The Bombay High Court has ruled that the scope of judicial review in matters of economic and financial policy, particularly schemes of bank amalgamation formulated by the Reserve Bank of India under Section 45 of the Banking Regulation Act, 1949, is extremely limited. Courts will not interfere with the expert judgment of a specialized regulatory body like the RBI unless the decision is proven to be arbitrary, irrational, mala fide, or vitiated by procedural impropriety.
The Court explained that a scheme of amalgamation framed under Section 45 of the Banking Regulation Act, 1949, can validly create different classes of depositors (e.g., retail and institutional) and provide for differential treatment, including staggered repayment schedules and reduction of interest. Such classification is not violative of Article 14 of the Constitution, provided it is based on an intelligible differentia and has a rational nexus with the object of the scheme, which is to act in the public interest and the interest of depositors to save a failing bank.
Section 45 of the Banking Regulation Act, 1949, is a self-contained code for the amalgamation of banking companies in emergent situations. Its provisions, by virtue of the non-obstante clause in Section 45(14), have an overriding effect on any other law, agreement, or instrument. This includes the power to reduce interest and rights of depositors and creditors to the extent the RBI considers necessary in the public interest, which is a permissible restriction and not an unconstitutional deprivation of property, added the Court.
On the issue of discrimination and classification of depositors, the Division Bench comprising Justice Bharati Dangre and Justice Manjusha Deshpande observed that the classification between retail depositors (individuals, proprietorships, HUFs) and institutional depositors (corporations, firms, societies) is based on their distinct characteristics and nature of deposits. The Bench held that this classification is reasonable and has a rational nexus to the object of the scheme, which is to serve the public interest and protect the maximum number of depositors by prioritizing individuals over institutions.
The Bench noted that while Article 14 forbids class legislation, it permits reasonable classification. Treating these two distinct classes differently does not amount to treating equals unequally. The Bench also justified prioritizing smaller depositors, stating that it catered to approximately 84% of the total depositors, thereby preventing potential widespread unrest.
On the issue of staggered payments, denial of interest, and deprivation of property, the Bench observed that Section 45(5)(f) of the Banking Regulation Act, 1949, explicitly permits a scheme of amalgamation to include provisions for the ‘reduction of the interest or rights’ of depositors and creditors. Given the precarious financial condition and negative net worth of PMC Bank, the RBI was empowered to take such measures to ensure the stability of the transferee bank and the eventual repayment of the principal amount to all depositors.
The Bench reasoned that the alternative was liquidation, under which depositors would have likely received only up to the DICGC insured amount of Rs. 5 lakhs, and that too after a prolonged process. Therefore, the scheme, by ensuring 100% return of the principal amount, was a more favourable outcome for depositors.
On procedural impropriety and lack of consultation, the Bench, relying on the RBI’s affidavit, noted that the draft scheme was placed in the public domain, suggestions were invited, and appropriate changes were made before finalization. The Bench held that Section 45 provides for an adequate opportunity for representation through written objections and does not mandate an oral hearing for every depositor. It affirmed that in such emergent situations involving a large number of stakeholders, considering written representations is sufficient compliance with the principles of natural justice.
On the role and liability of DICGC, the Bench observed that the liability of the DICGC is fixed by the DICGC Act, 1961, at the insured amount (Rs. 5 lakhs per depositor). The withdrawals allowed during the moratorium were to provide immediate relief to depositors facing hardship. The Bench found no violation of the DICGC Act, stating that the scheme ensured the DICGC’s liability was met as per the statute and that the transferee bank was obligated to repay the DICGC over time, as permitted by law.
Briefly, the case concerns the Punjab and Maharashtra Co-operative Bank (PMC Bank), a Multi-State Scheduled Urban Co-operative Bank. As of March 31, 2019, it had deposits of Rs. 11,617.34 crores and advances of Rs. 8,383.32 crores. In September 2019, the Reserve Bank of India (RBI) received a complaint from a senior official of PMC Bank alleging that the bank had sanctioned significant amounts to the Housing Development and Infrastructure Limited (HDIL) group in gross violation of banking practices and had manipulated data submitted to the RBI.
A subsequent statutory inspection by the RBI revealed severe financial irregularities. It was discovered that the total exposure to the HDIL Group was camouflaged and severely under-reported. The bank’s management had used specific access codes for HDIL group loan accounts, making them visible to less than 25 out of 1,800 staff members, and deliberately excluded these stressed accounts from system-generated NPA reports. To conceal this, the management had added 21,049 fictitious loan accounts to the master data. This fraud led to a drastic decline in the bank’s financial health; its net worth plummeted from a positive Rs. 706.20 crore as of March 31, 2018, to a negative Rs. 5,278.21 crore as of March 31, 2019, with a significant deposit erosion of 45.43%.
To protect depositors’ interests, the RBI imposed ‘All Inclusive Directions’ on September 23, 2019, under Section 35A of the Banking Regulation Act, 1949, restricting withdrawals. The RBI also superseded PMC Bank’s Board of Directors and appointed an Administrator. After exploring various resolution possibilities, including capital infusion and merger with a strong bank, which did not materialize, the RBI concluded that an amalgamation was the most viable option to avoid liquidation. Consequently, the RBI formulated the ‘Punjab and Maharashtra Co-Operative Bank Ltd. (Amalgamation with Unity Small Finance Bank Limited) Scheme, 2022’ under Section 45 of the Banking Regulation Act, 1949. The scheme was sanctioned by the Central Government and came into force on January 25, 2022.
Appearances:
Senior Advocate Virendra Tulzapurkar, along with Advocates Sangram Chinnappa, Dipika Sahani, Bhoomika Vyas, Shantanu Shetty, Ankit Lohia, Siddharth Joshi, Viloma Shah, Harshad Vyas, Viraj Raiyani, M/s. AVP Partners, Dr. Uday P. Warunjikar, Vaishnavi M. Gujarathi, Aditya P. Kharkar, Anilkumar Patil, Zeel Jain, Aseem Naphade, Subrata Sen, Akash Loya, Sujit Lahoti, Tejasvi Nakashe, Haaris Koradia, Sujit Lahoti and Associates, Karl Tamboly, Bhavin Shah, Krupesh Bhosle, and Maulik Tanna, for the Petitioners
Senior Advocates Ravi Kadam, Ashish Kamat and Venkatesh Dhond, along with Advocates Dhaval Patil, M/s. K. Ashar and Co., Shivam Mehra, Ameya Gokhale, Rishabh Jaisani, Harit Lakhani, Richa Bharti, Ansh Kumar, Shardul Amarchand Mangaldas and Co., Shlok Parekh, Mustafa Kachwala, Shantam Mandhyan, Shrishti Shetty, Sakshi Sri, Krishnamurthy and Co., Prasad Shenoy, Parag Sharma, Aditi Phatak, Parichehr Zaiwalla, Ishita Desai, Megha More, Juhi Bhayani, Kedar Dighe, Ashutosh Mishra, Mohamedali M. Chunawala, J. B. Mishra and Ashotosh Mishra, for the Respondents
