Madhya Pradesh High Court Stays RBI Circular On Urban Cooperative Banks

The Madhya Pradesh High Court has stayed a circular issued by the Reserve Bank of India (RBI) on June 25 which laid down several conditions related to Urban Coopeartive Banks.

A division bench comprising Chief Justice Mohammad Rafiq and Justice Vijay Kumar Shukla passed the interim order on September 3 while issuing notice on a writ petition filed by Mahanagar Nagrik Sahkari Bank Ltd. Bhopal challenging the Banking Regulation (Amendment) Act, 2020 and the said circular dated 25 June, 2021, on the ground that the same are ultra vires of the Constitution.

Arguments of the petitioner

It was argued by the advocates for the petitioner, Shri Ajay Gupta assisted by Shri Ravi Kant Patidar and Shri Milind Sharma Advocates, that 'Incorporation, Regulation and Winding up of Co-operative Societies' is a State subject under Entry 32 of List II of Seventh Schedule of the Constitution, and there is a specific exclusion of 'Incorporation, Regulation and Winding up of Co-operative 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 in relation to 'Banking' as provided in Entry 45 of List I of the Constitution, thus previously in 1966 on such provisions of Banking Regulation Act, 1949 were made applicable to co-operative banks which related to banking activity and rest all provisions which touched 'incorporation, regulation and winding up of the cooperative societies' were outside the domain of the Parliament. .

Thereafter, Part IXB was inserted in Constitution, by 97th Constitutional Amendment, 2011, whereby 2nd Proviso to Article 243ZL made all the provisions of Banking Regulation Act, 1949 applicable to all such co-operative societies doing the business of banking. On the strength of this provision in the Constitution of India, Parliament made Banking Regulation (Amendment) Act, 2020, whereby all such provision which were touching upon 'incorporation, regulation and winding up' were also made applicable to co-operative banks, though Parliament did not have competence to legislate about the same, as it was a State subject covered by Entry 32 of List II.

Once, the omitted provisions were made applicable, Reserve Bank India issued circular dated 25th June, 2021 directing Primary (Urban) Co-operative Banks of whole Country to appoint Managing Directors/ Chief Executive Officers of such banks, as per the eligibility criteria prescribed by RBI, and remove/terminate all such Managing Directors/ Chief Executive Officers of Banks who are not fit and proper as per said circular. Article 243ZL, alongwith Part IXB of the Constitution of India has been struck down by the Supreme Court of India in its judgment dated 20th July, 2021 passed in Union of India Vs. Rajendra N. Shah. Thus, the basis of promulgating Banking Regulation (Amendment) Act, 2020 has been struck down by the Supreme Court of India.

The petitioner has therefore challenged the constitutional validity of amended Section 4 of the Banking Regulation Amendment Act. The argument therefore is that the impugned order dated 25.06.2021 issued by the Reserve Bank of India is absolutely incompetent and lacks in authority

The High Court, after hearing the arguments of the petitioner- bank, issued notices to the respondents and stayed the circular. The matter will be listed after 8 weeks.

Click here to read/download the High Court order