Kerala High Court Issues Notice To Centre, RBI On Plea Against Amendments To Banking Regulation Act

The Kerala High Court will review whether the Banking Regulation (Amendment) Act, 2020 deprives states of their legislative jurisdiction under item 32 of List I.

Justice Devan Ramachandran recently served notice on the Centre and the Reserve Bank of India in the case and scheduled a hearing for a month later.

Senior Advocate Georg filed the case on behalf of two urban co-operative banks registered under the Kerala Co-operative Societies Act and Rules.

They petitioned the Court, claiming that as a result of amendments to the Banking Regulation Act, urban cooperative banks were now required to form a Board of Management and appoint a CEO/Managing Director, who would function as a parallel power centre alongside the Board of Directors elected by the General Body of the Co-operative Societies.

According to them, the Kerala Co-operative Societies Act occupies the legislative field in the State of Kerala, and hence no Parliament legislation can be enacted in that field.

They acknowledged that the Banking Regulation Act empowers the RBI to control and supervise solely banking activities of the petitioner banks.

They did, however, point out that it could not, in the pretext of the abovementioned power, violate and obliterate the provisions of the KCS Act, which are framed under item 32 in List II of the 7th Schedule of the Constitution, which states that Co-operative Societies are entirely a State issue.

The Supreme Court judgement in Union of India vs Rajendra Shah, which declared the 97th Constitutional Amendment unlawful inasmuch as it applies to Co-operative Societies under State laws, was also cited.

The petitioner claimed that the Centre modified the Banking Regulations Act in 2020, “cutting a direct road into the State list.”

The petitioners also stated that, in accordance with the modifications, the RBI published a circular outlining the procedure for appointing/terminating the MD/CEO, BoM, and their credentials.

According to these modifications, cooperative societies can no longer amend its by-laws without the permission of the Reserve Bank of India.

According to the revisions made in 2020, the sections of the Kerala Cooperative Societies (KCS) Act and Rules, as well as the power conferred to the general body of the societies under the KCS Act, were rendered null and void.

“…as a result of the amendments made to the BR Act, the RBI now has a stranglehold on the running of all UCBs, undermining and nullifying the provisions of the KCS Act and Rules, as well as the power conferred to the General Body of the Societies under the KCS Act,” the petition said.

The Banking Regulation Act modifications were enacted on the strength of the 97th Constitutional Amendment, 2011, in which the 2nd proviso to Article 243ZL made the provisions of the Banking Regulation Act, 1949, applicable to all co-operative societies engaged in banking.

As a result, the Central Government now has the authority to set the maximum number of directors of cooperative societies and the duration of the term of office of elected members of the Board of Cooperative Societies, among other things.

The petitioners claimed that the revisions violated the provisions of the KCS Act, which were framed under item 32 in List II. As a result, the modifications to the Banking Regulation Act were unlawful.