Gujarat HC issues notice in challenge to RBI regulation of co-operative societies

The Gujarat High Court has issued notice in a petition challenging the Constitutionality of Banking Laws (Application to Co-operative Societies) Act, 1965 and certain clauses of an RBI Master Circular which regulate the area of operation of co-operative societies..The petitioner in this case is the Gujarat Rajya Karmachari Co-operative Society Limited, a co-operative bank registered under the Gujarat Co-operative Societies Act, 1961..Advocates Vishwas K Shah and Masoom K Shah appeared for the petitioner before Chief Justice R Subhash Reddy and Justice Anant S Dave on February 19 this year..The Petitioner’s grievance arises from the denial of permission by RBI to open branch offices based on a Master circular which regulates the extension of area of operation. The challenge of the Petitioner is two-fold..The first challenge is with respect to the Banking Laws (Application to Co-operative Societies) Act, 1965. The Petitioner has contended that it is registered under the Gujarat Co-operative Societies Act, 1961 and thus falls under item 32 in List II of the 7th Schedule..Hence, the Union government has no competence to enact any law for the petitioner..“…in light of judgement of Hon’ble Supreme Court of India in Greater Bombay case (Three Judges Bench) Judgement, Co-operative Societies falling under local Co-operative Societies do not fall in S. 5 (c) of Banking Regulation Act, 1949. The logical corollary is that RBI which is creature of List I, can have no control over Petitioner society which is creature of List II. It is important to keep in mind that every Co-operative Bank is society but vice versa may or may not be true. There can never be Co-operative Bank which is not society. Thus Petitioner is essentially a society registered under Gujarat Co-operative Societies Act, 1961 and does not deal with public. In fact the definition of Banking in Banking Regulation Act speaks about dealing with public whereas Petitioner deals only with members and not with public.”.Secondly, the petitioner has attacked clauses 1.2, 1.3 and 1.4 of Master Circular issued by RBI pertaining to area of operation, branch authorization policy etc. Clause 1.2 deals with the regulatory requirements for extension of area of operation within the district of registration and adjoining districts within the State of registration while clauses 1.3 and 1.4 deal with extension of area of operation beyond the adjoining districts and to the entire State of registration..The petitioner bank has challenged the above clauses on the ground that the word “adjoining” used in the above clauses is vague and ambiguous. The communication by the RBI dated August 7, 2015 based on the above clauses has also been assailed by the petitioner..“…there is no definition of “adjoining” in the master Circular and thus phrase “adjoining” is vague and ambiguous. .The impugned communication is illegal and bad in law because on one hand, regulator Registrar of Co-operative Societies permit various districts in area of operation but as Petitioner is Tier I UCB , Reserve Bank has permitted to have branch only in district of registration and adjoining districts by virtue of clauses 1.2 – 1.4. The said clauses violate Art. 14 of Constitution. There is no logic or rational in this clause and it is devoid of substance. There is no classification as such between various kinds of UCBs as far as area of operation is concerned. The clause is otiose and nugatory as on one hand, regulator Registrar of Co-operative Society permits extension in area of operation but correspondingly there is specific clause which permits opening of branch only in district of registration and adjoining districts by Reserve Bank. There is no harmony between policy of Registrar of Co-operative Society and Reserve Bank as far as area of operation is concerned. It is classic case where two regulators of one entity can affect the functioning of entity. There is no nexus with the said clause with Banking Regulation Act. The Act does not provide such limitations and in this backdrop in absence of legislative mandate, Circular which provides such restrictions suffers from excessive delegation and is also arbitrary, illogical and illegal and sans rational. The said clause also violates Art. 19 of Petitioner and it is not reasonable restriction.”.Based on the above, the petitioner has therefore prayed for striking down the Banking Laws (Application to Co-operative Societies) Act, 1965 and clauses 1.2, 1.3 and 1.4 of the Master circular as unconstitutional. He has also prayed for quashing RBI’s communication dated August 7, 2015.