Multiple high courts (HCs) from across the country have almost simultaneously admitted petitions challenging the constitutionality of the Banking Regulation Act 2020 and stayed the execution of the Reserve Bank of India (RBI) circular issued on 25 June
2021. This circular notified several conditions related to urban cooperative banks (UCBs), including the appointment of managing director (MD) and whole-time director (WTD).
High courts from Rajasthan, Punjab & Haryana and Madhya Pradesh (MP) have issued a stay order on the RBI circular while hearing a writ petition challenging the constitutionality of the Banking Regulation (Amendment) Act, 2020 and the RBI circular.
These are: High Court of Judicature for Rajasthan Bench of Jaipur (SB Civil Writ Petition No. 9412/2021), HC of Judicature for Rajasthan at Jodhpur (SB Civil Writ Petition No. 11222/2021), High Court of Punjab & Haryana at Chandigarh (CWP 165090/2021) and the latest one the High Court Madhya Pradesh ( WP 16168/2-21).
A division bench of Madhya Pradesh HC, comprising chief justice Mohammad Rafiq and Justice Vijay Kumar Shukla, passed the interim order on 3 September and issued notice on a writ plea filed by Bhopal-based Mahanagar Nagrik Sahkari Bank Ltd. The Bank contended that the RBI circular is ultra vires of the Constitution of India. The HC has now listed the matter after eight weeks.
Counsel for the petitioner, Ajay Gupta, along with Ravi Kant Patidar and Milind Sharma, submitted that ‘incorporation, regulation and winding up of cooperative societies’ is a state subject under entry 32 of List II of Seventh Schedule of the Constitution. There is a specific exclusion of ‘incorporation, regulation and winding up of cooperative societies’ from Union List at entry 43 of List I of Seventh Schedule of the Constitution.
It was also argued that Parliament has competence only to legislate concerning ‘banking’ as provided in Entry 45 of List I of the Constitution. Earlier in 1966, such provisions of the Banking Regulation Act, 1949 were made applicable to cooperative banks, which related to banking activity and the rest of all provisions that touched ‘incorporation, regulation and winding up of cooperative societies' were kept in omission.
Part IXB was inserted in Constitution, vide 97th Constitutional Amendment, 2011, whereby 2nd Proviso to Article 243ZL made all the provisions of Banking Regulation Act, 1949 applicable to all such cooperative societies doing the business of banking.
On the strength of this provision in the Constitution of India, the Parliament made Banking Regulation (Amendment) Act, 2020, whereby all such provisions which were touching upon ‘incorporation, regulation and winding up’ were also made applicable to cooperative banks, though Parliament did not have the competence to legislate on it, as it was a state subject covered by Entry 32 of List II, the petitioner contended.
Once the omitted provisions were made applicable, RBI issued a circular on 25 June 2021 directing UCBs to appoint MD or chief executive officers (CEOs) of such banks, as per the eligibility criteria prescribed by the central bank, and remove or terminate all such MD and CEOs who are not fit and proper.
The Supreme Court struck down Article 243ZL, along with Part IXB of the Constitution of India, in its judgement dated 20 July 2021 passed in Union of India Vs Rajendra N Shah matter. Thus, the petitioner contended that the basis of promulgating the Banking Regulation (Amendment) Act, 2020 has been struck down by the apex court.
The Madhya Pradesh government had even allowed the appointments of MPs and MLAs to the position of chairpersons and vice-chairpersons of the cooperative banks through an ordinance last year. The ordinance has since been turned into law despite severe criticism. Banking experts had even pointed out that all cooperative banks are now mandated to follow the norms set by the RBI. There would be no other option for the Madhya Pradesh government but to repeal the law promulgated as the Madhya Pradesh Cooperative Societies (Amendment) Ordinance 2020.
In the writ petition of Manish Gupta Vs Union of India and RBI, the Rajasthan HC observed that “Meanwhile, no action shall be taken against the petitioner pursuant to the clause (4) of the communication dated 25 June 2021, issued by the RBI.”
In the case of Dr Karan Sharma vs RBI and others, the case was heard through video conferencing, the HC observed case is adjourned till October and status quo regarding service be maintained until then.
In the matter of Dharmendra vs RBI and others, justice Dinesh Mehta observed that “(the) Matter requires consideration. Issue notice. Issue notice of stay application also, returnable within six weeks. Meanwhile, no action shall be taken against the petitioner pursuant to clause (4) of the communication dated 25 June 2021, issued by the RBI.”
Meanwhile, Maharashtra home minister Dilip Walse Patil has said that the state government will amend the Cooperative Societies Act, 1960 during the winter session of the state legislature. A study group has been formed to draft the proposed amendment to the state law, and its report was expected in three months and the Cabinet will discuss the recommendations.
Earlier, Sharad Pawar, president of the Nationalist Congress Party (NCP), wrote to prime minister Narendra Modi expressing reservations about the amendments to the Banking Regulations Act. Mr Pawar met the PM and Union home minister Amit Shah.
It may be recalled that the Union government has recently even carved out a ministry (handled by Mr Shah) exclusively for cooperatives, seen as questioning states’ authority on the subject.
State cooperative banks have for long been the Achilles heel of the Indian banking sector. Politicians have run them as pocket boroughs and many cooperative banks have been run into the ground due to lack of professionalism and fraud. Hundreds of them have failed and it is only the failed cooperative banks that have failed to be revived.
According to RBI data, as of 31 May 2021, there were 1,531 UCBs in the country — 53 scheduled and 1,478 non-scheduled.