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Madhya Pradesh High Court stays RBI Circular on urban co-operative banks

The Madhya Pradesh High Court has delayed a Reserve Bank of India Circular that imposed certain requirements on Urban Cooperative Banks. (Mahanagar Nagrik Sahakari Bank Maryadit v. Union of India and Others)

The Reserve Bank of India (RBI) may need to reconsider its notification on the appointment of managing directors and full-time directors in primary (urban) co-operative banks (UCBs). The Madhya Pradesh High Court has halted the implementation of the RBI's notification, after a judgement by the Gujarat High Court in 2013, which was maintained by the Supreme Court in 2021.

The interim order was issued on 3 September by a division bench comprising Chief Justice Mohammad Rafiq and Justice Vijay Kumar Shukla 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 June 25, 2021, on the grounds that they are ultra vires of the Constitution.

The petitioner's attorneys, Shri Ajay Gupta, Shri Ravi Kant Patidar, and Shri Milind Sharma Advocates, argued that 'Incorporation, Regulation, and Winding up of Co-operative Societies' is a State subject under Entry 32 of List II of the Constitution's Seventh Schedule, and that there is a specific exclusion of 'Incorporation, Regulation, and Winding up of Co-operative Societies'.

It was also argued that Parliament has only the power to legislate in relation to 'Banking,' as defined in Entry 45 of List I of the Constitution, and that, prior to 1966, only those provisions of the Banking Regulation Act, 1949 that related to banking activity were made applicable to co-operative banks, while the rest of the Act dealt with the incorporation, regulation, and winding up of cooperatives.

Following that, the 97th Constitutional Amendment, 2011, incorporated Part IXB into the Constitution, whereby the 2nd Proviso to Article 243 made all of the requirements of the Banking Regulation Act, 1949 applicable to all such co-operative organisations engaged in banking. On the basis of this provision in the Indian Constitution, Parliament passed the Banking Regulation (Amendment) Act, 2020, which made all provisions relating to 'incorporation, regulation, and winding up' applicable to co-operative banks, despite the fact that Parliament lacked the authority to do so because it was a state subject covered by Entry 32 of List II.

Once the omitted provisions became effective, the Reserve Bank of India issued a circular on 25 June 2021, directing all Primary (Urban) Co-operative Banks across the country to appoint Managing Directors/ Chief Executive Officers of such banks based on the RBI's eligibility criteria and to remove/terminate all such Managing Directors/ Chief Executive Officers of Banks who are not fit and proper. The Supreme Court of India, in the case of Union of India v. Rajendra N. Shah, REED 2021 SC 07004, knocked down Article 243 and Part IXB of the Indian Constitution.

The Supreme Court of India has so knocked down the grounds for enacting the Banking Regulation (Amendment) Act, 2020. As a result, the petitioner has challenged the constitutionality of the Banking Regulation Amendment Act's revised Section 4. The claim is that the Reserve Bank of India's challenged order, dated June 25, 2021, is completely inept and devoid of authority.

After hearing the petitioner-arguments, the bank's the High Court issued notices to the respondents and delayed the circular. After 8 weeks, the case will be listed.

The stakes are so high for states in this case; the stay may attract more such requests in different courts. In addition, politicians have traditionally had a larger role in the activities of the cooperative sector. According to RBI data as of 31 May, the country has 1,531 UCBs, with 53 scheduled and 1,478 non-scheduled.

Members of Parliament, State Legislatures, Municipal Corporations, Municipalities, and other local bodies were forbidden from holding the position of MD/WTD per the RBI's directive.

Persons engaged in any other business or vocation, directors of a company (except non-profit ones), partners of any firm carrying on any trade, business, or industry, having a substantial interest in any company, or working as a director, manager, managing agent, partner, or proprietor of any trading, commercial, or industrial concern are also ineligible.

According to the order, the posts' tenure will not exceed five years at a time, with a minimum of three years at the time of the first appointment, unless terminated or removed early, and they will be eligible for re-appointment. The board will evaluate MD/performance WTD's on an annual basis. Furthermore, no one can hold the position for more than 15 years. Reappointment is allowed after a three-year cooling-off period.

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