Madras HC Denies Interim Relief To Cooperative Banks Against 2020 Ordinance Subjecting Them To RBI Supervision [Read Order]

The Madras high court on Monday refused immediate interim relief to cooperative banks which have challenged the Centre's ordinance bringing them under the purview of the RBI.

The two petitioners before Chief Justice A. P. Shah and Justice Senthilkumar Ramamoorthy are "some of the pioneers in Cooperative Banking in this country and their activities date back almost to a century". They have pitched up a challenge to the constitutional validity of certain Sections of the Banking Regulation Amendment Ordinance, 2020 promulgated on 26.06.2020 as being ultra vires the Constitution of India.

It is alleged that, in addition to matters relating to "banking", the Ordinance has given the RBI extensive jurisdiction over the Cooperative Banks even in those pertaining to "incorporation, regulation and winding up", placing them at par with commercial banks: in aspects relating to share capital and access to funds, which is an essential facet of the very incorporation of the cooperative bank; in essential aspects of management of cooperative banks, which were previously governed by the concerned state legislations - voting rights, restrictions on persons who can be appointed as directors in the cooperative banks; audit obligations; etc.

It is urged that the impugned Ordinance legislates on subject matters which are entirely beyond the legislative competence of the Union Parliament and cannot be presumed to be covered by Entries 43 and 45 of List I of the Seventh Schedule to the Constitution of India, in as much as the petitioners are Cooperative Societies. It is contended that, therefore, the impugned Ordinance amounts to impinging upon the rights of the Cooperative Societies to be governed exclusively by State framed law, which stands protected by virtue of Entry 32 of List II of the Seventh Schedule to the Constitution of India.

The argument is that the incorporation, organization, regulation and functioning of the cooperative society by itself would not constitute the activity of Banking, which is managed as a business by the Cooperative Society and, therefore, the impugned Ordinance, which encroaches upon this field of legislation, is totally beyond the Ordinance making power of the Centre and parliamentary competence and hence, the Ordinance deserves to be struck down.

Appreciating the ratio of the May 5 judgment of the SC 5-judge bench in the case of Pandurang Ganpati Chaugule, the division bench noted that prima facie the issue that has been raised is that the introduction of the impugned provisions of the Ordinance, whereby a substantial amendment has been made in Part V of the Banking Regulation Act, 1949, proceeds to bring about substantial changes that would affect the incorporation, regulation and winding up of Cooperative Societies, which in turn amounts to intruding upon the affairs of a Cooperative Society running a Cooperative Bank.

The top court, on May 5, has held that the SARFAESI Act is applicable to cooperative banks. "The co­operative banks under the State legislation and multi­ State co­operative banks are 'banks' under section 2(1)(c) of the SARFAESI Act", held the Constitution Bench. The Court rejected the argument that the 2013 amendment to the SARFAESI Act adding 'multi-state cooperative bank' in Section 2(1)(c)(iva) was a "colourable exercise of power". The Court also upheld the 2003 notification issued under the Banking Regulation Act 1949 by which 'co­-operative bank' was brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act. The 5-judge bench unanimously held that the Parliament had the legislative competence to bring cooperative banks under the ambit of SARFAESI Act. "We find that 'banking' relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co-­operative banks in the SARFAESI Act", the judgment stated.

Before the High Court, the cooperative banks argued that the aforesaid decision clearly saves the laws relating to incorporation, regulation and winding up of Cooperative Societies, the subject matter whereof falls exclusively within the competence of the State Legislature and hence, any law, including the impugned Ordinance, trenching upon Entry 32 of List II of the Constitution of India is liable to be struck down, as it is totally beyond the competence of the Parliament and, therefore, also beyond the Ordinance making power of the Centre. It is urged that the judgment categorically holds that the affairs of a Cooperative Society running a Bank, other than its banking affairs, would continue to be controlled by law made by the State Legislature exclusively under Entry 32 of List II of the Seventh Schedule to the Constitution of India.

Observations of the High Court

"The Banking Regulation Act, 1949 is there in place to control the banking affairs and to that extent the judgment in the case of Pandurang Ganpati Chaugule also indicates that banks run by Cooperative Society are governed by Entry 45 of List I of the Seventh Schedule to the Constitution of India. The question is as to whether all the affairs of a Cooperative Society running a bank, which is incorporated under the State enacted Cooperative Societies Act, would also be governed by Entry 45 of List I of the Seventh Schedule to the Constitution of India?", wondered the High Court.

It further pointed out that "the issue is that if a Cooperative Society is carrying out only the business of banking, can it be said that all the affairs of such a Cooperative Society can be controlled by the law made under Entry 45 of List I, even if it overlaps the existing law which stands covered under Entry 32 of List II, and thereby make the State law redundant?"

The division bench opined that the issue of incidental trenching would depend upon the concept of the existence of an entity as a Cooperative Society being so integral, and rather dissolved with its activity of Banking, so as to lose its very authority of governance in matters of incorporation, regulation and winding up and be overridden by a law made by the Parliament.

"This interplay of the Entries, as explained by the Constitution Bench (in the May 5 ruling), leads to the debate from the expressions used in the judgment, as to whether a Cooperative Bank run by a Cooperative Society can continue to exist as an entity with the affairs of the society segregated and controlled in the aspects of incorporation, regulation and winding up by the law made by the State Legislature?", the bench further reflected.

The High Court was of the view that the ultimate answer would depend upon as to how far the impugned Ordinance proceeds to allegedly encroach upon such affairs of the Cooperative Society, which is running a Cooperative Bank, and as to whether the impugned provisions suffer from the vice of incompetence, and thereby ultra vires the Constitution of India.

"The ambivalence of the constitutional provisions may have to be considered on the principles of the basic structure doctrine, involving constitutional federalism, and also to the extent of constitutional supremacy, which outlines the doctrine of separation and distribution of powers between its various organs, thereby ensuring to its citizens a rule under the Constitution, more particularly described as the Rule of Law", opined the bench.

It proceeded to observe that nonetheless the presumption of the constitutional validity of a law is a well known guiding principle, the barrier whereof has to be measurably calibrated before a certainty can be spelt out from the submissions raised on behalf of the petitioners.

Having weighed the consequences, the bench found that for the grant of an interim relief "the sounding of a trumpet and war drums is sufficient to entertain a legal debate, the arbiter whereof is this Court". However, it was their opinion that "unless there is an imminent tangible cause or evidence indicating actual invasion of the rights of the petitioner banks in running the affairs of the Society", it would not be appropriate to consider the issue of interim relief at this stage.

Accordingly, the division bench of the High Court left it open to be considered as and when any overt or covert act by the Central Government authorities or the Reserve Bank of India based upon the impugned provisions of the Ordinance actually impinges upon the functioning of the affairs of the Society, for which any appropriate material can be brought on record by the petitioner banks for such consideration.

The bench granted 4 weeks' time to the UOI and the RBI to file their replies.

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