Co-operative banks and banking recovery law: Entry 45, regulatory coverage, and SARFAESI applicability are upheld.

Co-operative banks' banking activity falls within Entry 45 of List I, while Entry 32 of List II governs only their incorporation, organisation and other non-banking aspects. Section 56(a) of the Banking Regulation Act, 1949 extends the banking regulatory framework to co-operative banks by treating references to a "banking company" as references to a co-operative bank for banking purposes. On that basis, co-operative banks are treated as "banks" under the SARFAESI Act, including for the validity of clause (iva) and the 28 January 2003 notification. The statutory recovery mechanism is therefore within Parliament's legislative competence and operates validly against co-operative banks.

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Issues: (i) Whether co-operative banks, including multi-State co-operative banks, are governed in respect of banking activity by Entry 45 of List I or by Entry 32 of List II of the Seventh Schedule to the Constitution of India; (ii) whether co-operative banks fall within the expression "banking company" in Section 5(c) of the Banking Regulation Act, 1949 by reason of Section 56(a); and (iii) whether co-operative banks are "banks" under Section 2(1)(c) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and whether clause (iva) and the notification dated 28.1.2003 are ultra vires.

Issue (i): Whether co-operative banks, including multi-State co-operative banks, are governed in respect of banking activity by Entry 45 of List I or by Entry 32 of List II of the Seventh Schedule to the Constitution of India.

Analysis: The constitutional scheme distinguishes between the incorporation, regulation and winding up of co-operative societies and the banking activity carried on by them. Entry 32 of List II governs co-operative societies in their organisational and management aspects, while Entry 45 of List I covers banking as an activity. The expression "banking" is to be given a wide meaning, and recovery of dues is an essential and integral part of banking. A law dealing with recovery by banks, including co-operative banks, falls in pith and substance within Entry 45. Incidental trenching upon the State field does not invalidate such legislation.

Conclusion: Co-operative banks, in relation to banking activity, are governed by Entry 45 of List I; Entry 32 of List II governs only their co-operative and non-banking aspects.

Issue (ii): Whether co-operative banks fall within the expression "banking company" in Section 5(c) of the Banking Regulation Act, 1949 by reason of Section 56(a).

Analysis: Section 56(a) applies the provisions of the Banking Regulation Act, 1949 to co-operative societies carrying on banking business by directing that references to a "banking company" or "the company" shall be construed as references to a co-operative bank. The amended scheme of Part V of the Act shows that co-operative banks were brought within the regulatory machinery applicable to banking companies for banking purposes, without disturbing the separate identity of co-operative societies for matters outside banking. Reading Section 56(a) with Section 5(c) gives full effect to the legislative intent and makes co-operative banks subject to the banking regulatory regime.

Conclusion: Co-operative banks engaged in banking activity are covered by the meaning of "banking company" for the purposes of the Banking Regulation Act, 1949 by virtue of Section 56(a).

Issue (iii): Whether co-operative banks are "banks" under Section 2(1)(c) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and whether clause (iva) and the notification dated 28.1.2003 are ultra vires.

Analysis: The SARFAESI Act is a law for enforcement of security interest and speedy recovery of bank dues, which is an essential incident of banking. Since co-operative banks are engaged in banking activity and are covered by the banking regulatory framework, Parliament was competent to include them within the Act. The definition in Section 2(1)(c), the addition of clause (iva), and the notification specifying co-operative banks operate within the legislative field of Entry 45. They are not colourable legislation and do not amount to an impermissible exercise of power merely because co-operative societies are separately dealt with under State law for non-banking matters.

Conclusion: Co-operative banks are "banks" for the purposes of the SARFAESI Act, clause (iva) is valid, and the notification dated 28.1.2003 is intra vires.

Final Conclusion: The impugned challenge to the applicability of the SARFAESI framework to co-operative banks fails, and the statutory recovery mechanism under the Act is upheld as constitutionally valid.

Ratio Decidendi: Banking activity carried on by co-operative banks falls within Entry 45 of List I, and Parliament may validly apply banking recovery legislation to such banks even though their incorporation and co-operative character remain within Entry 32 of List II.

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