Radio news & a dinner party: When bank nationalisation was ruled ‘unconstitutional' over unfair compensation method
During an intimate dinner party hosted by Rustom Cavasjee Cooper, 47, in July 1969, a news development crackled over the radio: the government had nationalised 14 of India's largest private commercial banks having deposits of over Rs 50 crore.
Recalling that dinner party in an article for Himmat, a weekly magazine, Cooper, a shareholder in several of these banks and a Swatantra Party leader, remembers spending the rest of the evening pacing and feeling agitated. Sensing his turmoil, a senior government official at the party remarked casually, 'Why don't you contest it in the Supreme Court?'
That casual suggestion would ignite one of the most important legal battles in India's constitutional history, ending with the Supreme Court emphasising that actions made for public interest must ensure just compensation and reaffirming that Directive Principles of State Policy, the guiding principles in making policies that aim to create a welfare state, cannot override fundamental rights.
After the dinner party
The very next morning, Cooper boarded the first flight to Delhi. Fate, it seemed, had conspired in his favour. Nani Palkhivala, one of India's brightest legal minds, happened to be in Delhi too. By that evening, the preparations for a constitutional challenge were underway.
Six months later, on February 10, 1970, an 11-judge Bench of the Supreme Court led by Justice J C Shah, while holding the Bank Nationalization Act, 1969, as 'unconstitutional' since it violated the right to property, clarified that nationalisation of banks itself was not unconstitutional.
Striking down the law, the SC said the method of calculating compensation to the shareholders undervalued the banks' assets by ignoring their goodwill and key properties.
Born on August 18, 1922, in a Mumbai-based Parsi family, Cooper, a chartered accountant, had completed his PhD in economics from the London School of Economics (LSE). He was also president of the Institute of Chartered Accountants of India (1963-64), the president of the Indian Merchants' Chamber (IMC), and the treasurer and general-secretary of Swatantra Party.
The ordinance enabling bank nationalisation was promulgated on July 19, 1969, a few days before the Parliament session was to begin. Three days prior to the ordinance, then Prime Minister Indira Gandhi had divested Morarji Desai of his finance portfolio.
Cooper's opposition to bank nationalisation was not about personal financial loss. Besides holding shares in the Central Bank of India Ltd (of which he was a director), Bank of Baroda Ltd, Union Bank of India Ltd and Bank of India Ltd, he also had current and fixed deposit accounts in these banks. His shareholdings were modest, entitling him to cash compensation in any event.
Instead, Cooper's grievance was rooted in principle: he believed the ordinance, promulgated in haste and without parliamentary debate, had trampled upon the Constitution's sanctity since it violated his right to property under Articles 19 (1)(f) and 31 over the unfair compensation method.
Cooper challenged the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 8 of 1969. The ordinance transferred and vested the undertaking of 14 commercial banks that held over 80% of India's bank deposits and had deposits of not less than Rs 50 crore, in the corresponding new nationalised banks set up under the decree.
Though pleas challenging the ordinance were lodged before the Supreme Court, before they were heard, Parliament enacted the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1969, replacing the ordinance with modifications.
The objective of the Act was to enable acquisition and transfer of the undertakings of certain banking companies so as to 'better serve the needs of development of the economy, in conformity with national policy' and connected matters.
Filed under Article 32 (right to move to Supreme Court to enforce fundamental rights), Cooper, through Palkhivala, argued that the law impaired his rights guaranteed under Articles 14, 19 and 31 (right to property).
In his February 20, 1970, article for Himmat, Cooper wrote, 'I thought that it (bank nationalisation) was done with unreasonable haste…a clear violation of the sanctity of the Constitution…I felt that not only political parties but individuals in the highest places had started regarding the Constitution as something which could easily be played with.'
While accusations later surfaced that big business interests were backing Cooper's case, he steadfastly denied such claims.
'Insinuations were made to this effect before the Supreme Court during the hearings too. I would like to clarify that not only was there no interest in financing this petition, but every single person (lawyers, accountants and experts)…who assisted Mr Palkhivala and me in these proceedings, did …not charge any fees,…including a large amount of travelling expenses,' his article states, adding that 'none of the Chairmen or members of the old boards of Directors of the nationalised banks or eminent businessmen and industrialists came forward to join us in this fight for democracy'.
Besides stating that the method of calculating compensation undervalued the banks' assets by ignoring their goodwill and key properties, the Supreme Court's February 10, 1970, verdict also held that forcing nationalised banks to cease both banking and non-banking activities was discriminatory and especially violative of equality before law under Article 14.
Denying the government's submission that banks — and not the shareholders — were directly affected by the decision, the SC held that shareholders could independently move the top court if their fundamental rights were infringed upon.
This approach would later become the bedrock of public interest litigation (PILs) in the country, empowering citizens to seek justice not just for themselves, but for broader public causes.
The Supreme Court clarified that nationalisation of banks itself was not unconstitutional, while emphasising that actions made for public interest must ensure just compensation. The court also reaffirmed that Directive Principles of State Policy cannot override fundamental rights.
Justice A N Ray, who became the Chief Justice of India (CJI) in April 1973, superseding three of his Bench colleagues, Justices J M Shelat, A N Grover and K S Hegde, however, took a dissenting view. Upholding the Act, Justice Ray said it was 'for development of the national economy with the aid of banks'.
Then CJI Mohammad Hidayatullah had recused himself from hearing the matter as he had given assent to the impugned law in capacity as then acting President of India.
Before 1970, constitutional law was still shaped by the judgment in the A K Gopalan v State of Madras (1950), where the Supreme Court had held that each fundamental right operated in isolation and that as long as a law adhered to one specific constitutional provision, its effects on other rights were irrelevant.
However, R C Cooper v Union of India shattered this view. The Supreme Court held that the impact of state action on individual rights determined constitutionality. 'Impairment of the right of the individual and not the object of the State in taking the impugned action, is the measure of protection. To concentrate merely on power of the State and the object of the State action in exercising that power is therefore to ignore the true intent of the Constitution…,' stated the majority opinion, authored by Justice Shah on behalf of the nine other judges and him.
In his article, Cooper opined that the SC judgment was important for shareholders of nationalised banks, as well those of any industries that may be nationalised in future. 'Parliament certainly has a right to legislate for nationalisation of certain aspects of economic activity…The second important principle which has emerged is that for assets which are taken over by the State there should be fair and reasonable compensation. And the third is that there should be no hostile discrimination against any particular concern or concerns in an industry,' he wrote.
Four days after the judgment, on February 14, 1970, then President V V Giri issued a new ordinance that stipulated compensation to shareholders of the 14 nationalised banks.
Cooper felt the new decree 'was an improvement over the previous one' and sought to 'undo illegalities' pointed out by the Constitution Bench. He added that the compensation offered to shareholders under the new ordinance was 'more realistic' and 'payable wholly in cash if so desired…in three years …, together with interest'.
The judgment paved the way for the apex court's decision in the 1973 Kesavananda Bharati case, in which it laid down the 'basic structure' doctrine that put limits on Parliament's powers to amend the Constitution, along the verdict in the 1978 Maneka Gandhi vs Union of India.
Cooper's case is remembered not merely for challenging bank nationalisation, but for establishing that constitutional rights must be protected against the real impact of state action, not just its stated aims.
While the right to property ceased to be a fundamental right in 1978, it is protected under Article 300A, which provides protection to citizens against arbitrary deprivation of their property by the state.
With the Swatantra Party dissolving in 1974 and Indira Gandhi imposing an Emergency in the country ini 1975, Cooper relocated to Singapore. where he set up a financial consultancy and also wrote two books, Job Sharing in Singapore (1986) and War on Waste (1991).
He died at the age of 90 while on a visit to London in June 2013. Nearly 55 years after the judgment, Cooper's spirit — demanding fairness, reasonableness and accountability from the state — continues to guide judicial review.
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