The Supreme Court has ruled that the Reserve Bank of India’s power to supersede the board of directors of a multi-State co-operative bank is not restricted by the six-month limit prescribed under Article 243ZL(1) of the Constitution.
The Court held that Section 36AAA of the Banking Regulation Act, 1949, permits the RBI to continue the supersession for a total period of up to five years. It further clarified that the supersession may continue even after the original term of the elected board has expired.
A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe delivered the ruling while dismissing appeals challenging the supersession of the board of directors of Abhyudaya Co-operative Bank Limited.
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Abhyudaya Co-operative Bank was initially registered as a co-operative society under the Maharashtra Co-operative Societies Act, 1960. It was converted into a bank in 1965 and declared a scheduled bank by the RBI in 1988.
Following its amalgamation with two banks in Gujarat and one bank in Karnataka, it became a multi-State co-operative society engaged in banking and consequently a multi-State co-operative bank for the purposes of the Banking Regulation Act.
The appellants were elected to the bank’s board of directors in May 2019 for a statutory term of five years.
On November 24, 2023, the RBI exercised its powers under Section 36AAA, read with Section 56 of the Banking Regulation Act, to supersede the board for one year. It appointed Satya Prakash Pathak as the administrator.
The RBI based its decision on three grounds: the bank’s financial health had deteriorated to a dangerous level, supersession was necessary to protect depositors and prevent the bank’s collapse, and professional management was required to restore the institution’s financial health.
The directors challenged the order before the Bombay High Court. During the pendency of their petitions, their five-year statutory term expired on May 24, 2024.
The RBI subsequently extended the supersession for another year from November 24, 2024. The Bombay High Court upheld the RBI’s action and dismissed the directors’ petitions on November 18, 2024.
During the pendency of the appeals before the Supreme Court, the RBI passed a third order on November 7, 2025, extending the supersession for another year from November 24, 2025.
The former directors argued that Article 243ZL of the Constitution prevented the board of a co-operative society from being superseded or kept under suspension for more than six months.
They contended that the subsequent RBI orders were invalid because they were issued after the expiry of the elected board’s statutory term. According to them, once the term expired, there was no existing board capable of being superseded.
It was also argued that the third proviso to Article 243ZL(1), which states that the Banking Regulation Act shall also apply to co-operative societies carrying on banking business, did not displace the six-month constitutional ceiling.
The appellants further alleged that the RBI had not undertaken the mandatory consultation contemplated under the proviso to Section 36AAA(1) before superseding the board.
The RBI argued that Section 36AAA expressly permits it to supersede the board of a co-operative bank for a period that may be extended from time to time, subject to a maximum aggregate period of five years.
It submitted that the tenure of the former directors had no bearing on the continued exercise of this regulatory power.
The central bank maintained that the third proviso to Article 243ZL preserves the application of the Banking Regulation Act to co-operative societies carrying on banking business. Multi-State co-operative banks, therefore, remain subject to the RBI’s specialised regulatory jurisdiction.
The RBI also contended that the statutory requirement of consulting a state government applies only to co-operative banks registered with the Registrar of Co-operative Societies of a state. It does not apply to multi-State co-operative banks.
The Supreme Court observed that the Constitution’s Ninety-Seventh Amendment inserted Part IXB to ensure that co-operative societies function in a democratic, professional, autonomous and economically sound manner.
Article 243ZL ordinarily provides that the board of a co-operative society cannot be superseded or kept under suspension for more than six months. However, its third proviso states that the Banking Regulation Act “shall also apply” to co-operative societies carrying on banking business.
The Court held that the expression “shall also apply” was used in an additive and non-restrictive sense. The proviso effectively incorporates the Banking Regulation Act into the constitutional framework governing multi-State co-operative banks.
Although a proviso generally restricts the main provision, the Court explained that a proviso may sometimes operate as an independent substantive provision. In the present case, the third proviso enlarged the scope of Article 243ZL by making the Banking Regulation Act applicable to multi-State co-operative banks.
The Bench also referred to the fourth proviso to Article 243ZL(1), which extends the period of supersession to one year for certain banking co-operative societies but specifically excludes multi-State co-operative societies from that arrangement.
The Court said that this express exclusion demonstrated that Parliament intended multi-State co-operative banks to be governed by the specialised mechanism under Section 36AAA of the Banking Regulation Act.
“An exclusion, by its very nature, presupposes a prior inclusion; Parliament does not exclude from a proviso what could never have fallen within it in the first place,” the Court observed.
Emphasising the public interest involved in banking regulation, the Supreme Court said banking is distinct from ordinary commercial or co-operative activity because banks hold and deploy the savings of depositors, including the life earnings of persons of modest means.
The Banking Regulation Act equips the RBI with the necessary powers to protect depositors and maintain the solvency, stability and discipline of banking institutions. Section 36AAA is one such regulatory tool, allowing the RBI to supersede the board of a failing or errant co-operative bank when required in the public interest.
The Court held that restricting the RBI to a rigid six-month period could leave it without sufficient time to restore a distressed bank’s financial health.
Such an interpretation would subordinate depositor protection and banking discipline to an overly technical reading of the constitutional proviso, the Bench stated.
It could also fragment regulatory authority and create a supervisory vacuum immediately after the expiry of the six-month period.
Accordingly, the Court ruled that the RBI’s power under Section 36AAA to supersede the board of a multi-State co-operative bank is not circumscribed by Article 243ZL’s six-month ceiling.
On the second issue, the Supreme Court held that an order of supersession validly passed while the elected board was in office may be extended even after the board’s original statutory term has expired.
Section 36AAA expressly allows an initial period of supersession to be extended from time to time, subject to an overall limit of five years. Once the board is superseded, it ceases to exercise its powers, which vest in the administrator.
The Court also relied on Section 36AAA(7), under which the administrator is required to call a general meeting to elect new directors on or before the expiry of the supersession period specified by the RBI.
This statutory arrangement, the Court said, makes the original tenure of the former board irrelevant to the continuation of the supersession.
At the same time, the five-year maximum period acts as a safeguard against elections being postponed indefinitely.
In the present case, the first supersession order was passed while the directors’ term was still subsisting. The later orders merely extended the existing supersession and remained within the permissible five-year limit.
The Court also rejected the contention that the RBI’s orders were invalid because it had failed to consult the government before superseding the board.
It 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.
Since Abhyudaya Co-operative Bank is a multi-State co-operative bank, the proviso did not apply to it.
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