Kerala High Court Upholds RBI’s Power to Supersede Cooperative Bank Boards

The Kerala High Court has delivered an important ruling on the Reserve Bank of India’s regulatory authority over urban co-operative banks, holding that the RBI can supersede the board of a co-operative bank under Section 36AAA of the Banking Regulation Act, 1949, without first granting a personal hearing. At the same time, the Court made it clear that the RBI must strictly comply with the statutory requirement of consulting the concerned State Government before exercising such power.

The judgment was delivered on July 3, 2026, by Justice M.A. Abdul Hakhim in WP(C) No. 3275 of 2026, filed by M.P. Jackson, former President of Irinjalakuda Town Co-operative Bank. The petitioner had challenged the RBI’s order superseding the bank’s elected Board of Directors and appointing an Administrator.

Background of the Case

The dispute arose after the RBI conducted an inspection of the bank and found several irregularities in its operations. The RBI subsequently placed the bank under All-Inclusive Directions in July 2025 and imposed regulatory restrictions on its functioning. Later, by an order dated October 7, 2025, the RBI superseded the Board of Directors and appointed an Administrator for a period of one year, from October 7, 2025 to October 6, 2026.

The former bank President challenged the RBI’s action on three principal grounds. He argued that the supersession order was passed without giving the elected board an opportunity of hearing, that the RBI had failed to properly consult the State Government as required by Section 36AAA, and that the RBI could not replace a democratically elected Managing Committee without proceeding under the Kerala Co-operative Societies Act.

No Prior Hearing Required Under Section 36AAA

The High Court rejected the argument that the RBI was required to issue a show-cause notice or grant a personal hearing before superseding the board.

The Court compared Section 36AA and Section 36AAA of the Banking Regulation Act. It observed that Section 36AA expressly provides an opportunity of representation in matters involving removal of managerial personnel, whereas Section 36AAA, dealing with supersession of the Board of Directors of a co-operative bank, contains no such requirement. The Court therefore held that the requirement of a prior hearing cannot be read into Section 36AAA.

The Court also noted that the RBI’s power under Section 36AAA is meant to protect public interest, depositor interests and the proper management of co-operative banks. It accepted that insisting on a pre-decisional hearing in every such case could delay regulatory intervention where immediate action may be necessary.

RBI Must Consult State Government

While upholding the RBI’s substantive power, the Court found fault with the manner in which the consultation requirement had been handled.

The proviso to Section 36AAA(1) requires the RBI, in the case of a co-operative bank registered in a State, to consult the concerned State Government before issuing a supersession order. The Court held that consultation with the Registrar of Co-operative Societies cannot be treated as a substitute for consultation with the State Government itself.

The Court observed that where a statute requires an act to be done in a particular manner, the statutory procedure must be followed in that manner alone. It held that, for this purpose, the competent authority to represent the State Government was the Secretary of the Co-operation Department and not merely the Registrar of Co-operative Societies.

The High Court therefore concluded that the consultation requirement had not been properly satisfied and that the RBI’s process was procedurally deficient on that ground.

RBI’s Powers Extend to Co-operative Banks

The High Court also rejected the argument that the RBI could not supersede the Board of a co-operative bank because its Managing Committee had been democratically elected under the Kerala Co-operative Societies Act.

The Court held that the Banking Regulation Act applies to co-operative banks and that Section 36AAA specifically empowers the RBI to supersede their boards. It further observed that the RBI possesses greater expertise in matters relating to financial administration, banking stability and depositor protection, making its regulatory oversight essential in the case of co-operative banks engaged in banking business.

Accordingly, the Court held that a co-operative bank cannot claim immunity from RBI action merely because it operates under a democratic management structure created under State co-operative law.

Court Declines to Restore Elected Board

Although the Court found that the consultation requirement had not been properly complied with, it declined to set aside the RBI’s supersession order at the present stage.

The Court noted that the Administrator had already been managing the bank for nearly nine months and that the one-year term of administration was due to expire on October 6, 2026. Considering the lapse of time and the interests of the bank and its depositors, the Court decided not to restore the elected Managing Committee immediately.

The writ petition was therefore dismissed, but the Court directed that if the RBI seeks to continue the supersession arrangement beyond October 6, 2026, it must do so only after proper consultation with the Government of Kerala.

Key Takeaways from the Judgment

The ruling clarifies three important principles relating to RBI oversight of co-operative banks.

First, the RBI has the statutory authority to supersede the Board of Directors of a co-operative bank under Section 36AAA of the Banking Regulation Act. Second, a prior personal hearing is not mandatory before such an order is issued. Third, consultation with the concerned State Government is a statutory requirement and cannot be replaced by consultation only with the Registrar of Co-operative Societies.

The judgment is significant for urban co-operative banks, their elected boards and regulatory authorities because it reinforces the RBI’s central role in banking supervision while also emphasising that regulatory powers must be exercised in strict conformity with the procedure laid down by law. CA Sansaar