Democratic Control Cannot Create a Regulatory Vacuum in a Failing Bank: Supreme Court Upholds RBI’s Power to Supersede Multi-State Co-operative Bank Boards for Up to Five Years

Case Name: Sandeep S. Ghandat and Others v. Reserve Bank of India and Others

Date of Judgment: 3 September 2026

Citation: 2026 INSC 955

Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe

Held: The Supreme Court held that the Reserve Bank of India’s power under Section 36AAA of the Banking Regulation Act, 1949 to supersede the Board of Directors of a multi-State co-operative bank is not restricted by the six-month ceiling prescribed under Article 243ZL(1) of the Constitution. The third proviso to Article 243ZL(1), which provides that the Banking Regulation Act “shall also apply” to co-operative societies carrying on banking business, constitutes an independent and substantive constitutional provision incorporating the Banking Regulation Act into the framework governing multi-State co-operative banks.

Consequently, RBI may supersede the Board of a multi-State co-operative bank and extend the supersession from time to time, subject to the aggregate statutory ceiling of five years under Section 36AAA. Such supersession may continue beyond the original tenure for which the displaced Board was elected. The expiry of the erstwhile Board’s term does not terminate RBI’s regulatory intervention because, once superseded, the Board ceases to function and its powers vest in the Administrator until a new Board is constituted in accordance with the statutory mechanism.

The Court further held 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. It does not apply to a multi-State co-operative bank. RBI was therefore not required to consult either the State Government or Central Government before superseding the Board in the present case.

Summary: Abhyudaya Co-operative Bank Limited was initially registered as a co-operative society under the Maharashtra Co-operative Societies Act, 1960 and was converted into a bank in 1965 with the permission of RBI and the Commissioner of Co-operation. It was declared a Scheduled Bank in 1988. Following an RBI-directed amalgamation with two banks in Gujarat and one bank in Karnataka, it acquired the status of a multi-State co-operative society carrying on banking business and consequently became a multi-State co-operative bank.

The appellants were elected to the Bank’s Board of Directors in May 2019 for a statutory term of five years. On 24 November 2023, RBI exercised its powers under Sections 36AAA(1) and 36AAA(2), read with Section 56 of the Banking Regulation Act, and superseded the Board for one year. RBI found that the Bank’s financial health had deteriorated to a dangerous level, that intervention was necessary to protect depositors and prevent the Bank’s collapse, and that its affairs required management by expert professionals. An Administrator was appointed to manage the Bank.

The appellants challenged the supersession before the Bombay High Court. During the pendency of the proceedings, their five-year elected term expired on 24 May 2024. RBI thereafter passed a second order on 18 November 2024, extending the supersession for another year from 24 November 2024. The High Court upheld RBI’s action and held that Section 36AAA remained operative notwithstanding Articles 243ZL and 243ZT of the Constitution. It also concluded that the statutory requirement of consultation with the State Government did not apply to a multi-State co-operative bank.

During the pendency of the appeals before the Supreme Court, RBI passed a third order dated 7 November 2025, further extending the supersession with effect from 24 November 2025. The appellants argued that the constitutional mandate of democratic governance of co-operative societies prevented RBI from continuing supersession beyond six months. They further contended that the second and third extension orders were invalid because the tenure of the elected Board had already expired, leaving no existing Board capable of being superseded.

The Supreme Court examined the relationship between Part IXB of the Constitution and the Banking Regulation Act. Part IXB, introduced through the Constitution (Ninety-Seventh Amendment) Act, 2011, granted constitutional recognition to co-operative societies and sought to ensure their democratic, professional, autonomous and economically sound functioning. Article 243ZL ordinarily prohibits supersession or suspension of a co-operative society’s Board for more than six months.

The Court, however, found that the third proviso to Article 243ZL(1) expressly provides that the Banking Regulation Act shall also apply to a co-operative society carrying on banking business. The expression “shall also apply” was used in an additive and non-restrictive sense. Through the doctrine of incorporation, the relevant provisions of the Banking Regulation Act became part of the constitutional framework applicable to multi-State co-operative banks.

The Court held that the third proviso was not merely an exception qualifying the main provision. In substance, it operated as an independent constitutional provision recognising the specialised regulatory role of RBI in relation to co-operative banks. This interpretation was reinforced by the fourth proviso to Article 243ZL(1), which expressly distinguishes co-operative banks other than multi-State co-operative banks. The express exclusion of multi-State co-operative banks from that proviso presupposed that such banks otherwise fell within the broader constitutional framework.

Banking, the Supreme Court observed, is fundamentally different from ordinary commercial or co-operative activity because it involves public funds and the life savings of depositors, including persons of modest means. The Banking Regulation Act equips RBI, as the apex banking regulator, with the powers necessary to preserve solvency, financial discipline and depositor confidence. Section 36AAA is one such protective mechanism, enabling RBI to supersede an errant or failing Board where intervention is necessary in the public interest, to prevent prejudice to depositors or to secure proper management.

Restricting RBI’s intervention to six months would potentially leave a distressed multi-State co-operative bank in a regulatory vacuum before it could be restored to financial health. The Court held that the constitutional objective of democratic management could not be interpreted in a manner that diluted RBI’s specialised regulatory authority or endangered depositors. The interpretation protecting depositors and preserving financial stability had to prevail over an excessively technical construction of Article 243ZL.

On the second issue, the Court held that Section 36AAA expressly permits the original period of supersession to be extended from time to time, provided the total period does not exceed five years. Once the Board is superseded, its powers and responsibilities vest in the Administrator. Under Section 36AAA(7), the Administrator must convene a general meeting for the election of new directors on or before the expiry of the supersession period specified by RBI.

The relevant reference point is therefore the duration of supersession fixed by RBI and not the unexpired tenure of the displaced Board. The expiration of the Board’s original elected term during the supersession period does not invalidate a subsequent extension. The five-year outer limit protects against indefinite displacement of democratic management, while giving RBI adequate time to stabilise and rehabilitate the bank.

The Supreme Court also rejected the contention that RBI was required to undertake prior consultation. The proviso to Section 36AAA(1) requires consultation only where the co-operative bank is registered with the Registrar of Co-operative Societies of a State. As Abhyudaya Co-operative Bank was a multi-State co-operative bank, that proviso had no application.

Decision: The Supreme Court upheld the Bombay High Court’s judgment and affirmed RBI’s successive orders superseding and continuing the supersession of the Board of Directors of Abhyudaya Co-operative Bank Limited. It held that RBI’s authority under Section 36AAA of the Banking Regulation Act was not restricted by the six-month period under Article 243ZL(1) and could validly continue beyond the elected Board’s original term, subject to the aggregate ceiling of five years.