Co-operative Societies: Kerala High Court notice to Centre, RBI on challenge to Banking Regulation Act amendments

Two Urban Co-operative Banks (UCB) registered under the Kerala Co-operative Societies (KCS) Act and Rules, 1969 have moved the Kerala High Court against certain provisions of the Banking Regulation (Amendment) Act, 2020. (Tiruvalla East Co-operative Bank & Anr. v Union of India & Ors.).Justice Devan Ramachandran issued notice to the Central government and the Reserve Bank of India (RBI) in the matter and posted it for hearing after a month..The plea, filed through advocate Nisha George of M/S George Poonthottam & Associates claimed that the amendments to the Banking Regulation (BR) Act, 1949 transgress and annihilate the provisions of the KCS Act framed under item 32 in List II of the 7th Schedule of the Constitution, which makes co-operative societies a purely State subject.As such, they have sought for declarations that,Amendments made to Sections 3, and Section 56 of the Banking Regulation Act, 1949 by the Banking Regulation Amendment Act 39 of 2020 are unconstitutional;Amendment made to the Banking Regulation Act through Act 39 of 2020 in so far as the co-operative societies, is beyond the legislative competence of parliament as the same is reserved within the State under the constitutional scheme.The two petitioner hold licenses for Urban Co-operative banks (‘UCB’, for short) registered under Section 22 of the BR Act. The plea contended that even though the BR Act enables the RBI to regulate and supervise purely banking activities in the country, the central bank cannot, in disguise of the said power, strike down provisions of the State KCS Act.To buttress this point, reliance was placed on the decision of the Supreme Court in Pandurang Ganpati Chaugule Vs. Vishwasrao Patil Murgud Sahakari Bank Limited in which a 5-Judge bench of the Supreme Court held that incidental encroachment by parliament into the State list is permissible only in case of ‘core-banking’ activities. Moreover, in Union of India vs Rajendra Shah, the Supreme Court struck down the 97th Constitutional amendment to the extent it relates to co-operative societies under State laws, as unconstitutional."However, cutting a direct road into the State list, the Central Government amended the BR Act through Act 39 of 2020", the plea said..Through this amendment and various circulars issued on the strength of the same, UCBs must now 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. Moreover, some of these circulars vest the power to appoint or terminate CEO, Managing Directors and Board of Management with the RBI .These amendments also prevent co-operative societies from amending their by-laws without the sanction of the RBI."Therefore, 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", the plea said..It was also contended that the 2020 amendments to the BR Act were riding on the shoulders of the 97th Constitutional Amendment which allowed parliament to curtail the unfettered powers of the State legislature under entry 32 in List II. The provisions of the BR Act were made applicable to co-operative societies such as UCBs through amendment to Section 39.Further, the plea submitted that amendments to sub-clauses of Section 56 had the effect of equating companies registered under the Companies Act with co-operative societies. By amendment to clause (i) under Section 56, a plethora of restrictions and guidelines were imposed on the shares, share capital and debentures of a cooperative society..On these grounds, among others, the petitions have challenged the amendments made to the BR Act through Acts 39 and 56 of 2020, and circulars issued on the basis of the amended provisions, as being unconstitutional and illegal.