The Supreme Court has clarified that the third proviso to Article 243ZL(1) of the Constitution is not a traditional proviso but an independent substantive provision that enlarges the scope of the main Article by incorporating the Banking Regulation Act, 1949 (BR Act) into the constitutional scheme for co-operative societies carrying on the business of banking. The Court ruled that the RBI’s power to supersede the Board of Directors of a multi-State co-operative bank under Section 36AAA(1) of the BR Act is not circumscribed by the six-month limit prescribed under Article 243ZL(1), and the BR Act applies in full to multi-State co-operative banks.
The Apex Court held that an order of supersession passed under Section 36AAA(1) of the BR Act can be extended beyond the original term of office of the Board, since once superseded the Board ceases to exist and all powers vest in the Administrator, with the outer limit of five years providing the sole safeguard against indefinite deferral of elections. At the same time, the Court clarified that the consultation requirement under the proviso to Section 36AAA(1) applies only to a co-operative bank registered with the Registrar of Co-operative Societies of a State and does not extend to multi-State co-operative banks.
The Court relied on the internal architecture of Article 243ZL, particularly the fourth proviso’s express exclusion of multi-State co-operative societies from the one-year extension, to hold that an exclusion presupposes a prior inclusion, confirming that multi-State co-operative banks fall within the sweep of the third proviso.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe noted that the BR Act is a parliamentary enactment under Entry 45 of List I of the Seventh Schedule, while the MSCS Act is traceable to Entry 44 of List I, and that Part IXB of the Constitution, comprising Articles 243ZH to 243ZT, was inserted by the Constitution (Ninety-Seventh Amendment) Act, 2011, conferring constitutional status upon co-operative societies. Article 243ZL(1) opens with a non-obstante clause laying down the general rule that no Board shall be superseded for a period exceeding six months, subject to four provisos.
The first specifies grounds for supersession; the second withdraws the power where there is no Government shareholding, loan, financial assistance, or guarantee; the third stipulates that in case of a co-operative society carrying on the business of banking, the provisions of the BR Act ‘shall also apply’; and the fourth extends the period from six months to one year for a co-operative society carrying on banking business, but expressly excludes multi-State co-operative societies from that extension, added the Court.
The Court observed that the expression ‘shall also apply’ in the third proviso is used in an additive and non-restrictive sense, incorporating the BR Act into Part IXB of the Constitution insofar as it pertains to multi-State co-operative banks. The Court held that the third proviso is not a proviso in the traditional sense but an independent substantive provision that enlarges the scope of Article 243ZL(1), since the Parliament has enacted a special provision for Boards of societies carrying on the business of banking. The Court further observed that the fourth proviso’s express exclusion of multi-State co-operative societies from the one-year extension presupposes their inclusion in the main provision, because an exclusion by its very nature presupposes a prior inclusion, and Parliament does not exclude from a proviso what could never have fallen within it in the first place.
Also read Delhi Court Grants Bail to AAP’s Satyendar Jain in Delhi Jal Board Tender Case
The Court emphasised that banking is impressed with a distinct public interest as it holds the savings of depositors, frequently persons of modest means who repose in the banking system both their trust and their life earnings, and the BR Act was enacted to arm the RBI with tools to safeguard depositors’ interests and maintain the solvency, stability, and discipline of banking institutions. Reading the third proviso as excluding multi-State co-operative banks from the reach of the BR Act would subordinate the protection of depositors and the discipline of the banking system to a truncated and overly technical reading of a constitutional proviso, defeating the very object of the enactment.
The Court noted that Section 36AAA(7) obliges the Administrator to convene a general meeting for election of new directors only upon expiration of the period of supersession specified by the RBI, and that the tenure of the erstwhile Board is of no consequence to the exercise of the supersession power, with the outer limit of five years providing the safeguard against indefinite deferral of elections. The Court also observed that the consultation requirement under the proviso to Section 36AAA(1) applies only to a co-operative bank registered with the Registrar of Co-operative Societies of a State, and since the Bank is admittedly a multi-State co-operative bank, this requirement does not apply.
Briefly, the dispute centres on Abhyudaya Co-operative Bank Limited, originally registered as a co-operative society under the Maharashtra Co-operative Societies Act, 1960, which was converted into a bank in 1965 with RBI permission and declared a Scheduled Bank in 1988 under Section 42(6)(a) of the RBI Act, 1934. Following a direction under Section 45 of the Banking Regulation Act, 1949, the Bank was amalgamated with two banks in Gujarat and one bank in Karnataka, becoming a multi-State co-operative bank. In May 2019, the appellants were elected to the Board of Directors for a statutory term of five years.
On Nov 24, 2023, the RBI, in exercise of power under Section 36AAA(1) and (2) read with Section 56 of the BR Act, superseded the Board for one year and appointed Mr. Satya Prakash Pathak as Administrator on three grounds: deterioration of financial health to a dangerous level, necessity to protect depositors’ interest, and need for expert professional management to restore the Bank to sound financial health.
The appellants challenged the First Supersession Order before the Bombay High Court. During the pendency of the writ petitions, the appellants’ statutory term expired on May 24, 2024. On Nov 18, 2024, the RBI extended the supersession for another year through the Second Supersession Order, and the Bombay High Court dismissed the writ petitions, holding that Section 36AAA of the BR Act continues to operate and is not rendered otiose by Articles 243ZL and 243ZT of the Constitution, that the proviso requiring consultation with the State Government has no application to a multi-State co-operative bank, and that principles of natural justice cannot be read into Section 36AAA. During the pendency of the appeals before the Supreme Court, on Nov 07, 2025, the RBI passed the Third Supersession Order extending supersession with effect from Nov 24, 2025.
