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CASE NO.: Appeal (civil)  3698 of 2006

PETITIONER: Ganesh Bank, Kurundwad Ltd. and Ors.

RESPONDENT: The Union of India and Ors.

DATE OF JUDGMENT: 28/08/2006

BENCH: ARIJIT PASAYAT & C.K. THAKKER

JUDGMENT: J U D G M E N T (Arising out of SLP (C) No. 7188 of 2006)

ARIJIT PASAYAT, J.

       Leave granted.   

       The present appeal is directed against the judgment and  order dated 5.4.2006 passed by a Division Bench of the  Bombay High Court in Writ Petition No.337/2006 questioning  Notification dated 7th January, 2006 issued by the  Government of India, Ministry of Finance imposing a  moratorium in respect of the appellant-Ganesh Bank of  Kurundwad Ltd. (hereinafter referred to as "Bank") for a period  of three months from the date of order upto and inclusive of  6th April, 2006. Amongst others, the said Bank was directed  not to grant any loan or advances or incur liability without the  permission in writing of the Reserve Bank of India (in short the  ’RBI’’). Further, withdrawal of sums not exceeding 5,000/- by  a Savings Bank or Current Account holder was permitted with  a further relaxation of amount not exceeding Rs.10,000/- or  the actual balance whichever is less in the event of certain  difficulties such as medical treatment, higher education and  obligatory expenses like marriage etc. Challenge was also  made to the appointment of two Directors on the Board of  Directors of the Bank.

Further Challenge was made to the Notification dated  9.1.2006 proposing a scheme of amalgamation of the Bank  with Federal Bank, another private sector commercial bank  and to the order dated 24.1.2006 sanctioning amalgamation of  Bank with Federal Bank.  

       It is to be noted that along with the said writ petition filed  by the Bank, another writ petition (WP(C) No. 160/2006) was  filed by one Mr. Sunil Mahadev Chavan.  

       The background facts in which the writ petitions were  filed are essentially as follows:                  Appellant Bank was founded sometimes in the year 1920  and is having a banking license given by the 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

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areas of these three districts.  

       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.   

       An interim order was passed by the High Court in  W.P.337/2006 by which operation of the order dated  24.6.2006 was stayed and status quo was directed to be  maintained. The order was challenged by the RBI and Federal  Bank before this Court.  

       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.  

Before the High Court the principal submissions of the  writ petitioners were two-fold, namely that the order dated 7th  January, 2006 imposing moratorium and then the order dated  7th January, 2006 appointing two Directors are both mala fide  to suit the convenience of Federal Bank, ultra vires the power  of the RBI and the Central Government and, therefore, bad in  law, illegal and void. Similarly, the other submission of the  writ petitioners was that the subsequent framing of scheme of  amalgamation on 9th January, 2006 and the decision to  sanction the amalgamation taken on 24th January, 2006 are  motivated and pre-planned decisions for the benefit of the  Federal Bank, mala fide and ultra vires the powers of the  Central Government and the RBI. It was further submitted  that both these decisions are not justified on facts and have  been arrived at without taking into consideration the relevant  materials. As far as the first decision imposing the moratorium  is concerned, it was submitted that there were no good  reasons to impose the same and, as far as the decision to  amalgamate is concerned, it was submitted that the said  decision was arrived at without considering the proposals of  four other banks which were better placed and had made  better offers.  

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

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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.             According to the High Court the following two questions  were to be adjudicated:  

"(A)    Whether the decision dated 7th January,   2006 of the Central Government imposing  moratorium and to appoint two directors was  mala fide, ultra vires the powers of the Central  Government and the RBI, bad in law and void  and unjustified on facts?

(B)     Whether the notification dated 9th  January, 2006 containing the proposed  scheme of amalgamation and the decision to  sanction the amalgamation dated 24th  January, 2006 were mala fide, ultra vires the  powers of the Central Government and the RBI  and unjustified on facts?"  

Taking note of the factual background the High Court  held that the inference drawn by RBI was a positive inference  and cannot be termed to be perverse. The High Court felt that  it is the discretion of the decision maker where two views are  possible and if the regulatory body arrived at a conclusion on  the basis of facts and figures before it and points out that it  has been warning the Bank for last over three years it will not  be proper for the High Court to substitute its judgment for  that of the RBI. Therefore, it was held that the decision of the  RBI to impose the moratorium was neither unjustified nor  against the provisions of Section 45(1) of the Banking  Regulation Act, 1949 (in short the ’Act’). It was noted that the  RBI is an expert body to regulate the banking activities and its  judgment based on the factual scenario cannot be substituted  by the High Court, may be because another view of the matter  was possible. The High Court held that the allegation of mala  fides was not substantiated. It was also of the view that while  dealing with the question of mala fides, the following questions  were also to be dealt with:

"(i)    The first one is non-consideration of any  scheme for reconstruction before going for  amalgamation.

(ii)    The second is with respect to proposing  amalgamation with Federal Bank on 9th  January, 2006 itself.   (iii)   The third facet is not considering the  proposal of other banks.

(iv)    The fourth is in respect to an adequate  opportunity under Section 45(6) and (7) of the  Act."  

After considering the rival submissions, the High Court

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held that the allegations were mala fides and were not  established. Accordingly, the writ petitions were dismissed.

The stands taken before the High Court were re-iterated  by learned counsel appearing for the appellant and the  respondents.  

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.

When objections were called for by the RBI regarding  amalgamation within a span of 15 days in January, 2006, out  of the total objections received by RBI, 97.49% of the  customers/depositors objected to moratorium and/or  amalgamation of the Bank and have opted for independent  entity of the Bank.  

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

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unless it is approved by the Directors appointed by the RBI.  

The entire exercise was pre-conceived under the garb of  exercise of statutory authority. There was a systematic plan to  amalgamate the appellant-Bank with the Federal Bank. The  entire proceedings are thus vitiated by malice in law. The  rejection of the proposal of Saraswat Bank is vitiated on  account of misunderstanding of Section 56(zb) of the Act and  on account of a failure to consider the interest of shareholders  whose interest would continue to be of paramount importance.  On account of heavy floods there was temporary disruption of  banking activities and this aspect has not been considered.  

The fact that Federal Banks’ Board Meeting was  preponed from 11.1.2006 to 8.1.2006 is a pointer to the fact  that they were very much in know of things to gain under  advantage.

The data given by the RBI relating to some other  amalgamation i.e. in cases of Global Trust Bank and Nedgundi  Bank have no relevance as in those cases there were large  scale complaints of fraud.  

In response, learned counsel for the respondent No.4 i.e.  Federal Bank submitted as follows:

The procedure, process and yardsticks envisaged under  Section 45 of the Act for the amalgamation of a financially  unviable bank with a stronger bank, cannot be the same as  are applicable to a tender process. It is submitted that when  acting under Section 45 of the Act, the primary consideration  must be of public interest. Under the said provision, the RBI  has the statutory duty and responsibility to act swiftly and  decisively to protect interests of depositors and public  confidence in the banking system. In contrast, when awarding  a tender, it is primarily commercial considerations that must  be the selection process. It is, therefore, submitted that it is in  public interest not to interfere on commercial consideration  with a decision made under Section 45 so long as it  safeguards depositors’ interests and public confidence in the  banking system in an emergent situation.  

The respondent No.4-Federal Bank is a financially strong  bank with high net worth, large capital funds and huge  amount  of deposits with more than adequate capital to Risk  Weighted Assets Ratio (in short the ’CRAR’). Its net worth is  about Rs.897 crores and its capital is about Rs.85 crores It  has deposits to the tune of Rs.16,448 crores and its CRAR at  11.34%, exceeds the Reserve Bank of India requirement of 9%.  It has a very low percentage of NPA with its Gross NPAs being  5.17% and Net NPA being 1.41%. As of 31st December, 2005  Federal Bank has recorded a profit of Rs.174.48 crores. The  contrast on each of these parameters with the appellant-Bank  is striking. On each parameter, the performance of the  appellant-Bank is abysmal in comparison to Federal Bank.  

It is also pertinent to note that Section 45 of the Act does  not contemplate or require the consent of either the transferor  or the transferee bank, although both are given an opportunity  to lodge their objections/suggestions to the draft scheme,  before a final decision is taken.  

It was submitted that Federal Bank was not privy to any  information from RBI regarding the status of the appellant- Bank or any proposal to impose a moratorium at any time

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prior to 7.1.2006 when for the first time the order of  moratorium and the RBI’s press release was placed on RBI’s  website.  

It was also submitted that allegations of complicity based  on the advancement of the date of Federal Bank’s Board  Meeting from 11.1.2006 to 8.1.2006 are completely  unfounded. It was submitted that Federal Bank had indeed  vide its Notice dated 29.12.2005 originally scheduled the said  Board Meeting for 11.1.2006 at Kochi, but this date was found  to be inconvenient to several directors. Instead, 8.1.2006 was  found to be a more convenient date for the meeting, since  firstly many of the directors were congregating at Kochi for the   wedding of the son of one of Directors on that date, and  secondly, one other director, an NRI was scheduled to attend a  meeting at the PMO on 7.1.2006. The said director would also  have found it convenient to attend the Board Meeting, if it  were to be held on 8.1.2006. In view thereof, for bona fide  reasons and in good faith, the said Board meeting was  rescheduled for 8.1.2006 vide notice dated 4.1.2006.        

Certain aspects which have been noted by the High Court  to dismiss the appellant’s writ petition need  to be noted to  test how for the conclusions are correct.

The first is whether there were "good reasons" for the RBI  to apply to the Central Government for the moratorium which  led to the impugned order dated 24th January, 2006, the  concept of "good reasons" contemplated under Section and as  to how the RBI justifies its decision on the basis of the  yardstick applied by it. As far as the appellant bank is  concerned, its case is that it is a small commercial bank and  the only year in which it had made losses was for the financial  year 2004-05. That was because of the value of the  Government securities going down and the provisioning norms  being made more stringent by the RBI. According to the RBI’s  application to the Central Government, the net worth of the  petitioner bank had become negative and so also CRAR had  become negative and was at 5.83.

As against this stand of the RBI, it was pointed out on  behalf of the appellant-Bank that Annexure-I to RBI’s  application under Section 45(1) dated 4th January, 2006  contained the key financial positions of the Bank. Clause 8  thereof dealt with the NPAs.  It was pointed that the net NPAs  had gone down from 10.59% to 8.32%. It was also pointed out  that the Bank had done good resource mobilization in the  meantime and its paid up capital had gone up from Rs.1.52  crore to Rs.1.82 crore.  

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

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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.

High Court noted that the Bank had paid up capital of  Rs.1.82 crores only, high gross NPAs at 18.04% and net loss of  Rs.3.97 crores. It was in these circumstances that the RBI had  to decide as to whether the depositors of the Bank required  any protection. RBI had been monitoring the financial position  of the Bank since June 1998 and since December 2003 the  Bank had been placed under monthly monitoring as provided  under Section 27 of the Act. According to High Court,  expression "good reasons" under Section 45(1), primarily  relates to   interest of the depositors and the interest of the  Bank. This is because the primary objective of the Act is  protection of the interest of depositors as against the primary  objective of the Company Law which is to safeguard the  interest of shareholders. This is what is specifically stated in  the Objects and Reasons of the Act. On these facts, the RBI  was of the view that an appropriate action was necessary. It  could not be said that the decision was lacking in the absence  of good reasons. It is difficult to say that it was taken for the  benefit of the Federal Bank since these reasons go back to  December 2003 when Federal Bank was not in picture.   

It has been submitted that a small bank like the  appellant cannot be expected to have the Capital Adequacy of  Rs.50 crores as advised in June 1998 and which was later on  revised to Rs.300 crores by circular dated 20th February  2004. Reference is made to Section 11(3)(i) of the Act which  provides that if a banking company has places of its business  in more than one State, it is required to have the aggregate  value of its paid-up capital and reserves at not less than Rs.5  lakhs. If that is the expectation, the RBI cannot insist on the  requirement of Rs.50 crores and then go on increasing it  further. Reliance is placed on the decision of this Court in  Assam Co. Ltd. v. State of Assam (2001 (4) SCC 202), which  lays down that a delegate cannot over-ride the Act either by  exceeding the authority or by making provision which is  inconsistent with the Act. On the other hand, stand of RBI is  that the language of Section 11(3)(i) is that in the case of such  a banking company, the aggregate value of paid-up capital and  reserves shall not be less than Rs.5 lakhs. Therefore,  insistence of Rs.50 crores or a higher amount cannot be said

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to be erroneous. With globalisation, finance and banking in  rural areas also have to improve and it is from that point of  view that the RBI had expected the above referred  enhancement. That was expected from all similarly situated  banks and not merely from the appellant-Bank alone.  Reference is made to the expectations under the Basle  Committee on Banking Supervision, 1988 and the first  Narasimham Committee Report on Financial System, 1991  which recommended on the basis of the Basle Committee that  India also must conform to the international standards of  capital adequacy in a phased manner. Second Narsimham  Committee Report on Banking Sector Reforms of 1998 led RBI  to issue guidelines to revise the minimum paid-up capital for  the private sector banks.  The actual scenario shows that when the paid-up capital  of the Bank is so low, namely Rs.1.82 crore, its gross NPAs are  at higher level (8.04%), its net worth had turned negative and  the net loss is Rs.5.97 crores. There was nothing wrong on the  part of the RBI to expect an appropriate plan of capital  augmentation. The Bank has not been able to do that and it  was quite likely that it would land into difficulties.  The phrase "good reasons" in sub-section (1) of Section  45 is a term of wide amplitude and it will not be correct to  restrict it only to the actions mentioned under sub-section (2)  of Section 45 of the Act as is contended by the appellant.  The  provision is concerned with preparing a scheme of  reconstruction or amalgamation which would become  necessary where the RBI is satisfied about the existence of   any of the four grounds mentioned in Section 45(4). Apart  from public interest and the interest of the banking system,  which are provided in sub-clause (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 that sub-section.  Precursor to the framing of the scheme is the imposition of the  moratorium which is provided in sub-sections (1) and (2) of  Section 45. 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 narrow one.   It has been contended that there was a negative impact  when moratorium was imposed, and there were long queues at  four branches of the appellant Bank on 8th January 2006.  The RBI arranged to send an amount of Rs.2 crores to the  Bank from its Current Account to meet the depositors’  demands. The manager of the Appellant Bank’s branch at  Dadar has made an affidavit to state that he had not asked for  an amount of Rs.2 crores and yet it was sent by RBI. The  branch manager has further stated that depositors were  unhappy with the decision of RBI. These are all disputed  questions as rightly noted by the High Court.  As far as the  views of the depositors are concerned, they are bound to vary  from person to person and no definite conclusion can be  drawn merely on the bank manager’s affidavit that people were  angry against RBI. Besides, no depositor has questioned  legality of the action. It can be said that the action of the RBI  is a pre-emptive action which it took considering the then  financial position of the appellant Bank and to prevent further  difficulties which were likely. It is not that when there is a run  on the bank then only RBI must intervene or that it must  intervene only when there are good number of court  proceedings against the concerned bank. The RBI has to take  into account the totality of the circumstances and has to form

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its opinion accordingly.   The ultimate 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. Even if  two views are possible since  the regulating body has arrived at a conclusion on the basis of  the facts and figures before it, and it has pointed out that it  has been warning the appellant Bank for last over 3 years, it  will not be proper for the Courts to substitute their judgment  for that of RBI. In the circumstances, it 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. The moratorium has  been challenged on the ground of malafides also. This  challenge along with the challenge to amalgamation also on  the basis of malafides needs to be considered.  As far as the challenge to the appointment of two  directors on the Board of Directors of the appellant Bank is  concerned, the RBI has the necessary power under Section  36AB of the Act. In the circumstances, it cannot be faulted for  appointing the two directors.  That brings into focus the question as to whether the  decision of RBI to recommend a scheme for amalgamation on  9th January 2006 and the decision of the Government to  sanction the amalgamation on 24th January 2006 could be  said to be mala fide or bad in law. As far as this question is  concerned, it contains many sub-questions which are as  follows:- (i) The first one is non-consideration of any  scheme for reconstruction before going for  amalgamation.   (ii) The second is with respect to proposing  amalgamation with Federal Bank on 9th  January 2006 itself.   (iii) The third facet is not considering the  proposal of four other banks.   (iv) The fourth is with respect to an adequate  opportunity under Section 45(6) and (7) of the  Act.  

Now, as far as the first two questions of non- consideration of reconstruction and proposing merger with  Federal Bank, the RBI has noted that the Bank was in  difficulties from 1990 and particularly from December 2003  when it was placed under monthly monitoring. RBI in its  application for moratorium to the Central Government dated  4th January 2006 had clearly stated that during the  discussion with the appellant-Bank, major shareholders and  directors had shown total reluctance to merge into the  stronger bank. In view thereof, it was imperative that  immediate arrangement to protect the interest of the  depositors was to be made through its merger with a bank  under Section 45 of the Act. RBI had, therefore, made an effort  and called upon the appellant-Bank, that if possible, to  explore the possibility of merger with another stronger bank. It  had also made an effort to impress that there should be  infusion of fresh capital. That was not coming. There could be  a reconstruction by bringing in more money or by narrowing  the size of the appellant-Bank which did not appear to be  feasible. The only option left was that of amalgamation.  When a moratorium is imposed, RBI was duty bound to  prepare a scheme either of reconstruction or of amalgamation  under Section 45(4) with any other banking institution. Thus,  RBI had to give a scheme. Federal Bank had responded  immediately and unconditionally. The fact that the appellant-

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Bank was put under moratorium was advertised on web site  on 7th January 2006 itself. It is at that stage that Federal  Bank promptly gave its proposal on 8th January 2006. The  Federal Bank gave three reasons in its letter to RBI which were  as follows:- (i)  Ganesh Bank of Kurundwad Ltd. has 32  branches situated in Western Maharashtra  and Belgaum area of Karanataka. Our  presence in this area is very minimal and  adding up of the branches of Ganesh Bank of  Kurundwad Ltd. will enable us to have  significant presence in the area.  (ii) Ganesh Bank of Kurundwad Ltd. has mot  of the branches in the agricultural heartland  which would enable us to augment our credit  disbursal to agricultural sector.  (iii). Small size of Ganesh Bank of Kurundwad  Ltd. ensures that there will not be any  difficulty in the merger process between our  bank and them.

Thereafter it stated as follows:- We also inform our unconditional acceptance  to make full payment to depositors and that we  will not demand any regulatory forbearance."  

Thus, the Federal Bank was ready to honour full  liabilities of the depositors and did not ask for any  concessions. Therefore, on the basis of a standard scheme, the  opinion of the appellant-Bank was sought on 9th January  2006 with respect to merger in Federal Bank. The scheme was  described as a "cut and paste scheme" and of RBI’s action as a  regulator in the interest of the depositors was highlighted.  

It appears that the action of the RBI was based on the  finding about the negative net worth and CRAR of the  Appellant-Bank, its inability to infuse fresh capital and the  continued existence of a high level of NPAs. It has been rightly  pointed out that once it was decided to amalgamate by reason  of Section 45 of the Act, the RBI had to move with utmost  expedition. This is of paramount importance to prevent erosion  of the confidence of the depositors. Once such confidence is  lost it becomes difficult to revive the confidence and the  credibility.  

This Court had occasion to deal with need for expedition  in Joseph Kuruvilla Vellukunnel v. Reserve Bank of India and  Ors. (1962 (Supp.) 3 SCR 632) and Reserve Bank of India and  Ors. v. Timex Finance and Investment Co. Ltd. and Ors. (1992  (2) SCC 344). It is not in dispute that there were long queues  and on 8.1.2006 the one branch of the appellant-Bank  actually faced cash shortage and had to draw its funds with  the RBI protecting the interest of the depositors because  during such period there are severe restrictions on the ability  of the depositors to operate their bank accounts. Therefore,  with a view to protect the interest of the depositors, the RBI  has to act expeditiously to identify another bank prepared to  take over the appellant-Bank and keeping in view the  background principles governing merger and amalgamation  RBI had to act with expedition. The factual scenario does not  show that there was any undue haste or mala fides involved.  

Under Section 45 of the Act, the primary consideration is  public interest.  There is an underlying object of acting swiftly  and decisively to protest interests of depositors and ensure

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public confidence in the banking system. The emergent  situation which warrants action with expedition cannot be lost  sight of while deciding the legality of the action.  

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.

As observed by this Court in Bari Doab Bank Ltd. v.  Union of India and Ors. (1997 (6) SCC 417) the provisions of  Section 45 of the Act provide adequate opportunity of a  representation and no additional opportunity is required to be  given. The objection filed by the appellant-Bank was duly  considered. In fact, certain objections were raised and  comments of the RBI on them were forwarded to the Central  Government along with the final recommendations. The RBI  was of the view that the proposal received from the Federal  Bank was best under the circumstances and, therefore, the  same appears to have been accepted.  

At this juncture it is to be noted that offer of Federal  Bank was an unconditional offer, whereby it proposed to take  over the responsibility of any regulatory forbearance.  Three  reasons given by the Federal Bank to take over the appellant’s  Bank were considered cogent reasons and, therefore, RBI’s  decision cannot be faulted. As rightly contended the offers  received from the City Bank, Standard Chartered Bank were  neither comprehensive nor unconditional. In fact, they were  not concluded offers, since they were both dependent upon a  request for due diligence and in certain instances regulatory  forbearances. Ratnakar Bank’s offer was not accepted as it  was itself an ailing bank.  

Learned counsel for the appellants has highlighted that  Sarastwat Bank’s offer was an equally good offer if not better  and should  have been accepted. It has been pointed out by  learned counsel for the  respondents that Saraswat Bank is a  Multi State Co-operative Bank and its functioning is governed  by Multi State Cooperative Societies Act, 2002 (in  short ’2002  Act’). The legal opinion available to the RBI was that it was not  feasible or permissible to amalgamate a commercial bank with  a cooperative Bank by reason of the provisions of the Act as  well as 2002 Act. The RBI was of the view that such  amalgamation is not possible under Sections 17 and 18 of the  2002 Act as also Section 56 (zb) of the Act.  It was pointed out  that Saraswat Bank cannot be considered to be a banking  company for the purpose of Section 45(4) to 45(15) of the Act.  In order to be a banking company within the meaning of the  Act, the entity in question must be a company. Section 56(zb)  of the Act excludes the applicability of Section 45(4) to 45(15)  so far as cooperative banks are concerned. It was pointed out  that even if it is conceded for the sake of argument that legally  amalgamation is permissible it could have taken a very long  time to get requisite clearance from several other agencies  under the 2002 Act and could not have gone through  expeditiously. It is also pointed out that an amalgamation of  Multi State Cooperative Bank is subject to far less regulatory  control of the RBI especially in relation to non banking  matters. There is no dispute that the application made by

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Saraswat Bank was duly considered by the RBI.    

The scope of Judicial review in administrative matters  has been the subject matter of consideration before this Court  in several cases.

There should be judicial restraint while making judicial  review in administrative matters. Where irrelevant aspects  have been eschewed from consideration and no relevant aspect  has been ignored and the administrative decisions have nexus  with the facts on record, there is no scope for interference.   The duty of the court is (a) to confine itself to the question of  legality; (b) to decide whether the decision making authority  exceeded its powers (c) committed an error of law (d)  committed breach of the rules of natural justice and (e)  reached a decision which no reasonable Tribunal would have  reached or (f) abused its powers.  Administrative action is  subject to control by judicial review in the following manner:

(i)     Illegality: This means the decision- maker must understand correctly the  law that regulates his decision-making  power and must give effect to it.

(ii)    Irrationality, namely, Wednesbury  unreasonableness.  

(iii)   Procedural impropriety.

        One of the points that falls for determination is the scope  for judicial interference in matters of administrative decisions.  Administrative action is stated to be referable to broad area of  Governmental activities in which the repositories of power may  exercise every class of statutory function of executive, quasi- legislative and quasi-judicial nature. It is trite law that  exercise of power, whether legislative or administrative, will be  set aside if there is manifest error in the exercise of such  power or the exercise of the power is manifestly arbitrary (See  State of U.P. and Ors. v. Renusagar Power Co. and Ors. (AIR  1988 SC 1737). At one time, the traditional view in England  was that the executive was not answerable where its action  was attributable to the exercise of prerogative power. Professor  De Smith in his classical work "Judicial Review of  Administrative Action" 4th Edition at pages 285-287 states the  legal position in his own terse language that the relevant  principles formulated by the Courts may be broadly  summarized as follows. The authority in which discretion is  vested can be compelled to exercise that discretion, but not to  exercise it in any particular manner. In general, discretion  must be exercised only by the authority to which it is  committed. That authority must genuinely address itself to the  matter before it; it must not act under the dictates of another  body or disable itself from exercising discretion in each  individual case. In the purported exercise of its discretion, it  must not do what it has been forbidden to do, nor must it do  what it has not been authorized to do. It must act in good  faith, must have regard to all relevant considerations and  must not be influenced by irrelevant considerations, must not  seek to promote purposes alien to the letter or to the spirit of  the legislation that gives it power to act, and must not act  arbitrarily or capriciously. These several principles can  conveniently be grouped in two main categories: (i) failure to  exercise a discretion, and (ii) excess or abuse of discretionary  power. The two classes are not, however, mutually exclusive.

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Thus, discretion may be improperly fettered because irrelevant  considerations have been taken into account, and where an  authority hands over its discretion to another body it acts  ultra vires.

The present trend of judicial opinion is to restrict the  doctrine of immunity from judicial review to those classes of  cases which relate to deployment of troupes, entering into  international treaties, etc. The distinctive features of some of  these recent cases signify the willingness of the Courts to  assert their power to scrutinize the factual basis upon which  discretionary powers have been exercised. One can  conveniently classify under three heads the grounds on which  administrative action is subject to control by judicial review.  The first ground is ’illegality’ the second ’irrationality’, and the  third ’procedural impropriety’. These principles were  highlighted by Lord Diplock in Council of Civil Service Unions  v. Minister for the Civil Service (1984 (3) All.ER.935),  (commonly known as CCSU Case). If the power has been  exercised on a non-consideration or non-application of mind to  relevant factors, the exercise of power will be regarded as  manifestly erroneous. If a power (whether legislative or  administrative) is exercised on the basis of facts which do not  exist and which are patently erroneous, such exercise of power  will stand vitiated. (See commissioner of Income-tax v.  Mahindra and Mahindra Ltd. (AIR 1984 SC 1182) . The effect  of several decisions on the question of jurisdiction has been  summed up by Grahame Aldous and John Alder in their book  "Applications for Judicial Review, Law and Practice" thus:

"There is a general presumption against  ousting the jurisdiction of the courts, so that  statutory provisions which purport to exclude  judicial review are construed restrictively.  There are, however, certain areas of  governmental activity, national security being  the paradig, which the courts regard  themselves as incompetent to investigate,  beyond an initial decision as to whether the  government’s claim is bona fide. In this kind of  non-justiciable area judicial review is not  entirely excluded, but very limited. It has also  been said that powers conferred by the Royal  Prerogative are inherently unreviewable but  since the speeches of the House of Lords in  council of civil Service Unions v. Minister for  the civil Service this is doubtful. Lords  Diplock, Scaman and. Roskili appeared to  agree that there is no general distinction  between powers, based upon whether their  source is statutory or prerogative but that  judicial review can be limited by the subject  matter of a particular power, in that case  national security. May prerogative powers are  in fact concerned with sensitive, non- justiciable areas, for example, foreign affairs,  but some are reviewable in principle, including  the prerogatives relating to the civil service  where national security is not involved.  Another non\027justiciable power is the Attorney  General’s prerogative to decide whether to  institute legal proceedings on behalf of the  public interest."

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(Also see Padfield v. Minister of Agriculture, Fisheries and  Food (LR (1968) AC 997). The court will be slow to interfere in such matters  relating to administrative functions unless decision is tainted  by any vulnerability enumerated above; like illegality,  irrationality and procedural impropriety. Whether action falls  within any of the categories has to be established. Mere  assertion in that regard would not be sufficient.

The famous case commonly known as "The Wednesbury’s  case" is treated as the landmark so far as laying down various  basic principles relating to judicial review of administrative or  statutory direction.

Before summarizing the substance of the principles laid  down therein we shall refer to the passage from the judgment  of Lord Greene in Associated Provincial Picture Houses Ltd. v.  Wednesbury Corpn. (KB at p. 229: All ER p. 682). It reads as  follows:

"\005\005It is true that discretion must be  exercised reasonably. Now what does that  mean? Lawyers familiar with the phraseology  used in relation to exercise of statutory  discretions often use the word ’unreasonable’  in a rather comprehensive sense. It has  frequently been used and is frequently used as  a general description of the things that must  not be done. For instance, a person entrusted  with a discretion must, so to speak, direct  himself properly in law. He must call his own  attention to the matters which he is bound to  consider. He must exclude from his  consideration matters which are irrelevant to  what he has to consider. If he does not obey  those rules, he may truly be said, and often is  said, to be acting ’unreasonably’ . Similarly,  there may be something so absurd that no  sensible person could even dream that it lay  within the powers the authority. . . . In  another, it is taking into consideration  extraneous matters. It is unreasonable that it  might almost be described as being done in  bad faith; and in fact, all these things run into  one another."

Lord Greene also observed (KB p.230: All ER p.683)

"\005..it must be proved to be unreasonable  in the sense that the court considers it to be a  decision that no reasonable body can come to.  It is not what the court considers  unreasonable The effect of the legislation is not  to set up the court as an arbiter of the  correctness of one view over another."  (emphasis supplied)

Therefore, to arrive at a decision on "reasonableness" the  Court has to find out if the administrator has left out relevant  factors or taken into account irrelevant factors. The decision of  the administrator must have been within the four corners of  the law, and not one which no sensible person could have  reasonably arrived at, having regard to the above principles,  and must have been a bona fide one. The decision could be

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one of many choices open to the authority but it was for that  authority to decide upon the choice and not for the Court to  substitute its view.

The principles of judicial review of administrative action  were further summarized in 1985 by Lord Diplock in CCSU  case as illegality, procedural impropriety and irrationality. He  said more grounds could in future become available, including  the doctrine of proportionality which was a principle followed  by certain other members of the European Economic  Community. Lord Diplock observed in that case as follows:

"\005\005.Judicial review has I think,  developed to a stage today when, without  reiterating any analysis of the steps by which  the development has come about, one can  conveniently classify under three heads the  grounds on which administrative action is  subject to control by judicial review. The first  ground I would call ’illegality’, the second  ’irrationality’ and the third ’procedural  impropriety’. That is not to say that further  development on a case\027by\027case basis may  not in course of time add further grounds. I  have in mind particularly the possible  adoption in the future of the principle of  ’proportionality’ which is recognized in the  administrative law of several of our fellow  members of the European Economic  Community."

Lord Diplock explained "irrationality" as follows:

"By ’irrationality’ I mean what can by now  be succinctly referred to as Wednesbury  unreasonableness’. It applies to a decision  which is to outrageous in its defiance of logic  or of accepted moral standards that no  sensible person who had applied his mind to  the question to be decided could have arrived  at it."

In other words, to characterize a decision of the  administrator as "irrational" the Court has to hold, on  material, that it is a decision "so outrageous" as to be in total  defiance of logic or moral standards. Adoption of  "proportionality" into administrative law was left for the future.

These principles have been noted in aforesaid terms in  Union of India and Anr. v. C. Ganayutham (1997 [7] SCC 463).  In essence, the test is to see whether there is any infirmity in  the decision making process and not in the decision itself. (See  Indian Railways Construction Co. Ltd. v. Ajay Kumar (2003 (4)  SCC 579).

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.