I. What are Emergency Powers?

In normal times, banking regulation is supervisory: licensing, inspection under Section 35 of Banking Regulation Act, 1949 [BR Act], directions under Section 35A.

In a crisis, the doctrine of parens patriae and police power of the State is invoked. Banking is treated as an essential public utility affecting Article 19(1)(g), 300A and public interest. Courts give wide deference but require proportionality and statutory backing.

There are 3 tiers:

1. Corrective / Enforcement: Directions, Prompt Corrective Action [PCA], supersession of Board.
2. Protective / Containment: Moratorium under Section 45 BR Act, stay on creditor action, deposit withdrawal caps.
3. Resolution / Restructuring: Amalgamation, reconstruction scheme under Section 45, bail-in of capital instruments, lender of last resort, emergency lending.

II. Legal Framework in India

1. Reserve Bank of India Act, 1934 + BR Act, 1949:

• Section 35A: RBI can issue directions to banking companies in public interest or to prevent detrimental management. Basis of all COVID moratorium circulars.
• Section 35AA & 35AB [Inserted 2017]: RBI can direct banks to initiate insolvency under IBC for specific defaults, but only with Central Government authorization for specific defaults, not a general mandate.
• Section 36ACA: Supersession of Board and appointment of Administrator - used in Yes Bank 2020, Lakshmi Vilas Bank 2020, PMC Bank 2019.
• Section 36AAA: RBI can appoint additional directors.
• Section 45: Central Government on RBI's application can impose moratorium not exceeding 6 months, and frame scheme of reconstruction or amalgamation. High Court upheld validity of moratorium orders in 1997 case.
• Section 45L & RBI Master Directions on Basel III: Power to prescribe capital instruments and conditions for write-down of AT1 bonds.

2. Deposit Insurance: DICGC Act, Banking Regulation Act 2020 enhancing RBI's powers over Co-op banks after PMC crisis - supersession under Section 36AAA read with Section 56.[Amendment]

III. Leading Indian Case Laws

1. Ganesh Bank of Kurundwad Ltd. v. Union of India, [2006 INSC 560]

Principle: Judicial deference in crisis.
Ganesh Bank challenged RBI's 3-month moratorium notification, appointment of 2 RBI directors and forced amalgamation with Federal Bank. Supreme Court held courts cannot sit in appeal over RBI's expert assessment of a bank's viability. Moratorium and amalgamation upheld as valid exercise under Section 45. Intervention must be tested on mala fides, not commercial wisdom.

2. Dharani Sugars and Chemicals Ltd. v. Union of India, - Stressed Assets Circular

Principle: Emergency power is not unbridled.
RBI issued 12 Feb 2018 circular directing banks to resolve stressed accounts >Rs.2000 cr within 180 days or refer to IBC. Petitioners argued RBI exceeded Section 35AA.
Supreme Court bench of R.F. Nariman, Vineet Saran struck down the circular as ultra vires Section 35AA. Court held: RBI can only give directions for resolution of specific defaults with Central Govt authorization, not a general, across-the-board directive. Upheld constitutional validity of 35AA/35AB but read down its use.[2019]

3. Yes Bank Ltd. v. Axis Trustee Services Ltd., 2026 INSC 1132 [AT1 Bond Write-off]

Principle: Urgency cannot override legal hierarchy.
Facts: Yes Bank deteriorated; Central Govt imposed moratorium on 5 March 2020 under Section 45, RBI superseded Board and appointed Administrator. Draft reconstruction scheme published 6 March 2020 had AT1 write-down clause, final scheme notified 13 March 2020 omitted it. On 14 March Administrator wrote down Rs.8,415 cr AT1 bonds permanently.

Supreme Court [Justices Dipankar Datta & Augustine George Masih, 15 Oct 2026] dismissed appeals of Yes Bank, RBI, Union Govt and upheld Bombay HC quashing write-down. Held:

• Administrator under Section 36ACA cannot assume regulatory role of RBI.
• Write-down after reconstruction scheme came into force was illegal, must precede scheme per Clause 2.15 of Annex 16 of RBI Master Circular.
• Rescue urgency does not legitimize extralegal loss imposition. Contractual trigger and PONV declaration under Basel III must be strictly complied.

4. Gajendra Sharma v. Union of India 13 SCR 835 - COVID Moratorium

Petitioner challenged RBI notification dated 27.03.2020 permitting moratorium but allowing interest accrual.
Supreme Court [2020 INSC 662] dismissed plea, holding RBI's power under Section 35A to issue moratorium directions is wide in disaster. Court refused to interfere with ex-gratia waiver scheme of Govt dated 23.10.2020 for compound-simple interest difference up to Rs 2 cr. Affirmed that emergency regulatory measures are policy domain.[2020]

5. Small Depositors & PMC / Cooperative Bank crisis

Courts held petitioner prayer for 100% deposit insurance and high-powered committee in emergency is policy making, not judicial. Led to 2020 Amendment bringing co-op banks fully under RBI.

IV. Comparative: US and UK Framework

US - Federal Reserve Act Section 13(3):
"In unusual and exigent circumstances" Fed can authorize emergency lending to non-banks. Used in 2008 for Bear Stearns acquisition by JPMorgan Chase and $85 bn credit line to AIG. Created Primary Dealer Credit Facility, Term Securities Lending Facility.

Case law:

• Starr International Co. v. Federal Reserve Bank of New York, 2d Cir. 2014: AIG's former shareholder sued FRBNY for breach of fiduciary duty in 2008 rescue. Court held Section 13(3) grants discretionary emergency power to provide loans to non-members in unusual and exigent circumstances, and federal common law preempts state fiduciary claims.
• After crisis, Dodd-Frank 2010 amended 13(3) to require broad-based facilities, not single-company bailouts.

Emergency Banking Act 1933: Enacted in Great Depression to stabilize banking system, increased presidential powers, allowed Comptroller to restrict impaired banks.

EU/UK: No harmonization initially but now Bank Recovery and Resolution Directive [BRRD] and UK Banking Act 2009 provide special resolution powers enabling authorities to take rapid action without shareholder/creditor consent. Tested in Albert and Others v. Hungary ECtHR Grand Chamber on banking restructuring vs. property rights.

V. Judicial Test Applied in Emergency

Courts across jurisdictions apply 4-part test:

1. Statutory Source: Is there explicit enabling provision? [Dharani, Yes Bank AT1]
2. Proportionality & Necessity: Was action limited to what crisis required?
3. Procedural Fairness: Even in emergency, natural justice cannot be completely excluded unless statute excludes.
4. Non-retrogression of creditor hierarchy: Bail-in must follow Basel III contract, not ad hoc executive order [Yes Bank 2026].

In India, Supreme Court consistently says RBI has wide supervisory powers and its directions are statutorily binding, but emergency does not mean arbitrariness.