Why the Supreme Court Struck Down India’s 1969 Bank Nationalisation Law

The 14 banks were chosen by size: each held deposits of at least Rs 50 crore. The judgment records that together with the State Bank of India and its seven subsidiaries they accounted for about 80% of the branch offices of the country’s commercial banks. The ordinance did not abolish the old companies. It transferred their undertakings, meaning the whole going concern with its assets, liabilities, staff and name, to new banks owned by the Centre, and left the shell companies to receive compensation.

The government moved fast at every step. It issued the ordinance on a Saturday afternoon, two days before Parliament was due to meet, a timing Cooper’s lawyers called hasty. The Act that replaced it was passed before the petitions could be heard. When the Court ruled, a new ordinance followed in four days, and a new Act in seven weeks. Both Acts were made to apply from 19 July 1969, so that, on paper, the banks had been public from the start.

The compensation finding was the heart of the case. The Act valued each bank by adding up some of its assets and subtracting liabilities, rather than valuing the business as a going concern. It left out goodwill and the value of unexpired long-term leases, valued occupied buildings at twelve times a reduced annual rent even though the new banks took vacant possession, and in effect deducted some debts twice. The majority held that a formula built on irrelevant principles did not produce “compensation” in the constitutional sense, and that bonds maturing years later might not either if their market value fell short of their face value.

The equality finding was narrower than it is often described. The Court did not hold that nationalising 14 banks while sparing others was discriminatory; it said it had no reliable data to decide that. What it struck down was the rule that, having lost their undertakings, the 14 old companies could never do banking again, while every other Indian and foreign bank could.

Justice A.N. Ray would have dismissed the petitions. He held that the President is the sole judge of the satisfaction needed to issue an ordinance, acting on ministerial advice that courts cannot inquire into; that the challenge to the timing of the ordinance showed no mala fides; and that the Act, including its compensation provisions and its retrospective operation, was valid. He did not rule on whether Cooper could sue, since the case had been argued on its merits. In April 1973, after the Kesavananda Bharati judgment, Ray was appointed Chief Justice of India over three senior judges, a supersession widely seen as linked to the government’s disputes with the Court over property and its economic programme.

Since A.K. Gopalan v. State of Madras in 1950, the Court had tended to read each fundamental right as a self-contained code. If a law was aimed at acquiring property, only Article 31 applied, and the owner could not also argue that it was an unreasonable restriction on property under Article 19(1)(f). R.C. Cooper rejected that. In the majority’s words, the extent of protection against impairment of a fundamental right is determined not by the object of the legislature nor by the form of the action, but by its direct operation upon the individual’s rights.

That sentence travelled far beyond banking. In Maneka Gandhi v. Union of India in 1978, the Court held that a law depriving a person of liberty under Article 21 must also satisfy Articles 14 and 19. The idea that a person may invoke every right a State action actually touches is now a basic feature of Indian constitutional litigation.

Parliament’s answer to the compensation holding was to change the Constitution. The 25th Amendment, in force from 20 April 1972, replaced “compensation” with “amount” in Article 31(2), said the amount could not be questioned as inadequate and could be paid other than in cash, and added Article 31C to protect laws giving effect to certain directive principles. The Supreme Court upheld the “amount” change in Kesavananda Bharati in 1973.

The 44th Amendment then removed property from the list of fundamental rights altogether, with effect from 20 June 1979, and placed it in Article 300A. Anyone reading R.C. Cooper today for its views on compensation is reading about a constitutional provision that no longer exists. Its reasoning on how rights interact is what remains.

The judgment did not slow the policy. Within a decade the government nationalised six more banks, and by then the constitutional route Cooper had used was closed. Liberalisation after 1991 brought new private banks and prudential rules, but no return of the nationalised banks to private owners. Instead, successive governments merged them. After the mergers of 1 April 2020, India had 12 public-sector banks.