wednesbury unreasonableness.

(iii) Procedural impropriety.

(Also see Padfield v. Minister of Agriculture, Fisheries and Food (LR (1968) AC 997).

Looked at from the aforesaid angle, the judgment of the High Court does not suffer from any infirmity to warrant interference. The appeal is dismissed.