Kerala HC Paves Way For Merger Of District Co-Operative Banks To Kerala State Cooperative Bank

Dismissing a batch of petitions which challenged the amendments made to the Kerala State Co-operative Societies Act, 1969, Justice A Muhammed Mustaq observed,

"While it is necessary to assert autonomy of co-operative enterprises through decision making at basic unit level, its affiliation to the central authority cannot be ignored to meet the challenges faced by it…There is no scope for interference with the process initiated to amalgamate the District Co-operative Banks with the Kerala State Co-operative Bank."

The government had proposed the formation of 'Kerala Bank', by merging District Cooperative Banks with the State Cooperative Bank. The amalgamation scheme so proposed by the government was approved by 13 out of 14 district banks at their respective general body meetings.

Earlier this year, RBI gave its final approval for the amalgamation. Pursuant to the same, amendments were made by the State to the Kerala State Co-operative Societies Act, 1969, whereby Section 14A and chapter XC were inserted.

Section 14A stipulates that transfer of assets and liabilities of the District Co-operative Banks to the Kerala State Co-operative Bank can be done by passing a resolution by a simple majority and the transfer would take effect from the date on which the Registrar approved the resolution.

Chapter XC refers to special provisions for compulsory amalgamation through transfer of assets and liabilities of the District Co-operative Banks to the Kerala State Co-operative Bank. Once a resolution under Section 14A for transferring the assets and liability is passed, Chapter XC would step in for compulsory amalgamation.

Impugning the provisions, the Petitioners had argued that compulsory amalgamation provided under Chapter XC of the Act was against the autonomous character of the district cooperative bank, thus in contravention of Article 43B of the Constitution.

Reliance was placed on Vipulbhai M. Chaudhary v. Gujarat Cooperative Milk Marketing Federation Limited & Ors. (2015) 8 SCC 1, to argue that democratic functioning is the essential feature of the co‑operative society.

Dismissing this contention, the court said that compulsory amalgamation was based on "voluntary initiation" of the transfer of assets and liability by district cooperative banks.

"The decision is purely a decision of the District Co-operative Bank. When the assets and liabilities have been decided to be transferred, the Registrar has no option but to merge the entity with the Kerala State Co-operative Bank. This does not affect the autonomous character of a society formed as District Co‑operative Bank," the court said.

The court went on to explain the amalgamation process as follows,

"This process is a two tier process, vis-à-vis, a voluntary resolution of the District Co-operative Bank to transfer assets and liabilities to the Kerala State Co-operative Bank by a resolution passed by the simple majority of the persons present at the Special General Body. The second tier is a compulsory statutory amalgamation based on the resolution passed under Section 14A of the K.C.S Act which means that, once a resolution is passed to transfer assets and liabilities to the State Co-operative Bank, the Registrar is bound to order amalgamation of District State Co-operative Banks with Kerala State Co-operative Bank. He has no option but to order amalgamation once such a decision is taken by the District State Co-operative Banks concerned."

The Petitioner had also argued that in the absence of an elected managing committee, the State Co-operative Bank as well as the District Co-operative Banks were under the control of the Administrator. Therefore, without there being a resolution in the general body meeting of the State Co-operative Bank, no scheme could be proposed by it to amalgamate with the District Co-operative Banks.

Rejecting this contention, the court said that there was no stipulation that all District Banks in Kerala should pass the resolution and that the approval of the scheme was done by an independent process and not by the administrator or administrative committee.

"It is to be noted that the scheme of amalgamation as proposed by the Kerala State Co-operative Bank is forwarded to the District Co-operative Banks through the Registrar. It is in the Special General Body meeting of the District Co-operative Bank, that the decision is taken to transfer the assets and liabilities. The decision therefore, is not taken by the Administrator or Administrative Committee. Thus, it is clear that Administrator of the District Co-operative Banks or the Kerala State Co-operative Bank have no role in themselves in deciding the amalgamation."

The amalgamation process was also challenged on the ground that the Kerala State Cooperative Bank was a scheduled bank, regulated by the Central Legislation, and therefore, it could not be amalgamated with non-scheduled District banks. In this regard the court said that RBI being the nodal body overseeing the amalgamation process was the befitting forum to decide in what form the final approval was to be given.

"The banking activity is regulated by Section 22 of the Banking Regulation Act, 1949. It is for the RBI to decide in what manner final approval can be given. No challenge would be maintainable before final approval is granted by the RBI unless there is glaring procedure of violation," it was held.