Judges: Arun Mishra, Indira Banerjee, Vineet Saran, M.R. Shah and Aniruddha Bose, JJ.

Facts:

The matters were referred to present bench in view of conflicting decisions in Greater Bombay Coop. Bank Ltd. v. United Yarn Tex (P) Ltd. and Ors. MANU/SC/7272/2007, Delhi Cloth & General Mills Co. Ltd. v. Union of India and Ors. MANU/SC/0377/1983, T. Velayudhan Achari and Anr. v. Union of India and Ors. MANU/SC/0500/1993, and Union of India and Anr. v. Delhi High Court Bar Association and Ors. MANU/SC/0194/2002 on various issues related to Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to the co-operative banks.

Issues:

(i) Whether 'co-operative banks', which are co-operative societies, also, are governed by Entry 45 of List I or by Entry 32 of List II of the Seventh Schedule of the Constitution of India, and to what extent?

(ii) Whether 'banking company' as defined in Section 5(c) of the BR Act, 1949 covers co-operative banks registered under the State Co-operative Laws and also multi-State co-operative societies?

(iii) Whether co-operative banks both at the State level and multi-State level are 'banks' for applicability of the SARFAESI Act?

(iv) Whether provisions of Section 2(c) (iva) of the SARFAESI Act on account of inclusion of multi-State co-operative banks and notification dated 28.1.2003 notifying cooperative banks in the State are ultra vires?

Law:

Constitution of India - Entries 43 of List I of the Seventh Schedule - Incorporation, Regulation and winding up of trading corporations, including banking, insurance and financial corporations but not including cooperative societies

Constitution of India - Entries 44 of List I of the Seventh Schedule - Incorporation, Regulation and winding up of corporations, whether trading or not, with objects not confined to one State, but not including universities.

Constitution of India - Entries 45 of List I of the Seventh Schedule - Banking.

Constitution of India - Entries 32 of List II of the Seventh Schedule - Incorporation, Regulation and winding up of corporation, other than those specified in List I, and universities; unincorporated trading, literary, scientific, religious and other societies and associations; co-operative societies.

Banking Regulation Act, 1949 - Section 5(b) - 'Banking' means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

Banking Regulation Act, 1949 - Section 5(c) - 'Banking company' means any company which transacts the business of banking in India.

Banking Regulation Act, 1949 - Section 6 Part II - Deals with forms of business in which banking companies may engage.

Banking Regulation Act, 1949 - Section 56(a) - References to a "banking company" or "the company" or "such company" shall be construed as references to a co-operative bank.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 2(1)(c) - Defines the term 'bank'.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 2(1)(d) - Defines the term 'banking company'.

Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 (No. 1 of 2013) - Section 2(1)(c)(iva) - Inserted into the SARFAESI Act, w.e.f. 15.1.2013, to include 'a multi-State co-operative bank' within the definition of 'bank' as defined under Section 2(1)(c) of SARFAESI Act.

Contentions:

Petitioners

(i) Parliament is not competent to enact laws concerning co-operative societies/banks. Banking business for a cooperative society is merely an incidental/ancillary business. A cooperative society doing business remains a co-operative society and is covered under Entry 32 of List II.

(ii) There is complete mechanism provided under the State Co-operative Societies Acts and MSCS Act; thus, the amendment to the SARFAESI Act and the notification deserve to be struck down.

(iii) The co-operative banks differ from other banks. Entities are basically co-operative societies, and it incidentally trenches on banking. The dominant legislation on the subject is State legislation under Entry 32. The co-operative banks are different from banking companies to the extent that they advance loans to their members only. The banking companies/corporations deal with the public. The co-operative banks do not carry the business as defined in the BR Act, 1949. The Doctrine of Pith and Substance has to be applied, cooperative society engaged in banking does not cease to be a cooperative society. In Entry 45 of List I, 'banking' does not include cooperative banks.

(iv) Amendment made by inserting the definition of 'multi-State cooperative bank' is colourable legislation and deserves to be struck down.

Respondent

(i) The matter is covered by Entry 45 of List I of the Seventh Schedule of the Constitution of India. For the very reason, the Parliament has the right to legislate in respect of the banking business as defined in Section 5(b) of the BR Act, 1949. The Parliament can enact a law in respect of matters contained in Entry 45 of List I, even if the bank in question is a co-operative society.

(ii) Recovery of dues is an essential function of a banking institution. Entry 45 of List I would mean legislation regarding all aspects of banking, including ancillary or subsidiary matters relating to that. The SARFAESI Act falls within the ambit of Entry 45 of List I.

(iii) It is permissible for the Parliament to include multi-State co-operative banks within the definition of 'bank.' Similarly, the Government could have notified co-operative banks under the purview of Section 2(1)(c)(v) of the SARFAESI Act, more so, in view of the definition in Clause (cci) of Section 56 of the BR Act, 1949.

(iv) The SARFAESI Act is not a legislation relating to incorporation, Regulation, and winding up of the co-operative societies or multi-State co-operative society engaged in banking. The same is traceable to Entry 45 of List I, i.e., the activity of banking.

Analysis:

Meaning of the word 'banking' - Entry 45 of List I of the Seventh Schedule of the Constitution of India - Whether includes 'co-operative banks'

(i) The term 'banking' used in Entry 45 List I, came up for consideration in Rustom Cavasjee Cooper (MANU/SC/0011/1970), in which 11-Judge Bench of Supreme Court held that the word 'banking' has never had any static meaning. The only meaning will be the common understanding of men and the established practice about banking. Various forms of business come within the legitimate business of a bank.

(ii) Framers of the Constitution cannot be said to have confined the meaning of 'banking' to a particular definition, as given in the BR Act, 1949. The word 'banking' has been incorporated in Entry 45 of List I of VIIth Schedule of Constitution. The decision in Rustom Cavasjee Cooper (supra) vividly leaves no room for doubt that banking done by the co-operative bank is covered within the ambit of Entry 45 of List I.

(iii) Entries have to be given full effect in pith and substance considering forms of business of cooperative banks performing the activities of banking under a licence. The same is covered within the purview of Entry 45 of List I.

(iv) Section 6 of BR Act, 1949 deals with the forms of business in which banking companies may engage. There cannot be any form of activity/business of banking without there being an entity. The definitions of 'banking' and 'banking company' are contained in Section 5(b) and 5(c) of the BR Act, 1949 respectively. Same when read with with Section 56(a) of BR Act, 1949, it means co-operative banks also.

Co-operative banks - Entries 43 and 45 of List I and Entry 32 of List II of the Seventh Schedule of Constitution

(i) Recovery of dues would be an essential function of any banking institution. Parliament can enact a law under Entry 45 of List I as the activity of banking done by co-operative banks is within the purview of Entry 45 of List I.

(ii) It is open to the Parliament to provide the remedy for recovery under Section 13 of the SARFAESI Act. Co-operative bank's entire operation and activity of banking are governed by a law enacted under Entry 45 of List I, i.e., the BR Act, 1949, and the RBI Act under Entry 38 of List I.

(iii) The sale and mortgage of property for recovering loans/debts is also an integral part of 'banking'. The setting up of an adjudicatory body like the banking tribunal would also fall under Entry 45 of List I of the Seventh Schedule. Thus, State law can operate if there is no Central law regarding the same.

(iv) State law cannot encroach upon the Central law by operation of the principle of repugnancy if there is a Central law. The Parliament is qualified with exclusive power to make law concerning banking. It is not possible to dissect the provisions of the SARFAESI Act and attach them to different entries under different lists. In pith and substance, the SARFAESI Act does not deal with the transfer of property in Entry 6 of List III of the Seventh Schedule but deals with the recovery of debt owing to banks and financial institutions.

(v) 'Incorporation, Regulation and winding up' of the co-operative societies are covered under Entry 32 of List II of the Seventh Schedule of the Constitution of India, whereas 'banking' is covered by Entry 45 of List I. Thus, aspect of 'incorporation, Regulation and winding up' would be covered under Entry 32 of List II. However, banking activity of such co-operative societies/banks shall be governed by Entry 45 of List I.

(vi) In the matter of licencing and doing business, a deep and pervasive control is carved out under the provisions of the BR Act, 1949 and banking activity done by any entity, primary credit societies, is a bank and is required to submit the accounts to the Reserve Bank of India, and there is complete control under the aforesaid Act. For activity of banking, these banks are governed by the legislation under Entry 45 of List I. Thus, recovery being an essential part of the banking, no conflict has been created by providing additional procedures Under Section 13 of the SARFAESI Act. It is open to the bank to adopt a procedure which it may so choose. When banking in pith and substance is covered under Entry 45 of List I, even incidental trenching upon the field reserved for State under Entry 32 List II is permissible.

Effect of Section 56(a) on the definition of 'banking company' as defined in Section 5(c) of the BR Act, 1949

(i) The co-operative banks, which are governed by the BR Act, 1949, are involved in banking activities within the meaning of Section 5(c) thereof. They accept money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Merely by the fact that lending of money is limited to members, they cannot be said to be out of the purview of banking. They perform commercial functions. A society shall receive deposits and loans from members and other persons. They give loans also, and it is their primary function. Thus, they are covered under 'banking' in Entry 45 of List I.

State level and multi-State level co-operative banks both - Applicability of the SARFAESI Act

(i) SARFAESI Act is to regulate securitisation and reconstruction of financial assets.

(ii) Definition of 'debt' in Section 2(1)(ha) of SARFAESI Act is the same as defined in Section 2(g) of RDB Act, 1993. 'Debt' is defined as any liability which is claimed as due during any business activity undertaken by the bank or the financial institution.

(iii) 'Banking' relating to co-operatives can be included within the purview of Entry 45 of List I of VII Schedule of Constitution. It cannot be said to be over inclusion to cover provisions of recovery by co-operative banks in the SARFAESI Act. SARFAESI Act also covers the activities undertaken by the co-operative banks.

Provisions of Section 2(c)(iva) of the SARFAESI Act on account of inclusion of multi-State co-operative banks and notification dated 28.1.2003 notifying cooperative banks in the State are ultra vires

(i) Expression 'bank' has been defined in Section 2(1)(c) of SARFAESI Act. Section 2(1)(c)(v) of SARFAESI Act authorises the Central Government to specify 'such other bank' for that Act.

(ii) Notification issued on 28.1.2003 notifying 'cooperative bank' as the 'bank' is covered by Entry 45 of List I as they are regulated by the BR Act, 1949, and the RBI Act.

(iii) For the 'banking' activity under Entry 45 of List I, the Parliament had the power to enact such a provision defining 'bank' to authorise and prescribe the recovery procedure for such a bank as provided in Section 13 of the SARFAESI Act.

(iv) Co-operative societies/banks stand included by incorporation in Section 5(1)(c) of the BR Act and the notification was issued ex abundanti cautela.

(v) By virtue of Section 56(a), co-operative banks, as defined in Section 56(cci) of the BR Act, 1949, are included in Section 5(1)(c). Similarly, multi-State co-operative banks were also covered.

Section 2(c) (iva) of the SARFAESI Act - Legislative competence of parliament and colourable legislation

(i) Doctrine of colourable legislation does not involve any question of 'bona fides' or 'mala fides' on the part of the legislature. It revolves into the question of competency of a particular legislature to enact a particular law. If the legislature is competent to pass a particular law, the motives which impelled it to act are really irrelevant.

(ii) It is the substance of the Act that is material and not merely the form or outward appearance. If the subject-matter in substance is something which is beyond the powers of that legislature to legislate upon, the form in which the law is clothed would not save it from condemnation.

(iii) By applying the aforesaid principle, Section 2(c)(iva) of the SARFAESI Act and notification dated 28.1.2003 cannot be said to be colourable legislation.

(iv) SARFAESI Act qualifies the test of legislative competence, as well as the definition, cannot be said to be colourable piece or over-inclusive or beyond the competence of the Parliament.

Conclusion:

(i) Co-operative banks registered under the State legislation and multi-State level co-operative 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.

(ii) Co-operative banks run by the co-operative 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. Same are governed by the said legislation relatable to Entry 32 of List II of the Seventh Schedule of the Constitution.

(iii) Co-operative 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 BR Act, 1949, which is a legislation relatable to Entry 45 of List I. It governs the aspect of 'banking' of co-operative banks run by the co-operative societies. The co-operative 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.

(iv) Co-operative banks under the State legislation and multi-State co-operative banks are 'banks' Under Section 2(1)(c) of SARFAESI Act. 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.

(v) 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 SARFAESI Act with respect to cooperative banks. The provisions of Section 2(1)(c)(iva) of SARFAESI Act, adding "ex abundanti cautela", 'a multi-State co-operative 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.

Important Precedents:

(i) Rustom Cavasjee Cooper v. Union of India (UOI) MANU/SC/0011/1970

(ii) The State of Madras v. Gannon Dunkerley & Co., (Madras) Ltd. MANU/SC/0152/1958

(iii) Girnar Traders (3) v. State of Maharashtra and Ors. MANU/SC/0029/2011

(iv) State of Tamil Nadu and Ors. v. K. Shyam Sunder and Ors. MANU/SC/0915/2011