Madhya Pradesh HC stays Operation of RBI’s Circular notifying Appointment of Managing Director or Whole-Time Director in Primary Co-operative Banks [Read Order]

The Madhya Pradesh High Court stayed the Operation of RBI’s Circular notifying Appointment of Managing Director or Whole-Time Director in Primary Co-operative Banks.

The petitioner, Mahanagar Nagrik Sahakari Bank  Maryadit challenged the Banking Regulation (Amendment) Act, 2020, and consequential Circular dated 25 June, 2021 on the ground that the same is ultra vires of the Constitution of India, 1951.

Mr. Ajay Gupta assisted by Shri Ravi Kant Patidar and Shri Milind Sharma Advocates, Counsels for Petitioner submitted 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 Constitution of India 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 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 provisions which were touching upon ‘incorporation, regulation and winding up’ were also made applicable to co-operative banks, though Parliament did not have the 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 a circular dated 25th June, 2021 directing Primary (Urban) Co-operative Banks of the 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, along with 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 the Banking Regulation (Amendment) Act, 2020 has been struck down by the Supreme Court of India.

A division bench headed by Chief Justice Mohammed Rafiq and Justice Vijaykumar Shukla issued notices accepting the challenge to the constitutionality of the Banking Regulation (Amendment) act, 1949, and stayed the effect and operation of the Reserve Bank of India’s circular dated 25th June 2021.

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