SARFAESI act is applicable to Cooperative banks: SC Constitution Bench

A constitution bench of the Supreme Court has held that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act 2002 is applicable to cooperative banks.

It stated, “The co­operative banks under the State legislation and multi­ State co­operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.”

The Court rejected the argument that adding ‘mutli-state cooperative bank’ in Section 2(1)(c)(iva) of the SARFAESI Act by the 2013 amendment was a “colourable exercise of power”.

The Court also upheld the 2003 notification under the Banking Regulation Act 1949 by which co­operative banks were brought within the class of banks and were entitled to seek recourse to the provisions of the SARFAESI Act.

The 5-judge bench unanimously while stating that that the Parliament had the legislative competence to bring cooperative banks under the ambit of SARFAESI Act, the 5 judge bench unanimously held,

“We find that ‘banking’ relating to co­operatives can be included within the purview of Entry 45 of List I, and it cannot be said to be over inclusion to cover provisions of recovery by co­operative banks in the SARFAESI Act.”

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The Bench comprising of Justices Arun Mishra, Indira Banerjee, Vineet Saran, M R Shah and Aniruddha Bose in this case Pandurang Ganpati Chaugule and others vs Vishwasrao Patil Murgud Sahakari Bank Limited decided :

The 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 of India.

The co­operative banks run by the co­operative societies registered under the State legislation with respect to the aspects of ‘incorporation, regulation and winding up’, in particular, with respect to the matters which are outside the purview of Entry 45 of List I of the Seventh Schedule of the Constitution of India, are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution of India.

The 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 relatable to Entry 38 of List I of the Seventh Schedule of the Constitution of India.

The co­operative banks under the State legislation and multi­ State co­operative banks are ‘banks’ under section 2(1)(c) of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The recovery is an essential part of banking; as such, the recovery procedure prescribed under section 13 of the SARFAESI Act, a legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.

The Parliament has legislative competence under Entry 45 of List I of the Seventh Schedule of the Constitution of India to provide additional procedures for recovery under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with respect to cooperative banks. The provisions of Section 2(1)(c)(iva), of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, adding “ex abundanti cautela”, ‘a multi­-State co­operative bank’ is not ultra vires as well as the notification dated 28.1.2003 issued with respect to the cooperative banks registered under the State legislation.

The issue in hand was referred to a Constitution Bench in 2015 in view of the conflicting decisions on the point.