Remarks on Banking Regulation Ordinance, 2020

Prepared By: Ravi B Gogia Advocate Prepared By: Karan A. Bhavnani Editor-in-Chief, The Legal Vidya

Part V – Application of the Act to the Co-operative Banks.

Preamble of Section 56 along with provisions applicable to co-operative bank – In light of Ordinance No. 12 of 2020

  1. Section 56 of the Banking Regulation Act is actually a complete code in itself. Section 56 makes the provisions of the Banking Regulation Act, 1949 applicable to co-operative societies, just as they apply to banking companies, subject to certain modifications indicated in clauses (a) to (zl). By the provisions contained in clauses (a) to (zl), Section 56 incorporates the amendments, the substantive provisions of the Act as well as the schedules thereto, insofar as their application to co-operative societies are concerned. By the Ordinance of 2020, in Section 56 of the principal Act, for the words “The provisions of this Act, as in force for the time being” the words “Notwithstanding anything contained in any other law for the time being in force” have been substituted. The word “Notwithstanding” attracts non-obstante clause. It is rule of interpretation that A clause beginning with “Notwithstanding anything contained in this Act or in some particular provisions in the Act or in some particular Act or in any law for the time being in force”, is appended to a Section in the beginning with a view to give the enacting part of the Section in case of conflict and overriding effect over the provisions or Act as mentioned in the non-obstante clause. When two or more laws or provisions operate in the same field and each contains a non-obstante clause stating that its provisions will override those of any other laws or provisions, stimulating and indicate problems of interpretation arise. In such circumstances, no settled principle of interpretation or problem is available or can be applied, and in such circumstances except to refer to the object and purpose of each of the two provisions, containing a non-obstante clause are required to be considered and interpreted. In case when two provisions in the same Act contain a non-obstante clause, they require a harmonious interpretation of two seemingly conflicting provisions of the same Act. In case of confliction between non-obstante clause with other provision of the same Act, the non-obstante clause shall prevail. Thus, by adding the word “Notwithstanding” in opening of Section 56 of the principal Act, the effect would be that the Section 56 shall prevail over the other provisions of the Act, which are conflicted to the provisions of Section 56 and in case of non-conflicted provisions of the principal Act, with Section 56, the principal of harmonious interpretation will apply. Means, the Banking Regulation Act shall apply to the co-operative banks subject to the modifications as mentioned in Section 56, the other provisions of the principal Act which are not conflicted with Section 56 and are harmonious to the provisions of Section 56, will also apply to the co-operative banks.

  2. By this amendment, the co-operative banks may, with prior permission of RBI, raise their equity by way of public issue or private placement. This amendment is made by inserting Section 12(1) and (2) in Part V of Banking Regulation Act. The said provision would not be mandatory for the co-operative banks, and it is optional.

  3. In Part V of the Principal Act, Section 56(g) relating to Section 10, 10A, 10B, 10BB, 10C and 10D were omitted earlier. By way of this amendment, the said omitted provision, has been omitted. The impact would be that the above provisions are covered under Part V of the principal Act. The said provisions are relating to professional and experienced Board of Directors, prohibition on employment of managing agents and restriction on certain employments, managing of the bank by whole time chairman, appointment of chairman by Directors, qualification of directors and overriding effect over the other laws. However, in above amendment Section 53A is inserted in Section 56(zj) of Part V of the principal Act, which empowers the RBI to exempt the co-operative banks in certain cases i.e. item (iii) of clause (b) of sub-section (1) and sub-section (2), of Section 10, clause (a) of subsection (2) of Section 10A, sub-section (1A) of Section 10B and clause (b) of sub-section (1) of Section 35B of the principal Act.

  4. By way of this amendment, Section 3 of the principal Act is substituted. The impact of substitution would be that, the Act shall not apply to Primary Agricultural Credit Societies (PACS) or co-operative societies whose primary object and principal business is long-term finance for agricultural development, and which do not use the word “bank” or “banker” or “banking” and do not act as drawees of cheques. Meaning thereby, the Act shall apply to all other co-operative societies, which use the word “bank”, “banker” or “banking” and act as drawees of the cheques, except above two categories of societies as above.

  5. (i) Provisions relating to Companies Act, 1956: By inserting the Section 56(a)(iv) in Part V of the principal Act, this provision relating to the Companies Act, 1956, as contemplated and referred in Banking Regulation Act, except Part III and IIIA of the Banking Regulation Act are made applicable to co-operative banks in following manner.

(ii) By this amendment, Banking Regulation Act, except Part III and IIIA of the said Act, reference to the provisions of the Companies Act, 1956 made therein shall be construed as to the reference to the corresponding provisions, if any, of the law under which co-operative bank is registered. Means, in Banking Regulation Act, where the provisions of Companies Act, 1956 are referred, except Part III and IIIA shall be construed in reference to the corresponding provisions of the law, if any under which the co-operative bank is registered.

  1. The object of the Ordinance is to protect the interests of depositors and strengthen co-operative banks by improving governance and oversight by extending powers already available with RBI in respect of other banks to Co-operative Banks as well for sound banking regulation, and by ensuring professionalism and enabling their access to capital. The amendments do not affect existing powers of the State Registrars of Co-operative Societies under state co-operative laws.

  2. Details of the amendments, made by the above Ordinance and effect thereto:

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