Cooperative Society Banks challenge Banking Regulation Amendment Ordinance, 2020: Madras HC asks RBI, Centre to respond [Read Order]

The Madras High Court on Monday declined to grant any interim relief in a challenge moved against the Banking Regulation Amendment Ordinance, 2020 promulgated last month to regulate the affairs of Cooperative Banks by introducing an amendment to the Banking Regulation Act, 1949 (Big Kanchipuram Cooperative Town and anr v. UOI and anr)..Petitions filed by two Cooperative Societies challenge the constitutionality of Sections 4(A), 4(F), 4(G), 4(J), 4(L), 4(M) and 4(Q) of the 2020 Ordinance. The challenge is grounded on contentions that by virtue of these provisions, the Centre had encroached into the State’s legislative domain..When the matter was taken up by the Bench of Chief Justice AP Sahi and Justice Senthil Ramamoorthy today, the Court opined that a case had not been made out to warrant its interference as of yet..The Bench observed that it would have to examine more material before it can issue any interim orders. As stated in the order,.“in our opinion, 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, leaving 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”.Whereas the Central Government has the power to legislate on the subject of banking under Entry 45 of List I of the Seventh Schedule of the Constitution, the State holds the power to enact laws governing Cooperative Societies under Entry 32, List II. .Entry 43 of List I empowers the Centre to make laws on "Incorporation, regulation and winding up of trading corporations, including banking, insurance and financial corporations, but not including co-operative societies.".The petitioners contend that matters such as the incorporation, organization, regulation and functioning of the cooperative society by itself would not constitute the activity of banking, and that it (banking) is only managed as a business by the Cooperative Society. It is argued that their non-banking affairs are governed by the State’s law on the subject i.e. the Tamil Nadu Cooperative Societies Act, 1983..In this backdrop, it is the petitioners' case that the 2020 ordinance does not only seek to control banking affairs, but that it seeks to control the very entity of the cooperative society, thereby making the State legislation completely redundant. According to them, the activity of the bank and the entry of the bank are split functions..The Reserve Bank of India (RBI) and the Central Government, on the other hand, countered that the petitioners are cooperative societies exclusively running the banking business. As such, for all intents and purposes, they are cooperative banks and amenable to the Central Government’s jurisdiction as far as legislations go. Since their core functions were those of banking, their existence could not be segregated from their other activities, it was asserted..It was also submitted by the Government authorities that the 2020 ordinance does not invade the autonomy of the State to make any laws under List II..Further, it was argued that the ordinance was brought in to exercise sufficient control over banking affairs, to protect the larger public interest and to secure the financial trust vested by investors and customers in the banking business of Cooperative Societies..Inter alia, the Court opined that the case poses the following questions for consideration: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?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?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 has now granted four weeks time to the Centre and the RBI to file counter-affidavits on the issue. The petitioners were given two weeks time thereafter to file a rejoinder. .The matter has been posted to be taken up next on September 1..Senior Advocate Arvindh Pandian appeared for the petitioners, assisted by Advocate LP Shanmugasundaram. Additional Solicitor General R Sankaranarayanan, assisted by Government standing counsel CV Ramachandramoorthy appeared for the Union of India. Senior Advocate AL Somayaji appeared for the RBI, for Advocate C Mohan, M/s King and Partridge..Read the Order: