Sibal, Chidambaram battle for Co-op societies to accept deposits without banking license

A number of co-operative societies (Petitioners) have moved the Supreme Court against a judgment of the Rajasthan High Court requiring them to obtain banking license for accepting deposits from its members..The matter was heard on May 27 by the Vacation Bench of the Supreme Court comprising Justices AK Sikri and UU Lalit which stayed the judgment of the High Court subject to certain conditions..Senior Advocates Kapil Sibal, P Chidambaram, Meenakshi Arora, VP Singh and Parag Tripathi and Advocates including Anuradha Dutt, Masoom K Shah, Vishwas Shah and Vijayalakshmi Menon appeared for various co-operative societies..The Rajasthan High Court, in its judgment dated May 14, 2015 had held that “acceptance of deposits by co-operative societies” falls within the definition of “banking” under Section 5(b) of the Banking Regulation Act, 1949 and hence co-operative societies have to obtain banking license under Section 22 of the Banking Regulation Act to accept deposits from members..The Petitioners have contended that the scheme of the Banking Regulation Act, 1949 covers only banking companies and co-operative banks. Hence, the High Court’s attempt to bring co-operative societies within the domain of the Reserve Bank of India is overreaching the Banking Regulation Act, 1949..As per the petition filed by one of the societies,.“The High Court has erred in understanding the difference between Co-operative Society and Co-operative Bank. Difference between functioning of Co-operatives and Banks. The Petitioner society deals only and only within four corner of their members and not with Public at large. This is hallmark distinction between Society whose functions are very limited and restricted up to their members. ….There is great difference between such Society and Banks who works for any Person of Public. The Petitioner has no such facility for member and if Person who is not a member of the Society has no right to deal with Co-operative Society.”.The Petitioners have further contended that the observation in the judgment that “acceptance of deposits by co-operative societies” falls within the definition of “banking” under Section 5(b) of the Banking Regulation Act, 1949 is contradictory to Section 67 of the Multi State Co-operative Societies Act, 2002 which expressly permits co-operative societies to receive deposits from external sources to such extent and conditions as may be specified in the bye laws..The Petitioners have also submitted that the,.“interpretation of the word “public” in the definition of the word banking u/s. 5(b) of the Banking Regulation Act, 1949 that it shall also include nominal member, ordinary members and members of any category under the bye laws of the co-operative society destroys the fundamental distinction between banking company and co-operative society and also renders s. 67 of the Multi State Co-operative Societies Act, 2002 (Special Act holding the field) nugatory, otiose and redundant.”.It is the Petitioners’ case that since the legislature has specifically added a chapter on “Co-operative Banks” under the Banking Regulation Act, 1949, yet at the same time there is no specific mention of co-operative societies which take deposits from its members, it shows that the legislature has exempted such societies from obtaining banking license..The Court, after hearing the Petitioners on May 27, issued notice in the case while observing that there is a need to regulate the activities of co-operative societies insofar as accepting deposits from members are concerned..It held that,.“..though we are inclined to issue notice, at the same time we find that there is also a need to regulate the activities of the petitioners’ societies appropriately having regard to the manner in which these societies are functioning, as demonstrated, in paras 7, 15 and 17 in particular, in the impugned judgment. It also needs to be considered as to whether the activities amount to `banking business’ and therefore these petitioners can undertake these activities at all or not and insofar as deposits from the members is concerned, in what manner they can be regulated to avoid any malpractices.”.The Court, however, stayed those portions of the judgment of the High Court which mandate co-operative societies to obtain banking license for accepting deposits from members. This would, however, be subject to the following conditions:.“(i)Earlier interim order dated 18.3.2015 passed by the High Court in D.B. Civil W.P.NO. 26/2013 shall continue in the meantime;.(ii) it is specifically reiterated that the petitioners shall not carry on `banking’ activity as defined under Section 5(b) of the Banking Regulation Act, 1949;.(iii) No deposits shall be taken from the nominal members;.(iv) no deposits shall be taken from the public, i.e. non-members..(v) The fresh deposits that shall be taken from the members, shall carry such rate of interest that would not exceed the interest rate allowed by the Reserve Bank of India for nationalized banks.”.The matter in all likelihood will now be taken up only after the summer vacation.