Introduction:
The Banking Regulation (Amendment) Ordinance, 2020 ("Ordinance") was promulgated on June 26, 2020 to bring "Co-Operative Banks" under the ambit of the RBI by amending the Banking Regulation Act, 1949 ("Banking Act").
Section 3 of the Banking Act is now replaced by the Ordinance. As per the release of the Finance Ministry dated June 27, 2020, the Ordinance has been introduced to protect the interest of depositors, and for improving the governance and regulations of cooperative Banks.
The Ordinance is intended not to overlap with the powers that already exist with the Registrars under the respective State Co-Operative laws. The Non-Application of the Banking Act continues as far as Primary Agricultural Credit Societies ("PACS") are concerned and the Ordinance extends the non-applicability to co-operative societies whose primary object and principal business is long-term finance for agricultural development.
Prompting of the ordinance:
The Reserve Bank of India has cancelled the license of two Co-Operative Banks which is the "The Mapusa Urban Co-operative Bank of Goa Ltd" ("Mapusa Case") on April 17, 2020 and "The CKP Cooperative Bank Ltd" ("CKP Case") on May 2, 2020. The liquidation proceedings for these banks have been initiated. The cancellation of these two licenses echoes the introduction of the Ordinance.
Apart from these two cases, the other case worth mentioning which was the primary reason for this Ordinance was the case of the Punjab and Maharashtra Cooperative Bank ("PMC Bank" or "PMC Case"), wherein the RBI imposed significant restrictions of withdrawal and suspended its business.
The said directive now continues for the next six months until December 22, 2020.
The PMC Bank was ramped up with financial irregularities and failed internal control systems. These cases significantly highlight the problems of dual regulation plaguing Co-Operative Banks, the sector whose depositors will now view the ordinance as a much-needed measure to protect their interest.
Report of the High Powered Committee on Urban Co-Operative Banks under R. Gandhi ("Report"):
The Urban Co-Operative Banks also known as the Primary (Urban) Co-Operative Banks were brought under the ambit of the Banking Act with effect from March 1, 1966. The Report considered Urban Co-Operative Banks ("UCBs") as the base level of banking system in India providing banking and finance facilities to people of small means and recognized the phenomenal growth of the UCB sector.
This Report examined the entire sector concerning the UCBs and had placed its recommendations.
The Report among other suggestions had firstly, recommended conversion of UCBs into Joint Stock Banks having a threshold limit of a business size of Rs 20000 crores; secondly, the conversion of UCBs into Small Commercial Banks, thirdly having a Board of Management as recommended by the Malegam Report; fourthly, being the depositors being represented by Board Members.
The Report had also taken cognizance of the fact that there are no powers with the RBI for constituting the boards of the UCBs, removal of directors, its supersession, auditing and winding up.
The recommendations of various reports calling for the umbrella structure of organization ensuring effective regulation of the UCB sector under the guise of the RBI along with the rise of cases concerning financial irregularities [as evident in the PMC Case, Mapusa Case and the CKP Case] are more than enough reasons justifying the grave necessity of the Ordinance which will instill confidence/ protect the interest of the depositors and stabilize this sector of banking.
Sandeep Bhalla v The Reserve Bank of India:
In the said case before the Delhi High Court, the RBI and the Government of India has been directed to explain reasons by way of affidavits with respect to the reconstruction scheme introduced for "Yes Bank".
The writ petition was filed by one of the depositors of the PMC Bank wherein the question being considered is that "if a scheme could be drawn up by the Government and the RBI for "Yes Bank", why the same can't be extended to the depositors of the PMC Bank".
The rationale of the gazette notification dated March 13, 2020 introducing the Scheme of Reconstruction; states that such measures are being introduced in public interest, interest of the depositors and also to secure the management of the banking company.
The Scheme grafted by the RBI by virtue of section 45 of the Banking Act, contemplated investment of funds into "Yes Bank" which would be equivalent to an amount which would be not less than twenty percent but not more than forty percent of the total equity shares.
The Scheme also provided that the investment was to be tied in with a lock-in of three years and the Board of "Yes Bank" was reconstituted.
Ordinance an Answer to the PMC Case and the DHC:
The introduction of the ordinance offers much relief to the plagued UCB sector. The Urban Co-Operative Banks have now been brought under the ambit of the Banking Act.
Apart from maintaining the exclusion which is already discussed, amongst others, the Ordinance adds that firstly, a scheme of reconstruction or amalgamation can be initiated any other time and not necessarily during the moratorium; secondly, during the moratorium, the UCB cannot grant any loans or make investments in any credit instruments. Thirdly, the UCB may issue equity shares, preferential shares, special shares, unsecured debentures or bonds with the prior approval of the RBI.
Fourthly, the UCB cannot reduce or withdraw capital except as per the conditions specified by RBI and there can be no demand for surrendered shares. Fifthly, the board of a UCB registered under a State Law, can be superseded only with the consultation of the concerned State Government. Finally, the RBI may exempt the UCBs or a certain class of UCBs from the application of the provisions of the Banking Act.
The Ordinance has given the much need legal impetus for regulation, revival, stabilization and recovery of the UCB sector which would enable the RBI to introduce Scheme's of reconstruction or amalgamation similar to the one drawn up in the case of "Yes Bank".
Basis of classification and differentiation:
It is worth discussing that the Ordinance has consciously excluded Credit & Co-Operative Societies pertaining to agriculture which may raise the voice of inequality amongst the equal class of depositors.
The "object" of the ordinance is evident and celebratory while the "effect" may not reach the agricultural class of depositors. Whether or not such a question of exclusion of a certain common class facing common issues is equal, fair, constitutional and valid may be subject to debate and possibly challenged in a Court of Law.
Conclusion:
The ordinance would now bring under the wing of the RBI probably 1544 Urban Co-Operative Banks having deposits to the extent of Rs 4,84,316 Crores and a total asset base of 5,99,214 Crores which is on the basis of the RBI's Report on Trend & Progress of the Banking Sector in India dated December 24, 2019.
The depositors of Urban Co-Operative Banks would vide the Ordinance enjoy the privilege, immunity and protection of the Deposit Insurance and Credit Guarantee Corporation.
The organizational, financial, operational problems faced by the UCB sector should be addressed by the ordinance, though the competition on levels of technology, other small finance banks and problems of interference in management/affairs of the UCB may continue to persist.
[Pawan Jhabakh and Salai Varun are Advocates, Madras High Court. The views expressed are their own.]