Category: Banking & Finance

The Reserve Bank of India (RBI) may need to introspect on the notification related to the appointment of managing director/whole-time director in primary (urban) co-operative banks (UCBs). After a ruling by the Gujarat High Court in 2013, which was upheld by the Supreme Court in 2021, the Madhya Pradesh High Court has stayed the implementation of RBI’s notification.

The stay may attract more such petitions in different courts as stakes are very high for States in this matter. Also, traditionally, politicians have a larger say in the affairs of the co-operative sector. As per RBI data on May 31, there are 1,531 UCBs in the country — 53 scheduled and 1,478 non-scheduled.

The Centre recently carved out a Ministry exclusively for co-operatives, seen as questioning States’ authority on the subject.

Although the Banking Regulation (Amendment) Act notified on September 29, 2020 was meant to provide additional power to the central bank for effectively regulating co-operative banks, there is a feeling that it may not be easy, given the Centre-States tussle on the issue. In the latest case, the petitioner, Bairagarh (Madhya Pradesh)-based Mahanagar Nagrik Sahakari Bank had moved the State High Court challenging the constitutional validity of the amended Section 4 of the Banking Regulation Amendment Act, 1965. It had argued that the RBI order dated June 25, 2021, is ‘absolutely incompetent and lacks in authority’.

Eligibility criteria

The RBI’s order debarred persons such as Member of Parliament or State Legislature or Municipal Corporation or Municipality or other local bodies from holding the post of MD/WTD.

Also, persons engaged in any other business or vocation, director of a company (except non-profit one), a partner of any firm which carries on any trade, business or industry, having substantial interest in any company or working as director, manager, managing agent, partner or proprietor of any trading, commercial or industrial concern will not be eligible.

The order states that the tenure of the posts will not be for more than five years at a time, subject to a minimum period of three years at the time of first appointment, unless terminated or removed earlier, and will be eligible for re-appointment. The performance of MD/WTD shall be reviewed by the board annually. Also, the post cannot be held by the same incumbent for more than 15 years. However, after a cooling period of three years, reappointment is possible.

In State’s domain

The petitioner submitted that Bairagarh-based Mahanagar Nagrik Sahakari Bankit was an UCB registered under the MP State Co-operative Societies Act, 1960. The Act governs service conditions of the MD/CEO of the co-operative banks registered under it. It added that the co-operative is part of the State List in the Seventh Schedule of the Constitution while banking is a part of the Union List.

It was argued that the power to legislate co-operative societies falls exclusively with the State and not within the domain of the Union, much less the RBI.

The petitioner’s counsel also submitted that the 97th Constitution Amendment (2011) provided that in case of a co-operative society carrying on the business of banking, the provisions of the Banking Regulation Act 1949 will apply.

This provision was struck down by the Gujarat High Court and recently upheld by the Supreme Court.

The Madhya Pradesh High Court has stayed the operation and effect of the RBI’s order dated June 25. The matter will be listed for further hearing after eight weeks.