wala SHARAD PAWAR Member of Parliament (Rajya Sabha) No.2021/MP/PM/Coop-1 ate-PFuly, 2021 Dear P-s-nn DEVON In the wake of certain developments in the co-operative banking sector, the Banking, Regulation Act has been amended primarily to protect the interests of the depositors of co-operative banks. The Act focuses to regulate the functioning of banks and sing, management, functioning and provides details on various aspects such as licei operations of co-operative banks. It aims to strengthen the co-operative banks by increasing professionalism, enabling access to capital, improving governance and ound banking by conferring exclusive powers to the Reserve Bank of India. ensuring Although the objects and reasons for amending the Act are laudable, I wish to point out certain inconsistencies and the ri of the Act that are in conflict most specifically with the 97 Constitutional sulting legal inefficacy of normative provisions Amendment, State Co-operative Societies Acts and with the Co-operative Principles. tutional Amendment: 1. Conflict with Con; As you are aware, by 97! Constitutional amendment, the word “co-operative society” in Article 19 (1)(6) of Part IIT of the Constitution is added, whereby all citizens shall have the right to form a Co-operative society. Further, the Article 43 B (being a directive principle of state policy, provides for autonomy of co-operative societies) is inserted in Part IV of the Constitution which says, “The State shall endeavor to functioning, democratic promote voluntary formation, autonome control and professional management of co-operative societies”. ‘This was done with a view to encourage the co-operative movement, enhance publie faith in Co- operatives and ensure people's participation in the economic development of the country, Resi: 6, Janpath Road, New Delhi - 110 011 (India) | Tel : 011-23018870, 23018619 | Fax : 011-23018609 Silver Oak Estate II, Bhulabhai Desai Road, Mumbai - 400 026. Maharashira Tel. 022 - 23525244, 23515222 | Fax : 23538911 Email: sharadpawar [email protected]Further, the terms incorporation, regulation and winding up of Co- operative societies, were preserved as State subjects under Entry 32 of List n of India, However the Reserve II of the VII schedule of the Constitu Bank, on the basis of various newly introduced impugned provisions of sections 4, 4F, 4G, 4d, 4L, 4M and 4Q of the Amendment Act, directly intervening into the id functioning of the affairs of the Co-operative Banks. Therefore I opine that the impugned provisions are unconstitutional and ultra vires, for having been passed without legislative competence. In this connection, I would like to bring to your kind notice the judgment of a Constitution Bench of the Hon’ble Supreme Court of India in ‘Pandurang Ganapati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd.” il Appeal No. 5674 of 2009). ‘The Supreme Court had observed that “The Co- operative banks run by the Co-operative Societies registered under State Legislation wir. the aspects of ‘incorporation, regulation and winding up’, in particular, wart. 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.” ‘Thus it is prima facie clear that the Amended Act deals with matter pertaining to ‘incorporation, regulation and winding up’ in addition to matters relating to ‘Banking’, which are exclusive domain for State Legislation. Therefore I reiterate the fact that various impugned sections that have been introduced to amend section 56 of the B.R.Act, are beyond the legislative competence of the Parliament and therefore void under Article 123(3) of the Constitution of India. L also would like to point out here another recent judgment of a Constitution Bench of the Supreme Court, wherein it is held that recovery of debt was an essential facet of ‘banking’ and therefore it is within the purview of Parliament to enable co-operative banks to recover debt under the SARFAESI Act. The judgment noted that a co- operative bank's entire operation and activity of banking are governed by the BR Act. As banking in pith and substance is covered under entry 45, incidental trenching, upon a subject reserved for states (entry 32) is permissible. It added that on matters of ‘incorporation, regulation and winding up’ which are unrelated to entry 45 of the Union List, co-operative banks will be governed by state legislation. 22. Conflict with Provisions of State Co-operative Societies Act: The powers bestowed on the Reserve Bank to deal with matters pertaining to issuance & refund of share capital, appointment or disqualification of Directors, constitution of Board of Management, appointment of CEO, audit obligations ete can be construed as excessive regulation, The Amended Act overrules various provisions of the Co-operative Act in regard to the formation of the Board and election of Chairman, appointment of Managing Director ete. by holding, a caveat in terms of such appointments. (a) _ Issuance of Share Capital Amended B.R. Act , enables co-operative banks to issue (with prior approval from RBI) equity, preference or special shares, at face value or at a premium by way of public issue or private placement. However, Co-operative banks are set up on the principle of member control with (equity) shares issued to members. Since co-operative societies capital from members, it is unclear what it means to raise equity capital from the public and how it will be treated and regulated. Further, issuance of equity shares may violate principles of co-operation if they carry proportional voting rights. Co-operative societies grant voting rights only to members based on the principle of ‘one member one vote’ irrespective of shareholding, Even the Vishwanathan Committee (2006), set up by the Reserve Bank to study ways to augment capital of UCBs, recommended ial shares, both of which would be non-voting. issuance of preference and spe (b) Refund of Shares Amended Act prohibits refund of shares to members even if there are no them, This contravenes provisions contained in outstanding dues again certain Co-operative Societies Acts and raises concerns for existing members of co-operative banks whose option to exit by surrendering their share capital will be restricted.(c) Board of Management RBI insisted all UCB’s to form Board of Management before 30" June, 2021. However post B.R.Act amendment, the provisions of section 10-A(2) are made applicable to UCBs, where the eligibility criteria for Board of Directors and expected criteria for Board of Management are almost same. Therefore mandating constitution of BOM and creating two power centres in Co- operative Banks by the Reserve Bank by issuing circular is now irrelevant (a) Appointment of Auditors: ‘The 97th Constitutional Amendment whieh is over and above all Acts, has given power to General Body to appoint Statutory Auditors, while under amended B.R. Act, RBI's approval is required for appointment of Statutory Auditors, (©) Completion of Audit: Under State Act, the Audit should be completed within 6 months after completion of financial year, while under amended B.R.Act, it should be completed within 3 months. () Terms of Board of Directors Under State Act, the tenure of BoD is 10 years, while under amended B.R. Act it is 8 years. of CEO: Under State Act, Power lies with BOD to remove CEO, while under amended (sg) Remov: B.R.Act, RBI's approval is required. (h) Supersession of Board: Amended si ion 36AAA deals with supersession of board of co-operative bank which I opine that is in derogation of the powers conferred on the Registrar of Co-operative Societies of the State, who is now merely given a consultative role. Needless to say, the Reserve Bank is already vested with powers at its disposal to take strict action against the Board and Management of erring banks. However, 1 personally feel that any excessive power given to the Regulator without any checks 4and balances seems to be unnecessary and interfering with the autonomous functioning of Co-operative banks and run the risk of being misused. 3. Conflict with Co-operative Principles: ‘There is a general perception that with this amendment, all UCBs will come under out here that the supervision of the Reserve Bank, However, I would like to poi all UCBs are already under the supervision of the Reserve Bank and inspections of all UCBs are conducted by the Reserve bank at regular intervals, In fact, what will change with the amendment is that the co-operative principles enshrined in the Constitution as regards to the UCBs may be compromised. The provision u/s 12 (1) and (2) of the Act w.r.t. issuance and redemption/return of shares are contradictory with the prineiples of Co-operation of (i) open membership, where the capital is collected from amongst the members through and (ii) democratic control to have only one vote irrespective One Member One Vote. The Amended collective effo of the number of shares held by him i. Act also empowers the Reserve Bank to remove and replace any officer or employee. Perhaps this is the first time that the Regulator has been bestowed with such wide administrative powers which may interfere with the day to day working of a Co-operative Bank, and violate the Co-operative Principle — Autonomy and Independence. ‘The prescription of ‘fit and proper’ criteria applied by the Reserve Bank takes away the democratic right of an elected member to be a constituent of the Board. Here with regret I have to state that though this criterion is presently applicable to public and private sector banks; there have been maximum cases of mismanagement, fraud and wrongdoings. So I emphasize here on ‘Governance’ as the core issue, be it public, private or co-operative bank. Summarizing all above, I firmly state that the Amended Act does little to promote the well-being and growth of the Co-operative sector as envisaged by the Government. In fact, recently you had advised the rural youth of the country to engage in micro, small and medium sized businesses along with their farming activities so as to make them ‘atmanirbhar” under adverse climatic conditions. The co-operative banks can effectively contribute to this cause since they have the expertise of lending to these a t-time borrowers and contribute more than 23% of their total advances of % 3.04 5lakh crore to Small and Micro Industries. Thus, the growth of this sector is crucial for the holistic economic development of the country and all efforts should be made to encourage the sector. While concluding my statement, I reiterate that the aims and objectives of the Amended Act are well-intentioned, and many provisions are necessary. Erring Board janagement must definitely be acted upon strictly and the depositors’ interests and} should be protected, but at the same time it should be ensured that while doing so, the Co-operative Principles laid down in the Constitution are not sacrificed at the altar of over-zealous regulation. With warm regards, Yours sd/- (Shard Pawar) V Shri Narendra Modi ji, Hon'ble Prime Minister of India, 152,PMO, South Block , Raisina Hills, New Delhi 110011. A copy for necessary action to : 1. Smt. Nirmala Sitharaman, Hon'ble Union Minister of Finance and Corporate Affairs, A-Wing Shastri Bhavan, New Delhi 110001 Shri Narendra Singh Tomar, Hon’ble Union Minister of Agriculture and » Farmers Welfare, Krishi Bhavan, New Delhi 110001 (Shard Pawar)