2003 (10) TMI 388 - SC - Companies Law

Co-op Societies: Limits on Banking License & State Recognition

The Supreme Court held that a co-operative society registered under the Multi-State Act cannot be granted a banking license by the RBI unless it falls ... Whether a co-operative society registered under the Multi-State Act can be granted a license by the RBI to commence and carry on banking business? Whether a co-operative society registered under the Multi-State Act can be recognized and notified by the State Government as a State Co-operative Bank? Whether a co-operative society registered under the Multi-State Act, which has been recognized and notified by one State Government as a State Co-operative Bank for that State, can be granted a License by the RBI to commence and carry on banking activities in other States in which it has not been recognized as a State Co-operative Bank? Held that:- Appeal dismissed. Merely because on obtaining a stay from this court they continued to operate would not be a circumstance which can be taken into consideration by this Court. The appellants cannot be allowed to continue to operate as a state co-operative bank when in law they are not entitled to be one. We, therefore, do not accept this submission. Issues Involved:1. Whether a co-operative society registered under the Multi-State Act can be granted a license by the RBI to commence and carry on banking business.2. Whether a co-operative society registered under the Multi-State Act can be recognized and notified by the State Government as a State Co-operative Bank.3. Whether a co-operative society registered under the Multi-State Act, which has been recognized and notified by one State Government as a State Co-operative Bank for that State, can be granted a License by the RBI to commence and carry on banking activities in other States in which it has not been recognized as a State Co-operative Bank.Issue-wise Detailed Analysis:Issue 1: Whether a Co-operative Society registered under the Multi-State Act can be granted a License by the RBI to commence and carry on banking business.The RBI initially took the stand that a co-operative society registered under the Multi-State Act would not be a co-operative bank as defined in the Banking Regulation Act (BR Act). This position was reiterated in the RBI's affidavit before the High Court. However, the RBI presented a contrary stand before the Supreme Court. The relevant provisions of the BR Act, specifically sections 5(b) and 22, were examined. Section 5(cci) defines 'co-operative bank' to include only a state co-operative bank, a central co-operative bank, and a primary co-operative bank, as defined in the NABARD Act. Section 22 prohibits co-operative societies from carrying on banking business unless they fall within these categories. Thus, the RBI's initial position in its letter dated 25th April 1994 was deemed correct. The court held that the RBI could not grant a license to any co-operative society unless it was a state co-operative bank, a central co-operative bank, or a primary co-operative bank, as defined in the NABARD Act.Issue 2: Whether a Co-operative Society registered under the Multi-State Act can be recognized and notified by the State Government as a State Co-operative Bank.The NABARD Act defines a 'state co-operative bank' as a principal co-operative society in a State, primarily financing other co-operative societies in the State. The proviso allows the State Government to declare any co-operative society carrying on business in that State as a state co-operative bank. However, the court emphasized that the business must be of financing other co-operative societies, not necessarily banking business. The court found that the Appellants had not carried on any business of financing other co-operative societies before the Notification dated 13th December 1995. The activities of accepting entrance fees and share subscriptions were not sufficient to constitute carrying on business. Therefore, the Notification declaring the Appellants as a state co-operative bank could not be sustained.Issue 3: Whether a Co-operative Society registered under the Multi-State Act, which has been recognized and notified by one State Government as a State Co-operative Bank for that State, can be granted a License by the RBI to commence and carry on banking activities in other States in which it has not been recognized as a State Co-operative Bank.The court held that the RBI could only issue a license to a state co-operative bank declared by a particular State. The definition of co-operative societies in the NABARD Act is restricted to those registered under State Acts, and the provision allows a State to declare a co-operative society as a 'state co-operative bank' only within that State. Therefore, a license granted by the RBI to a co-operative society recognized as a state co-operative bank in one State does not extend to other States. The RBI erred in issuing a license to the Appellants for the States of Maharashtra and Goa when the Appellants had not been declared a state co-operative bank in Goa.Conclusion:Civil Appeal No. 439 of 1997 was dismissed, and Civil Appeal No. 8478 of 2003 was allowed. The court directed the RBI to revoke the banking license granted to the Appellants. The appellants' request to continue operating was denied, as they were not entitled to be recognized as a state co-operative bank in law.