Bank amalgamation under Section 45 upheld: depositor classification, staggered repayment and interest treatment found lawful.

A Reserve Bank-approved amalgamation scheme for a co-operative bank was upheld as within the powers conferred by Section 45 of the Banking Regulation Act, 1949 and not violative of Articles 14, 19(1)(g), 21 or 300A. The court found that the bank's grave financial distress justified restructuring in public interest, and that judicial review was limited to illegality, irrationality, mala fides or procedural impropriety. Classification of depositors into retail and institutional categories, staggered repayment, deferred release of larger balances and reduced post-five-year interest were held to be reasonable and consistent with the scheme. The consultation process was also found valid, and the treatment of interest accrued before the appointed date was upheld.

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Issues: (i) Whether the sanctioned amalgamation scheme for the co-operative bank was ultra vires the Banking Regulation Act, 1949 and violative of Articles 14, 19(1)(g), 21 and 300A of the Constitution of India; (ii) Whether the scheme's classification of depositors into retail and institutional depositors, along with staggered repayment and reduced post-five-year interest, was arbitrary or discriminatory; (iii) Whether the consultation process under Section 45 and the treatment of interest accrued prior to the appointed date were legally infirm.

Issue (i): Whether the sanctioned amalgamation scheme for the co-operative bank was ultra vires the Banking Regulation Act, 1949 and violative of Articles 14, 19(1)(g), 21 and 300A of the Constitution of India.

Analysis: The statutory framework under Section 45 of the Banking Regulation Act, 1949 permits the Reserve Bank to prepare a scheme of reconstruction or amalgamation in public interest, in the interest of depositors, and for proper management of the bank. The provision has overriding effect. The Bank's financial position was found to be gravely precarious, with massive erosion of net worth and substantial NPA exposure, and the Reserve Bank acted after inspection, supervision, moratorium measures, supersession of the board, and exploration of other resolution options. In such economic and banking policy matters, judicial review is limited to illegality, irrationality, mala fides, or procedural impropriety, none of which was established.

Conclusion: The scheme was held to be within statutory power and not unconstitutional.

Issue (ii): Whether the scheme's classification of depositors into retail and institutional depositors, along with staggered repayment and reduced post-five-year interest, was arbitrary or discriminatory.

Analysis: The scheme classified depositors on the basis of the nature of the depositor and account, not merely on the size of the deposit. Retail depositors were individuals and specified entities, while institutional depositors were corporations, firms, societies, associations of persons and trusts. The distinction was held to be a reasonable classification with a rational nexus to the object of protecting the maximum number of depositors and preserving public confidence in the banking system. Staggered repayment, deferred release of larger balances, and reduced interest after five years were treated as permissible incidents of restructuring under Section 45, which expressly allows reduction of rights and payment in cash or otherwise in satisfaction of claims. The pro-rata rule relied on by the petitioners was held to be applicable to liquidation, not to a Section 45 amalgamation scheme.

Conclusion: The classification and repayment structure were upheld and found not to be discriminatory or arbitrary.

Issue (iii): Whether the consultation process under Section 45 and the treatment of interest accrued prior to the appointed date were legally infirm.

Analysis: The draft scheme was circulated, objections and suggestions were invited, and modifications were made before final approval. Section 45 requires written suggestions and objections, not individualized oral hearings for every affected depositor. The scheme's provision stopping interest accrual from 31 March 2021 and reversing post-cut-off interest was treated as part of the restructuring mechanism in a situation of severe financial distress and negative net worth. The court found no procedural illegality in the manner of consultation and no basis to strike down the interest-related clauses on the facts placed before it.

Conclusion: The consultation process and interest treatment were upheld.

Final Conclusion: The amalgamation scheme was sustained as a lawful, public-interest driven banking resolution measure, and the petitions were dismissed.

Ratio Decidendi: In a banking amalgamation under Section 45 of the Banking Regulation Act, 1949, a Reserve Bank-approved restructuring scheme that is framed in public interest to protect depositors may validly reduce depositor rights, classify depositors on a rational basis, and provide staggered repayment, and such economic policy choices will not be interfered with absent illegality, mala fides, irrationality, or procedural impropriety.

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