SARFAESI & Co-operative Banks: 'If I Am A Cooperative Society In Stock Market, I Can't Say I Am Not Bound by SEBI':SG Tells SC

The Five Judge Constitution Bench headed by Justice Arun Mishra resumed hearing on the question of applicability of The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 on Co-operative Societies/Banks.

A three judge bench, referred this matter to constitution bench noticing the conflicting decisions in Greater Bombay Coop. Bank Ltd. vs. United Yarn Tex (P) Ltd. and others [(2007) 6 SCC 236] and the earlier pronouncements of this Court in Delhi Cloth & General Mills Co. Ltd. vs. Union of India [(1983) 4 SCC 1666], T. Velayudhan vs. Union of India [(1993) 2 SCC 582] and Union of India vs. Delhi High Court Bar Association [(2002) 4 SCC 275]. These judgments relate to the scope of the legislative fields covered by Entry 45 of List I and Entry 32 of List II of the Seventh Schedule.

"Pith and substance needn't be resorted to. For example, take a cooperative society. As a structure, it has members, which may be individuals or cooperative societies themselves. It may be engaged in varied activities- selling fertilisers, some equipment, banking. The Constitution requires that how the society is incorporated, how it is regulated and how wound up is governed by Entry 32 of List II. But if I am a cooperative society selling fertilisers, the prices will be fixed under the Central Act", began SG Tushar Mehta on Wednesday.

He indicated Entry 43 of List I- Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies. "The Parliament cannot legislate as to the incorporation, regulation and winding up of  cooperative societies", he submitted.

"It is being contended (on the other side) that if cooperative societies are excluded from 43, then why not from Entry 45 (of List I- 'Banking')", iterated Justice Arun Mishra.

"If the Parliament decides that as to all cooperative banks, we will make the law for their incorporation, regulation and winding up, it will lack the legislative competence because these come under the state legislature under 32. But it is no as if the Parliament cannot otherwise touch the cooperative societies", advanced the SG.

"For banking, the sole repository of the legislative power is the Parliament in 45. Imagine the disastrous consequences if my friend (the appellants) succeeds There are two fallouts- there will be a separate banking regime for each state, and if 45 is not applicable to cooperative societies, then a cooperative society can never engage in banking as a state legislature has no power so far as banking is concerned...", he argued.

"Banking by a company, cooperative society or even partnership firm, if is permitted in the future, let's take the extreme for tasting- Dena bank was originally a partnership, will be the sole purview of the Parliament. Things like managing committee of a cooperative society, elections, auditing, if there is something wrong in the audit, how it will be superseded, winding up etc are all List II. But banking is List I", he continued.

"List II can't control everything- fertilisers, agricultural aid to farmers etc Say, I am a cooperative society in stock market and by virtue of Entry 48 in List I, the Central government has power over Stock exchanges and futures markets. So I will be bound by SEBI! I can't say that I come under 32...If I am selling fertilisers, I will be bound by the Central law on standards of weights and measures as it is Entry 50 in the Union List and I am doing that activity!...Activity is the key figure! Otherwise section 56 of the Banking Regulation Act ('Act to apply to co-operative societies subject to modifications') would become redundant and would have to be declared unconstitutional!", expounded Mr. Mehta.

"Even in the absence of the 2003 notification (the Central government is authorised by Section 2 (c)(v) of the SARFAESI to specify any other bank for the purpose of the Act. In exercise of this power, the Central government by Notification dated 28.01.2003, has specified 'co-operative bank'), cooperative banks have been there in the Banking Regulation ACT IN SECTION 56...", he continued.

"So it came under 45 effectively. That has never been questioned. But in the DRT and SARFAESI Acts, thought the notification came earlier, the amendment came later. And there is definition of 'bank' in both...", ventured Justice Mishra.

"In section 2(c)(i) of SARFAESI, 'bank' means a banking company. Section 2(d) says that 'banking company' shall have the meaning assigned to it in clause (c) of section 5 of the Banking Regulation Act, 1949. Section 5(c) says 'banking company' means any company which transacts the business of banking in India...Banking company has been there in the SARFAESI from the beginning and it has the same meaning as in the Banking Regulation Act...section 56 of the Banking Regulation Act came in 1965. It reads that throughout this Act, unless the context otherwise requires, references to a 'banking company' or 'the company' or 'such company' shall be construed as references to a co-operative bank...", averred the SG.

Justice Vineet Saran pointed out that what is a 'company', as defined in section 5(d) of the Banking Regulation Act, is also relevant- "company" means any company as defined in section 3 of the Companies Act, 1956.

"Because of the definition of 'company', it is a restrictive definition. But by virtue of section 56, the provisions of the Banking Regulation Act apply independently to cooperative societies...that should be your argument", opined Justice Aniruddha Bose.

"Application of this Act is by virtue of section 56 and the definition clause. It stands impliedly modified by the subsequent introduction of Part V (in the Banking Regulation Act in 1965, on APPLICATION OF THE ACT TO CO-OPERATIVE BANKS)", continued the judge.

"2(c) is read with 2(d) and 5(c) is to be read with 56...it was argued that recovery is not a core banking power. See the Statement of Objects and Reasons of SARFAESI- it is for recovery! It cannot be believed that a cooperative society engaged in banking would keep lending without any modes of recovery. Recovery is an integral part of lending! Lending is not for charity!", urged the SG.

"SARFAESI is traceable to 45. A state Act would give way to Parliamentary legislation if a cooperative society is in banking", he concluded.

"Recovery includes banking, banking includes recovery", articulated Justice M. R. Shah.

Earlier, in the day, Justice Bose had stated, "whether recovery can be said to be incidental to banking is the issue"

"Banking in Entry 45 has a wider meaning...The question is core and incidental. Nothing is independent. It is all in culmination", Justice Mishra had observed.