Opinion | The heroes and villains of 1969’s bank nationalization

Last week marked 50 years of the first attempt by Indira Gandhi to nationalize banks. What is less known is how some managed to hasten while others managed to delay Gandhi’s plans by a few months after the initial ordinance was passed, removing some outrageous portions of the legislation.

Though banks were seemingly nationalized overnight in 1969, it was long coming since independence. In 1948, the Congress’ Economic Programme Committee, chaired by Jawaharlal Nehru, suggested nationalizing Imperial Bank of India. However, the idea was dropped on the persuasion of Vallabhbhai Patel and C.D. Deshmukh. In 1949, the Reserve Bank of India (RBI) was nationalized. Similar action on others was demanded by the Socialist Party in 1951 and Jayaprakash Narayan in his 14-point plan in 1953, but only Imperial Bank was nationalized in 1955 into State Bank of India.

Nationalization regained popularity in the 1964 Bhubaneswar meetings of the Congress, which officially adopted the “Democracy and Socialism” resolution. Some proposals were introduced in Parliament, but the then finance minister T.T. Krishnamachari, who believed the compensation payouts for nationalized banks could be used better in other parts of the economy, opposed the idea in Parliament.

Until the mid-1960s, saner and informed voices prevailed. After the deaths of Nehru and Lal Bahadur Shastri, renewed demands for nationalization gave Indira Gandhi the perfect political opportunity to strengthen her position. To set herself apart from the Congress Syndicate, which was moving away from socialism, Gandhi took a left turn to propose greater state presence in economic life. Morarji Desai, who favoured greater regulatory control over banks instead of nationalization, was relieved of his duties as finance minister on 16 July 1969.

Surrounded by loyalists and sycophants, Gandhi’s path to bank nationalization was clear. Secret meetings led to a law conceptualized by her secretary P.N. Haksar, RBI governor L.K. Jha and chief economic adviser I.G. Patel, and drafted by S.K. Maitra. It was promulgated as an ordinance to surprise the banks before V.V. Giri left office; but it violated constitutional and parliamentary norms, since Parliament was to reconvene in a mere two days. The ordinance was taken to V.V. Giri, who was acting president since president Zakir Husain had died earlier that year. The day after signing the ordinance, Giri stepped down to become a candidate for the forthcoming presidential election, which that year was also tangentially related to bank nationalization. Giri was standing as an independent supported by Gandhi, while the syndicate’s candidate was N.S. Reddy. Deshmukh, a former RBI governor who had argued against bank nationalization immediately after independence, was also contesting the election, this time supported by the Swatantra Party and Jan Sangh. Giri won with Gandhi’s support, and his legacy is often regarded as that of a rubber-stamp loyalist who damaged the independence of the President’s office.

Drafted in a mere matter of hours, the ordinance was presented to the cabinet at 5pm on 18 July 1969 and approved without discussion or opposition. Giri signed and promulgated it within a few more hours. The ordinance nationalized the 14 largest Indian banks with deposits more than ₹50 crore.

Oddly, none of the banks challenged the ordinance in the courts. The challenge came from R.C. Cooper, a shareholder and director of Central Bank of India. Cooper lost the right to his dividends, and was deprived of his right as a shareholder to carry on business, as he was converted from a shareholder to a depositor overnight without his consent.

Nani Palkhivala argued the case for the petitioner and made many interesting legal arguments in challenging the validity of the ordinance (and later when the ordinance was passed in Parliament as the Banking Companies Act, 1969). The main challenge was the lack of any clear legal principles in determining compensation. The Act did not value the entire bank in any systematic way, but valued only some components. Important assets like goodwill were left out of the valuation, and that land, rents, interest payable, etc., were undervalued. The most outrageous provision of the Act was that once the total compensation was determined, it was not paid in cash, but in government of India securities maturing in 10 years.

Chief justice J.C. Shah—who had taken over from chief justice Hidayatullah, who was then the acting president after the resignation of Giri—led the 11-judge bench. Shah (joined by 9 justices) wrote in the majority opinion that the Act violated the principles for compensation guaranteed under Article 31(2). The majority also held that the ordinance amounted to an act of hostile discrimination, preventing the 14 banks from carrying on their business under Article 19 of the Constitution, whereas other Indian and foreign banks could carry on with their business. The lone dissent came from justice A.N. Ray, who upheld the constitutionality of the legislation.

Palkhivala won the battle but lost the war against nationalization. In March 1970, soon after the judgement, the government redrafted the Banking Companies Act. The main difference was an additional ₹58 crore paid out to bank owners. The new Act was implemented without challenge and its legacy, mostly for the worse, continues till date.

Shruti Rajagopalan is assistant professor of economics, Purchase College, State University of New York