The Supreme Court on Tuesday held that cooperative banks come under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act 2002 (SARFAESI Act)
A constitution bench of Justices Arun Mishra, Indira Banerjee, Vineet Saran, M.R. Shah and Aniruddha Bose said, "The provisions of Section 2(1)(c) of SARFAESI Act, 2002 is not ultra vires."
The top court observed that the recovery is an essential part of banking; as per the recovery procedure prescribed under Section 13 of the SARFAESI Act, legislation relatable to Entry 45 of List I of the Seventh Schedule to the Constitution is applicable.
"We find that the SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be a colourable piece or over inclusive or beyond the competence of the Parliament," said the court.
The SARFAESI Act was introduced in 2002, and it defined bank and multi-state co-operative banks. Through a notification issued by the Centre in 2003, cooperative banks were allowed to proceed under the SARFAESI Act.
The top court noted that cooperative banks registered under the state legislation and multi-state level cooperative societies registered under the MSCS Act, 2002, with respect to 'banking' are governed by the legislation relatable to Entry 45 of List I of the Seventh Schedule of the Constitution.
The top court also upheld the 2003 notification under the Banking Regulation Act, where cooperative banks were brought within the class of banks entitled to seek recourse to the provisions of the SARFAESI Act.
The top court held that cooperative banks involved in the activities related to banking are covered within the meaning of 'Banking Company' defined under Section 5(c) read with Section 56(a) of the Banking Regulation Act, 1949, which is a legislation relatable to Entry 45 of List I.
It governs the aspect of 'banking' of cooperative banks run by the cooperative societies.
"The cooperative banks cannot carry on any activity without compliance of the provisions of the Banking Regulation Act, 1949 and any other legislation applicable to such banks relatable to 'Banking' in Entry 45 of List I and the RBI Act," said the court.
The Banking and Regulation Act was made applicable to cooperative banks in 1965, which led to the beginning of a regime of dual control, as these banks were also controlled by laws, which were state specific. In 2013, "multi-state cooperative banks" were included in the definition.
In the backdrop of several conflicting decisions of the courts on this issue, a three-judge bench of the apex court headed by Justice Mishra had referred the matter to a larger bench.