Kerala High Court Issues Notice To Centre, RBI On Plea Against Amendments To Banking Regulation Act

The Kerala High Court will consider if the Banking Regulation (Amendment) Act, 2020 takes away the legislative power of States under item 32 in List II in the 7th schedule of the Constitution and whether it is liable to be declared as unconstitutional. 

Justice Devan Ramachandran recently issued notice to the Centre and Reserve Bank of India in the matter and posted it for hearing after a month. 

The petition was filed by two urban co-operative banks registered under the Kerala Co-operative Societies Act and Rules, through Senior Advocate George Poonthottam, Advocates J. Vishnu and Nisha George. 

They approached the Court alleging that under the Banking Regulation Act amendments, urban cooperative banks were now forced to constitute a Board of Management and appoint a CEO/Managing Director which is to function as a parallel power centre along with the Board of Directors elected by the General Body of the Co-operative Societies.

According to them, the Kerala Co-operative Societies Act occupies the legislative field as far as the State of Kerala is concerned and therefore, there cannot be any Parliament legislation in the said field.

They admitted that the Banking Regulation Act enables the RBI to regulate and supervise purely banking activities in the petitioner Banks. 

However, they pointed out that it cannot, in disguise of the said power, transgress and annihilate the provisions of KCS Act framed under item 32 in List II of the 7th Schedule of the Constitution, wherein, Co-operative Societies are purely a State subject.

Reliance was also placed on the Supreme Court decision of Union of India vs Rajendra Shah which struck down the 97th Constitutional amendment to the extent it relates to Co-operative Societies under State laws as unconstitutional.

On this ground, the petitioner alleged that the Centre had amended the Banking Regulations Act in 2020 'cutting a direct road into the State list'.

The petitioners further pointed out that the RBI had also issued a circular in accordance with the amendments containing the procedure of appointment/termination of the MD/CEO, BoM and their qualifications.

As per these amendments, now cooperative societies could not amend their by-laws without the sanction of the Reserve Bank of India.

The amendments brought in 2020 had nullified the provisions of the Kerala Cooperative Societies (KCS) Act and Rules and the power granted to the general body of the societies as per the KCS Act, it is argued.

"...vide the amendments carried out in the BR Act, the RBI has got a stranglehold on the functioning of all UCBs, eroding and nullifying the provisions of the KCS Act and Rules and the power granted to the General Body of the Societies as per the KCS Act," reads the plea.

The Banking Regulation Act amendments were brought on the strength of the 97th Constitutional Amendment, 2011, whereby 2nd proviso to Article 243ZL made all the provisions of Banking Regulation Act, 1949, applicable to all co-operative societies in banking.

As a result, the power to fix the maximum number of directors of cooperative societies and the duration of the term of office of elected members of the Board of co-operative societies etc were now put in the hands of the Central Government.

The petitioners contended that the amendments had transgressed into the provisions of the KCS Act framed under item 32 in List II. Therefore, the Banking Regulation Act amendments were unconstitutional.

Also Read: Madhya Pradesh High Court Stays RBI Circular On Urban Cooperative Banks

Case Title: Tiruvalla East Co-operative Bank & Anr. v. Union of India & Ors.