Gujarat High Court
Surat vs State on 4 May, 2011
Author: S.J.Mukhopadhaya
Bench: S.J. Mukhopadhaya
Gujarat High Court Case Information System
Print
SCA/2943/2008 31 JUDGMENT
IN
THE HIGH COURT OF GUJARAT AT AHMEDABAD
SPECIAL
CIVIL APPLICATION No. 2943 of 2008
With
SPECIAL
CIVIL APPLICATION No. 2890 of 2008
With
SPECIAL
CIVIL APPLICATION No. 2769 of 2008
With
SPECIAL
CIVIL APPLICATION No. 4506 of 2008
With
SPECIAL
CIVIL APPLICATION No. 2767 of 2008
With
SPECIAL
CIVIL APPLICATION No. 2789 of 2008
With
SPECIAL
CIVIL APPLICATION No. 5849 of 2008
With
SPECIAL
CIVIL APPLICATION No. 2891 of 2008
For
Approval and Signature:
HONOURABLE
THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA
AND
HONOURABLE
MR.JUSTICE ANANT S. DAVE
=================================================
1
Whether Reporters of Local Papers may be allowed to see the judgment ? Yes 2 To be referred to the Reporter or not ? Yes 3 Whether their Lordships wish to see the fair copy of the judgment ? No 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? No 5 Whether it is to be circulated to the civil judge ? No ================================================= SURAT DISTRICT COOPERATIVE BANK LIMITED. & 1 - Petitioner(s) Versus STATE OF GUJARAT & 2 - Respondent(s) ================================================= Appearance :
MR SN SHELAT, SR. ADVOCATE with MS VD NANAVATI, MR BS PATEL, MR NAVIN PAHWA for M/S THAKKAR ASSOCIATES, MR BM MANGUKIYA, MR ASHISH H SHAH and Ms NAYANA M PATEL, for Petitioners.
MR KAMAL TRIVEDI, ADVOCATE GENERAL with MS SANGITA VISHEN, AGP for Respondent - STATE, MR SN SOPARKAR, SR. ADVOCATE with MR AMAR N BHATT for Respondent -
RESERVE BANK OF INDIA, MR PK JANI with MS ARCHANA AMIN for Respondent - NABARD.
================================================= CORAM :
HONOURABLE THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA and HONOURABLE MR.JUSTICE ANANT S. DAVE Date : 04/05/2011 COMMON CAV JUDGMENT (Per : HONOURABLE THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA) In these cases, while the petitioners have challenged the validity of the provisions of the Gujarat Co-operative Societies (Amendment) Act, 2008 [hereinafter referred to as "the Amending Act, 2008"], sought for a declaration that Sections 67, 73, 73A, 74, 74D, 76, 81 and 81A of the Gujarat Co-operative Societies Act, 1961 [hereinafter referred to as "the Principal Act"] as amended by the Amending Act, 2008 are unconstitutional and invalid. Prayer has also been made to set aside the guidelines dated 10.7.2007 and 29.4.2008 issued by the Reserve Bank of India [hereinafter referred to as "the RBI"].
2. When the matter was taken up on 10.8.2010, Mr SN Soparkar, learned senior counsel appearing on behalf of the RBI, informed that both the guidelines dated 10.7.2007 and 29.4.2008 issued by the RBI have been substituted by fresh guidelines dated 18.6.2008 and all the co-operative societies have been allowed to function as per their Bye-laws.
3. An affidavit is also filed on behalf of the 1st respondent - State of Gujarat, which will be discussed in details at the appropriate stage. In view of the stand taken in the affidavit filed on behalf of the 1st respondent - State of Gujarat, the learned counsel addressed the Court on the question of validity of the following provisions :-
(i) Section 15 of the Amending Act whereby Section 73A was inserted.
(ii) Section 18 of the Amending Act whereby the proviso to Section 76 after existing proviso was inserted.
4. In view of the stand taken by the RBI that earlier guidelines dated 10.7.2007 and 29.4.2008 have been substituted by the subsequent guidelines dated 18.6.2008 and that all the co-operative societies have been allowed to function in terms with their Bye-laws, the learned counsel for the parties have not pressed the prayer against the earlier guidelines issued by the RBI.
5. Further, in view of the affidavit filed by the 1st respondent, the learned counsel for the petitioners had not raised nor argued the question of validity of Sections 67, 73, 74, 74D, 81, 81A of the Amending Act, 20008.
6. For appreciation of the case, it is desirable to notice and refer to Sections 15 of the Amending Act, 2008 whereby new Section 73A was inserted in the Principal Act, and Section 18 of the Amending Act whereby two provisos were inserted after the existing proviso to Section 76 of the Principal Act, as reproduced hereunder :-
"15. In the principal Act, after section 73, the following section shall be inserted, namely :-
"73A. Freedom for affiliation or disaffiliation with a federal society of choice,
- Notwithstanding anything contained in this Act or the rules for the time being in force, the societies in the co-operative credit structure shall be at liberty to affiliate or disaffiliate with any federal society of its choice provided a resolution approving such affiliation or disaffiliation with a federal society is passed in the annual general meeting held for the purpose with three - fourth majority of total members, and subject to the rules as may be prescribed and the guidelines issued by the Reserve Bank of India."
18. In the principal Act, in Section 76, after the existing proviso, the following proviso shall be added, namely :-
"Provided further that the qualifications for appointment of the Chief Executive Officer and the Directors of the Central Co-operative Banks and the State Co-operative Bank shall be such, as may be determined by the Reserve Bank of India from time to time.
Provided also that the Registrar of the Co-operative Societies or the Board of the Central Co-operative Banks or the State Co-operative Bank shall remove, at the request of Reserve Bank, such Directors and Chief Executive Officers who do not fulfill the criteria stipulated by Reserve Bank. However, the existing elected Directors holding their post as such Directors on the date of the commencement of the Gujarat Co-operative Societies (Amendment) Act, 2008, shall continue to hold their offices till the expiry of their current remaining term. "
7. Mr SN Shelat, learned senior counsel appearing on behalf of Surat District Co-operative Bank Ltd. submitted that the writ petition preferred by the said co-operative bank is limited to Section 15 of the Amending Act, 2008 whereby Section 73A has been inserted. Section 73A provides for freedom of affiliation and disaffiliation with federal society of its choice. It was submitted that there is no nexus with the object sought to be achieved by granting freedom of affiliation to primary agriculture co-operative society to affiliate with any district bank within the State is violative of Article 14 of the Constitution of India being arbitrary in character in view of the following :-
(i) The provisions for liberty to the societies in the co-operative credit structure to affiliate or disaffiliate with any federal society destroy the very basis of the co-operative credit structure.
(ii) The thrust of the co-operative movement is development of villagers, farmers at village level. The primary societies are constituted to provide promotion of agriculture in the rural area.
(iii) The District Federal Bank provides finances to the said society so as to enable both of them to provide for integrated rural development of the area within which the District Co-operative Bank operates i.e. at the district level.
(iv) The primary agriculture societies are the members of the District Co-operative Bank.
(v) Section 4 of the Gujarat Co-operative Societies Act, 1961 provides for registration and it can refuse registration if it has adverse effect upon any other society.
(vi) The object is avoiding competition among primary societies within area so as to enable the said society to provide co-operative facilities at the village level.
(vii) Section 6 also provides a clue to the object of the co-operative movement, namely, residence in the same town or village or in the same group of villages for a society with unlimited liability.
(viii) Permitting the societies to affiliate themselves with outside the district bound to take adverse effect upon the District Bank to which it is to be affiliated.
8. The learned counsel submitted that the structure of the nationalized bank or private bank cannot be brought into the co-operative sector because -
(a) area of operation has to be limited i.e. at the village level.
(b) the object is development of agriculture.
(c) thrifty habits are to be promoted which have direct impact on the bank functioning within the limited area.
9. He further submitted that the farmers of primary co-operative society in Surat district seeking affiliation at Kutch or Rajkot Bank can lead to the following consequences :-
(a) The farmers may have to travel outside the district which itself is opposed to the co-operative principle.
(b) Those District Bank may not have acquainted with the characteristic of other region as regards availability of soil, irrigation facilities, cropping pattern, marketing pattern and basic character of inhabitants.
(c) It is not likely to serve the basic object of the co-operative movement that is uplifting of the rural economy if freedom of affiliation is granted and is not likely to promote the co-operative movement.
10. In support of the aforesaid submissions, the learned counsel referred to the following extract from the Text Book "Rural Economic"
by Shri AR Patel and DP Khankhoje (Page 254) :-
"The position of Central Co-operative Bank is of crucial importance in the co-operative structure. They form an important link between the State Co-operative Bank at the apex and the primary agricultural credit societies at the base. The Maclagan Committee suggested that the term "Central Bank" should be applied to all local financing institutions directly financing the primary societies "within an area sufficiently limited to allow them to exercise also the duties of supervision and control over these societies".
The Standing Advisory Committee on Agricultural Credit constituted by the Reserve Bank recommended that as a general proposition, there should be one Central Co-operative Bank for one district. This view was also expressed by the Rural Credit Society Survey Committee. A programme of rationalization of the Central Co-operative Banking structure was taken up in the States during the Second Plan period through a process of merger or amalgamation of uneconomic or weaker units with a view to having one strong viable central bank in each district. The process of reorganization is almost complete.
Central banks are the intermediate agency between the primary credit societies at the village level run by the agriculturists having no touch with the money market and the State Co-operative Banks run mainly from the metropolitan cities, having little direct association with the countryside. This agency is closer to the primary societies than an apex bank could be and affords opportunities to them for influencing its policies to suit their requirement and enables them to train themselves in sound banking principles and practices. The Central Bank's primary function is to mobilize the resources in the district for financing its members to maximum extent possible in addition to channeling the flow of funds from the State Co-operative Banks."
He relied on the decision of a Division Bench of this Court in the case Siddhpur Taluka Co-operative Purchase & Sales Union vs. State of Gujarat, reported in 2002 (2) GLR 1357, wherein the Division Bench, after examining the scheme of the Act and the relevant bye-laws, at para 17, observed that qualifications, constitution and structure of the societies from State level down to Taluka level are based on the territorial revenue areas of District and Taluka.
11. Reference was also made to the provisions of the National Bank for Agriculture and Rural Development Act, 1981. The preamble of the said Act is required to be considered. It is the Bank for Agriculture and Rural Development for providing credit for the promotion of agriculture, small scale industries and economic activities in rural areas with a view to promote integrated rural development securing prosperity of rural areas.
12. The learned counsel also referred to the terms "central co-operative bank", "rural development" and "State co-operative bank"
as defined in Sections 2(d), 2(q) and 2(u) of the National Bank for Agriculture and Rural Development Act, 1981. It was submitted that Section 21 provides for function of the National Bank and Section 21(v) provides for marketing activities at the village level. The proviso to Section 22 enables the NABARD to make loans and advances to the Central Co-operative Bank for a specified period in case of calamities. It was submitted that the scheme of the Act, therefore, recognizes the District Co-operative Bank to function within the district.
He further submitted that the provisions of the Bombay Co-operative Act, 1925 and the preamble to the said Act and that the said Act was repealed and the Gujarat Co-operative Societies Act was amended.
13. Under the 2nd proviso to Section 76, as was inserted by Section 18 of the Amending Act, 2008, qualifications for appointment of the Chief Executive Officer and the Directors of the Central Co-operative Banks and the State Co-operative Bank, are ordered to be determined by the RBI from time to time; the same has been challenged by the learned counsel for the other petitioner on the following grounds :-
By inserting the 2nd proviso, the State legislatures have abdicated its essential legislative function of providing for qualification of the Chief Executive Officer and Directors of the Central Co-operative Banks and State Co-operative Bank in favour of the RBI and, therefore, it is violative of Article 14 of the Constitution.
Even if it is assumed, though not admitted, that such delegation was permissible, the 2nd proviso requires to be read as applicable to those Directors who are in receipt of any remuneration by way of salary or reward and it cannot be applied to the officers who are not receiving any remuneration. Such power vested in the RBI is excessive and thereby unconstitutional being violative of Article 14 of the Constitution.
The 2nd proviso is violative of Article 19(1)(c) and (g) of the Constitution, there being a freedom to form an association guaranteed under Article 19(1)(c) upon which only the reasonable restriction can be imposed by a legislation by the appropriate legislative authority as contemplated under clause (4) of Article 19. The right to form an association confers the right to determine the constitution of the association and to organize and manage it through the representatives elected by the members who have voluntarily associated themselves into the Union. The sweep of the fundamental rights guaranteed under Article 19 being very wide and being the fundamental right of a citizen of a free country, it cannot be destroyed by the impugned 2nd proviso inserted in Section 76 by Section 18 of the Amending Act, 2008 so as to destroy the very genesis of the association, which is violative of Article 19 of the Constitution.
14. The learned counsel for the petitioners would contend that the co-operative movement by its very nature is a form of voluntary association where individuals or their association unite for the purpose of promoting economic interest of its members in accordance with the well recognized co-operative principles as embodied in the 1st Schedule to Multi State Co-operative Societies Act, 2002. The co-operative principles visualize co-operative institutions as democratic organization controlled by the members making elected representative responsible and accountable to the members. The power of the members of the co-operative society to conduct the affairs of the society, having right of voting and participation in decision making process being the basic power of a co-operative movement, cannot be affected in the manner as prescribed under the 2nd proviso to Section 76 of the Principal Act.
15. Mr Kamal Trivedi, learned Advocate General appearing on behalf of the State while submitted that there is always a presumption in favour of the constitutional validity of any legislation, made the following submissions :-
Article 19(1)(c) of the Constitution of India guarantees freedom to all citizens to form an association, but such freedom is always subject to certain permissible restrictions imposed by law. According to him, the main provisions are not violative of Article 19(1)(g) of the Constitution since in case of an individual citizen to whom a right to carry on a trade or business or pursue an occupation is guaranteed under the said provisions and they do not not infringe the freedom of any association. The validity of the legislative provisions which seek to impose any restriction on the right guaranteed under Article 19(1)(g) of the Constitution, is required to be decided by the criteria laid down by clause (b) of Article 19. In the present case, there being a rationale behind enactment of the said provisions and has a nexus between the said provisions on one hand and the object sought to be achieved by the said provisions on the other hand, the same are also not violative of Article 14 of the Constitution.Entry No. 32
in List - II of the 7th Schedule of the Constitution relates to co-operative societies. Under the said Entry, the State legislature is competent to make law with respect to the co-operative societies as regards to incorporation, regulation and winding up etc. Therefore, it is competent to enact the Amending Act, 2008 which contains the impugned provisions which are in public interest and regulatory in character.
16. The learned Advocate General referred to the suggestions of the Task Force constituted by the Government of India to suggest an action plan for reviving rural co-operative credit institutions including legal measures necessary for facilitating the said process, as also the relevant recommendations of the Task Force for enactment of multi co-operative law. Reliance was also placed on the Memorandum of Understanding {"the MoU" for short) between the Central Government, State Government and NABARD arrived on 21.12.2006 for implementation of the package for revival of rural Co-operative Credit Structure (CCS), comprising the State Co-operative Banks, Central Co-operative Banks and Primary Agricultural Credit Societies as per the consensus arrived at through serious of discussions by the Central Government with the State Governments and the recommendations made by the Vaidyanathan Committee on revival and reform of Co-operative Credit Structure. They will be discussed at the appropriate stage. It was contended that in view of the aforesaid developments, the new provisions as contained in Sections 73A, 74D, 76, 67A and 81 have been brought into play by the Amending Act, 2008.
17. With regard to each of the provisions, the learned Advocate General highlighted the stand of the State Government, as noticed hereunder.
Regarding Section 73A, he would contend that the apprehension of the petitioners does not have any basis. Prior to enactment of Section 73A, primary agricultural co-operative society had no choice in the matter of availment of finance, more particularly, in the area of rate of interest, availability of finance, etc. because it was supposed to be affiliated with only one District Central Co-operative Bank of the concerned district. On the contrary, the new provisions seek to offer financial freedom of a greater degree which should not be allowed to be viewed in a parochial fashion. Even otherwise, the enactment of the provisions is very much in line of the Clauses 9.5. 9.6 and 9.7 of the MoU.
Earlier, many a times primary agricultural co-operative societies had to suffer because of inefficiency or weak financial position of the higher tiers above them and some times because of the partisan approach being adopted by the same. In view of the aforesaid amendment, the higher tiers being otherwise supposed to be stronger in position, will be confronted with an element of competition for remaining more focused and competitive so as to see that the primary agricultural co-operative societies remain wedded to them. Under the circumstances, the liberty sought to be given to lower tiers of the co-operative credit structure will not destroy the same as being apprehended by the petitioners and, therefore, there is no question of the said provision being violative of Articles 14, 19(1)(c) and 19(1)(g) of the Constitution.
With regard to Section 76 which relates to appointment of officers and employees and their conditions of service, he would contend that as per the revised fit and proper criteria dated 18.3.2009, age limit and other qualifications which were in picture with reference to the Directors will be taken care of. The petitioners cannot have any grievance as to the qualifications prescribed for the professional Directors vis-a-vis of Chief Executive Officers including the criterion relating to the age. Such aspects are of utmost requirement for any organization being vibrant and efficient. Only with the fit and proper persons appointed as Directors and Chief Executive Officer for the District and/or State Co-operative Banks, such banks can succeed. For improving the environment of the whole co-operative structure in the State as well as the country in general and for the revival of the rural co-operative credit environment in particular, such measures should in fact be commended, which may re-invite confidence of the people at large which is almost on the brink of eclipse.
18. In view of the stand taken in the reply affidavit filed on behalf of the 1st respondent - State of Gujarat, the counsel for the petitioners had not pressed the challenge to Sections 74D(1)(1A) relating to appointment of Custodian and conduct of elections, Section 67A regarding writing off of bad debts and Section 81 with reference to appointment of persons as Administrators for managing the affairs of the society. Such prayer has not been made in view of the following stand, as shown and quoted hereunder :-
"9.2 Re : Provisions contained in section 74-D more particularly contained in sub-section (1) and sub-section (1A) relating to appointment of Custodian and conduct of elections.
(a) The petitioners seek to challenge the said provisions on the supposition that till today there are large number of cases where election authority has failed to hold election before the expiry of the term of the Managing Committee/Board of Directors and as a consequence, co-operative societies have been constrained to file petitions for direction to hold elections. Earlier, as per the judgment of this Hon'ble Court, according to the petitioner, it was not permissible for the authority to appoint a Custodian for a period of six months after the expiry of the term of the Managing Committee/Board of Directors and that too not without hearing the affected parties, which aspects are now sought to be given a go0bey in the new provisions. In view of this, according to the petitioners, the said new provisions which mandate appointment of Custodian before the expiry of the term of the Managing Committee/Board of Directors if a new Committee of Management is, for any reason whatsoever, not elected, within a term of two months within which election is required to be held and the Committee is required to be constituted, is violative of Article 14 of the Constitution.
(b) The above stated premise adopted by the petitioners in challenging the said provisions contained in Section 74-D of the Act is misconceived.
In fact, the petitioners should have appreciated that behind the enactment of the said new provisions, the idea is to see that timely elections are ensured before the expiry of the term of the earlier body. This apart, earlier, Custodians used to carry on for a very long time. However by restricting the said period, the State interference in the management of co-operative societies for longer period is reduced so as to have elected body in place. Such provisions are not unknown so far as various Panchayats, Market Committees and Municipal Corporations under the Gujarat Panchayats Act, 1993, the Gujarat Agricultural Produce Market Committees Act, 1963 and under the BPMC Act, 1949, respectively, are concerned. This apart, the enactment of the said provisions are also in line with para 9.15 of the aforesaid MoU.
9.4 Re : Provision contained in Section 67-A regarding writing off of Bad Debts :
(a) The petitioners' challenge against the provisions of section 67-A is with reference to the proviso containing provisions as regards 'the passing of the resolution in the General Meeting of the society by a majority of total members of the society' and 'by a majority of not less than 2/3rd of the members of the society present and voting'. The petitioners want to read 'or' in place of the aforesaid 'and' used in the said proviso, since according to them, the provisions would be otherwise arbitrary.
(b) The aforesaid stand of the petitioners is not in consonance with the spirit for which Section 67-A came to be inserted. To take a decision for writing off of Bad Debts of any Bank is a very serious decision affecting the financial position of the Bank, for which various pros and cons are required to be examined preferably by the whole body of the society. It may so happen that even though the debts are recoverable, attempt may be made to brand them as irrecoverable for being written off against the Bad Debt Reserve Fund. Thus, the said provision is to see that such a writing off succeeds only in genuine cases for which there would be required a larger number of members of the society approved the same.
(c) In that view of the matter, the petitioners' grievance referred to above is not sustainable in law.
9.5 Re : Provisions contained in section 81, more particularly with reference to appointment of persons as Administrators for managing the affairs of the society.
(a) The petitioners seek to challenge the said provisions on the ground that choice of Administrator is only from amongst the members of the society or the officers of Co-operative Department of the State Government and that as per the provisions of unamended section 81, choice in this behalf was not confined to the said two categories only, for it was very wide for which provision was made in Rule 37-A of the Rules. It is the contention of the petitioners that there is no rationale in restricting the appointment of the Administrator to two categories as mentioned above and hence the said provisions are violative of Articles 14 and 19 of the Constitution.
(b) The above-stated perception of the petitioners in undertaking the challenge against the insertion of the new provisions in section 81 of the Act is totally baseless inasmuch as the sole idea in amending sub-clauses (I) and (ii) of clause (b) of section 81(1) of the Act was to see that any Member of the Committee who has been removed under the said section 81, is not appointed as an Administrator.
However the provisions of Rule 37-A of the Rules have been kept intact and hence the apprehension of the petitioners that the choice of the appointment of Administrator is now confined to the aforesaid two categories pales into insignificance.
19. It appears that the Government of India had set up a Task Force to suggest an action plan for reviving rural co-operative credit institutions including legal measures necessary for facilitating the said process and the following references were made to the Task Force :-
1. To recommend an implementable action plan for reviving the Rural Co-operative Banking Institutions, taking into consideration, inter alia, main recommendations made by various committees in this regard.
2. To suggest an appropriate regulatory framework and the amendments which may be necessary for the purpose in the relevant laws.
3. To make an assessment of the financial assistance that the Co-operative Banking Institutions will require for revival, the mode of such assistance, its sharing pattern and phasing.
4. To suggest any other measures required for improving the efficiency and viability of Rural Co-operative Credit Institutions.
The Task Force after careful examination of all records and recommendations of the earlier Committees met several co-operators, officials, politicians from all over the country and made certain recommendations. The report was placed in public domain in the websites of the Government of India, Reserve Bank of India and NABARD, which elicited responses from a number of State Governments. In the Executive Summary provided in the report dated 4.2.2005, the Task Force observed as under :-
"5. The Co-operative Credit Structure (CCS) is today impaired in governance, managerial and financial fronts. Examples of impairment on governance include non-conduct of elections for a long time, frequent supersession of Boards, delay in audit, States intrusion in administrative and financial management. The impairment of management includes deputation of government officials to top positions in many banks, setting up the common cadre system for PACS, determination of staffing patten by States, interference in the operational decision making of co-operatives, an ageing staff profile, poor housekeeping and weak MIS. Apart from the above, even the supervision and the prudential regulation of co-operative banks is not as stringent as it is for commercial banks.
6. The financial position of the system is weak and deteriorating. The accumulated losses of PACS are estimated roughly on the basis of available incomplete data at Rs.4,595 crore as on 31 March 2003. The position of DCCBS is also equally unsatisfactory; with accumulated losses aggregating Rs,4,401 crore and erosion in deposits being Rs.3,100 crore. Due to such financial impairment, cooperatives have been steadily losing their capacity to meet the rapidly growing credit needs of agriculture. In the early 1990s, they accounted for over 60 percent of the total institutional credit to agriculture, while currently their share has fallen to about one-third. This situation gives cause for serious concern.
38. Once a State Government accepts to participate in the scheme and share its financial liability, the concerned committees and dedicated teams would be put in place. They will be responsible to get the required Memorandum of Understanding (MoUs) signed between the various parties, get the special audits conducted, assess the financial support required, ensure issuance of the executive orders and resultant amendments to byelwas of the co-operatives, recommend and ensure flow of financial assistance. It is expected that the entire scheme take about three years to implement in each State."
The Task Force also recommended the enactment of Model Co-operative Law by observing, inter alia, as under :-
"5.25 While some of the necessary changes can be implemented through Executive Officer, under the existing State laws, formal legislation to repeal or modify existing laws will be necessary. The Model Coop law, suggested by the Brahm Prekash Committee, and endorsed by all recent committees which have gone into this issue, is consistent with the kind of regime, which we think is necessary for healthy functioning of cooperatives as democratic, member-driver and self reliant organizations.
5.25 Even though several States have enacted new laws on this pattern, they have not made much of an impact. In all these States, most societies continue to operate under the regime of the extant CSAs, with hardly any effort to enable or encourage existing societies to come under the new law. Part of the reason is the absence of provisions in the pre-existing law to permit and enable existing societies to come under the new law. A stronger reason is, perhaps, the non-availability of refinance to such cooperatives, registered under the new Acts."
A copy of "Institutional, Legal and Regulatory Reforms", which is at Chapter V of the report of the Task Force has been enclosed as Annexure - I to the reply affidavit.
The Task Force suggested various options which were responded to by the RBI by offering its comments which is at Annexure - II to the reply affidavit field by the State. Thereafter, the MoU between the Central Government, State Government and NABARD was arrived at on 26.6.2006 for implementation of the package for revival of rural Co-operative Credit Structure (CCS), comprising the State Co-operative Banks, Central Co-operative Banks and primary agricultural credit societies and thereafter consensus arrived at between the parties and the recommendations made by Vaidyanathan Committee on revival and reform of CCS were noticed before singing the MoU. The relevant extracts of the preamble of the MoU are reproduced hereunder :-
"1. Whereas it is considered necessary as a national priority to affirm the following objectives for revival and restructuring of the rural co-operative credit structure (CCS), comprising the State Co-operative Banks (SICBs), Central Co-operative Banks (CCBs) and Primary Agricultural Credit Societies (PACS) including LAMPS, MPCS and FSS affiliated to CCBs on a sustainable basis :-
a. Efficient delivery of financial services, including savings and loan products as grassroots level in rural areas through the CCS with minimum regulatory burden.
b. Ensuring safety of public deposits accepted by the co-operative banking system.
2. Whereas it is considered necessary for achievement of the objectives that the institutions comprising CCS :
i. are democratic, well governed, professionally managed and audited.
ii. have requisite autonomy in raising resources and deploying funds as also in other operational matters connected therewith;
iii. undertake financial activities as principal business and separately account for and fund other activities, if undertaken, and that iv. the SICBs and CCBs are effectively regulated on par with other entities accepting public deposits."
20. Some of the provisions of the MoU with regard to the obligations of the 1st respondent - State were set out at para 9 series onwards, which are relevant for the present purpose and quoted hereunder :-
'9. The State undertakes to bring in amendments to or incorporate a special chapter in the Gujarat State Co-operative Societies Act, 1961 to give effect to the reforms envisaged under the Package in respect of all entities which are part of the CCS. Pending such amendments, the State undertakes to issue an Ordinance under the powers conferred on it under Article 213 of the Constitution of India to provide for the following in respect of all entities which are part of the CCS :
9.1 ensuring full voting membership rights to all depositors/borrowers in cooperatives other than co-operative banks.
9.4 allowing transition of any cooperative registered under the Gujarat State Co-operative Societies Act, 1961, to the parallel Self Reliant Cooperative Societies Act, when enacted and permitting cooperatives under the Self Reliant Cooperative Societies Act to be members of federal structures registered under the Gujarat Cooperative Societies Act, 1961 and vice versa, 9.5 allowing freedom to any cooperative in the CCS to affiliate or disaffiliate with a federal structure of its choice.
9.6 allowing freedom of entry and exit for any unit of CCS at any level with no mandated restrictions of geographical boundaries for its operations.
9.7 withdrawing any restrictive orders on financial matters like investments to be made to cooperatives and permitting them to invest funds, subject to the guidelines as may be prescribed by RBI, 9.14 Supersession of the Board of the GSCB or a CCB by the RCS under any other clause of the Gujarat State Co-operative Societies Act, 1961, shall be done only in consultation with RBI. The Board of a PACS shall be superseded by the RCS only under the following conditions :
9.14.1 if a society incurs looses for three consecutive years, or 9.14.2 if serious financial irregularities or frauds have been identified, or 9.14.3 if there are judicial directives to this effect or there is perpetual lack of quorum.
9.15 ensuring timely elections before the expiry of the term of the existing Board of any cooperative and within two months from the date of supersession of any Board. Also ensuring that members of the Board of PACS which has been superseded due to a reasons as in 9.14.1 and 9.14.2 above would not be entitled to contest again for a period of at least three years after supersession.
9.18 removing at the request of NABARD/RBI, director(s)/CEO(s) who do not fulfill the fit and proper criteria stipulated by RBI in the case of GSCB and CCBs."
21. Taking into consideration the aforesaid report and the MoU, the Amending Act, 2008 was enacted. Before the Act, the statement of object for making important amendments were notified in the Extraordinary Gujarat Government Gazette dated 8.10.2007 which reads as follows :-
"The Government of India, based on Vaidyanathan Committee's Report, has announced revival package for co-operative societies to be implemented through NABARD. As per the package, agricultural credit sector i.e. Primary Agricultural Credit Co-operative Societies, District Central Co-operative Banks and State Co-operative Banks and State Co-operative Bank will get the benefit of the package for compensating the losses in their balance sheet as on 31.3.2004 subject to certain conditions of Memorandum of Understanding (in short "MoU") signed by the Government of Gujarat with the Central Government and NABARD. As per one of the conditions of the said MoU, the State Government is required to amend the various provisions of the Gujarat Co-operative Societies Act, 1961. An undertaking has been given by the State Government to the Government of India and NABARD in the said MoU that pending such amendments (through Legislative Assembly) an Ordinance under Article 213 of Constitution shall be issued to give effect to the reforms.
In the Gujarat State, there are 7768 Primary Agricultural Credit Co-operative Societies, 18 District Central Co-operative Bank and the apex body namely, the Gujarat State Co-operative Bank in the three tier agricultural credit sector which are likely to be benefited by the revival package declared by the Government of India to be implemented through the NABARD.
In view of fact that the stage of special audit for the purpose is almost completed so far and the State Government is likely to get the share of the revival package of Rs.1106.58 crores from the Central Government as per the sharing pattern, and as initial payment, the NABARD will release seventy-five per cent of the entitled amount i.e. around Rs.800 crores in the current financial year, if the condition of legal reforms as per MoU as stated above is complied with. It is, therefore, considered necessary to amend the Gujarat Co-operative Societies Act, 1961.
The following are some of important amendments considered necessary to be made in the said Act as per the MoU signed by the Government of Gujarat with the Central Government and NABARD :
(1) ensuring full voting membership rights to all depositors/borrowers in co-operatives other than co-operative banks, (2) providing autonomy to Co-operative Credit Structure in all financial and internal administrative matters.
(3) Restricting the State Government's equity to a maximum of twenty-five per cent in any co-operative at any level and limiting State participation in the Committee of a co-operative bank to only one nominee and not to have any State nominee on the Committee of any Primary Agricultural Credit Co-operative Society. The State Government or a co-operative society at any level wishing to reduce the State equity further would be free to do so, (4) allowing freedom of any co-operative society in the co-operative credit structure to affiliate or disaffiliate with a federal structure of its choice and there would not be any restrictions of geographical boundaries for its operations, (5) allowing freedom for investments to be made by co-operative societies and permitting them to invest funds, subject to the guidelines as may be prescribed by the Reserve Bank of India;
(6) permitting any co-operative in all the three tiers freedom to take loans from any RBI regulated financial institution, and refinance from NABARD or any other refinancing agency directly and not necessarily with only the federal tier to which it is affiliated;
(7) powers taken from laying down guidelines for the purpose of payment of dividend by Primary Agricultural Credit Co-operative Societies in consultation with NABARD.
In addition to above, the provisions are also made for exclusion of defaulters from the voters list, provisions for maintaining Bad Deb Reserve Fund and provisions for periodical inspection by the Registrar of Co-operative Societies, financing bank and federal societies. The provisions are also made for availing loan facility to group of persons (self help groups) and for availing memberships to such group also in the Society.
As the Legislative Assembly of the State of Gujarat is not in session, this Ordinance is promulgated to amend the said Act to achieve the aforesaid objects.
Gandhinagar NAWAL KISHORE SHARMA Dated the 7th October, 2007 Governor of Gujarat By
order and in the name of the Governor of Gujarat, DR.
AVINASH KUMAR, Additional Chief Secretary to Government"
From the aforesaid statement of objects, it will be evident that taking into consideration the fact that there are 7768 Primary Agricultural Credit Co-operative Societies, 18 District Central Co-operative Banks and the apex body, namely, the Gujarat State Co-operative Bank in the three tier agricultural credit sector and to benefit them, the State Government was likely to get share of the revival package of Rs.1106.58 crores from the Central Government and as initial payment, the NABARD will release 75% of the entitled amount i.e. around Rs.800 crores. Such amount could not have been received by the State Government for the benefit of the three tier agricultural credit sector, including 7768 Primary Agricultural Credit Co-operative Societies apart from 19 District Central Co-operative Banks and its apex body namely the Gujarat State Co-operative Bank, if the Memorandum of Understanding signed between the Central Government, the Government of Gujarat and the NABARD is not acted upon and, therefore, the public in general were informed to derive such benefit. As per the MoU, freedom was allowed to any co-operative society in the co-operative credit structure to affiliate or disaffiliate with a federal structure of their choice and there would not be any restriction of geographical boundaries for its operations. It additionally permitted any co-operative society in all the three tiers freedom to take loan from any RBI regulated financial institution and refinance from NABARD or any other refinancing agency directly and not necessarily with only the federal tier to which it is affiliated. Such decision was for the benefit of all the co-operative societies in the co-operative credit structure in all three tiers. The fund was generated from the Central Government for distribution amongst the co-operative societies. Therefor, much more advantages were given to the co-operative societies including the petitioner - banks.
22. It has been rightly pointed out by the learned Advocate General for the State that prior to the enactment of the provisions of Section 73A, Primary Agricultural Credit Co-operative Society had no choice in the matter of availment of finance, more particularly in the area of rate of interest, availability of finance, etc. as it was to be affiliated with only one District Co-operative Bank. In view of the fact that now the restriction has been lifted, under Section 73A the financial freedom of a grater degree has been allowed in favour of the co-operative societies including the petitioner - banks.
23. Any co-operative bank in three tier have freedom to take loan from any RBI regulated financial institutions and refinance from NABAARD or any other financial agency directly and not necessarily with only federal tier to which it is affiliated. This happened only because of the restriction lifted on the recommendations of the expert body including the Task Force and the recommendations of the Vaidyanathan Committee.
24. In view of Section 73A, the monopoly of the federal society, namely the Gujarat State Co-operative Bank now stands curtailed and the member - cooperative societies have wides choice to avail benefit without any restriction like payment of higher interest for taking loan and will now not be deprived of loan on the ground that the federal society have no money to grant loan.
25. The Court normally does not interfere with the decisions of the expert bodies, particularly if it involves regulation of economic activities by different constituents. This will be evident from the decision of the Supreme Court in the case of Bhavesh D. Parish vs. Union of India, reported in AIR 2000 SC 2047, wherein the Supreme Court has observed thus :
"23. it was further submitted that the amendments were introduced after taking into account the recommendations of successive committees, appointed by the Bank and Government of India, which had studied the functioning of these bodies. The question of restricting such financial activity by unincorporated bodies, in a question of economic policy as it involves regulation of economic activities by different constituents. In such matters of economic policy, this Hon'ble Court does not interfere with the decision of the expert bodies which have examined the matter. The following observations of this Hon'ble Court made in RK Garg vs. Union of India, 1982(1) SCR 947 at 969 L (AIR 1981 SC 2138 at p.2147) are appropriate :
"Another rule of equal importance is that laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person that Holmes, J. that the Legislature should be allowed some play in the joints, because it has to deal with complex problem which do not admit of solution through any doctrinaire or straight-jacket formula and this is particularly true in case of Legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with greater play in the joints has to be allowed to the Legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the filed of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey vs. Doud [1957] 354 US 458 where Frankfurter, J. said in his imitable style :
"In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the Judges have been overruled by events self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability."
26. In the case of RK Garg vs. Union of India, (1981)4 SCC 675, the Supreme Court observed that :-
"It has been said by no less a person that Holmes, J. that the Legislature should be allowed some play in the joints, because it has to deal with complex problem which do not admit of solution through any doctrinaire or straight-jacket formula and this is particularly true in case of Legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with greater play in the joints has to be allowed to the Legislature. The Court should feel more inclined to give judicial deference to legislative judgment in the filed of economic regulation than in other areas where fundamental human rights are involved. Nowhere has this admonition been more felicitously expressed than in Morey vs. Doud [1957] 354 US 458 where Frankfurter, J. said in his imitable style :
"In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the Judges have been overruled by events self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability."
In the said case, the Supreme Court further observed that :-
"The Court must always remember that 'legislation is directed to practical problems, that the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry'; 'that exact wisdom and nice adaption of remedy are not always possible' and that 'judgment is largely a prophecy based on meagre and interpreted experience'. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method and therefore it cannot provide for all possible situations or anticipate all possible abuses. There may be crudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secy. of Agriculture vs. Central Roig Refining Co., 338 US 604 (1950), be converted into tribunals for relief from such crudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to tis provisions and to provide against such distortions and abuses. Indeed, howsoever great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its crudities or inequities or possibilities of abuse come to light, the legislature can always step in and enact suitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the legislature in dealing with complex economic issues."
27. In view of the aforesaid authoritative pronouncement of the Supreme Court, as we find that the Amending Act, 2008, particularly Section 73A is based on the recommendations of the Task Force constituted by the Central Government which is based on the report of the Vaidyanathan Committee and the MoU has been reached between the Government of Gujarat with the Central Government and NABARD for providing freedom from affiliation or disaffiliation with a federal society of choice to avail the financial benefits out of the share of the revival package of Rs.1106.58 crores received from the Central Government, such policy and law cannot be held to be bad on mere presumption that it may violate the right of the petitioner - banks as guaranteed under Article 19(1)(c) or Article 19(1)(g) of the Constitution.
We have noticed that the impugned provision is reasonable having nexus with the object sought to be achieved and is in consonance with Article 14 of the Constitution. The said provision neither take away the right of the petitioners, the freedom to form an association or union as guaranteed under Article 19(1)(c) nor infringes freedom of any of the petitioner - bank to carry on trade or business as guaranteed under Article 19(1)(g) of the Constitution. On the contrary, the Amending Act, 2008 is in furtherance to such right to practice trade or business by any co-operative credit structures including primary agricultural credit co-operative societies, Central Co-operative Banks and the State Co-operative Bank, as defined under Section 73A of the Gujarat Co-operative Societies Act, 1961, inserted by the Gujarat Co-operative Societies (Amendment) Act, 2008.
28. So far as the new provisos added after the existing proviso to Section 76 relating to qualifications for appointment of the Chief Executive Officer and the Directors of the Central Co-operative Bank and the State Co-operative Bank is concerned, under 2nd proviso, the Reserve Bank of India has been empowered to determine the same. Further, as per the 3rd proviso, the Registrar of the Co-operative Societies or the Board of the Central Co-operative Banks or the State Co-operative Bank is required to remove, at the request of the Reserve Bank, such Directors and Chief Executive Officers who do not fulfill the qualification as may be prescribed by the Reserve Bank. However, the existing elected Directors holding their post as such Directors on the date of the commencement of the Gujarat Co-operative Societies (Amendment) Act, 2008 have been allowed to hold their offices till the expiry of their current remaining term.
29. In normal course, under the Banking Regulations Act, 1949, a banking Company is required to include persons with professional or other experience under Section 10A and is required to be managed by whole time Chairman under Section 10B of the said Act. The Reserve Bank of India has the power to appoint Chairman of the Board of Directors appointed on a whole-time basis or a Managing Director under Section 10BB. The provisions of Sections 10A and 10B override all other laws, contracts, etc. as per Section 10D of the said Act.
It is true that the said provisions are not directly applicable to the co-operative banks, but we have noticed the power of the Reserve Bank of India binding on the banking Companies to run a bank by qualified professionals having expertise in the field which can be managed by a whole-time Chairman.
30. The Banking Regulation Act, 1949 has been made applicable to the co-operative banks under Part V of the said Act, by Act 23 of 1965 with effect from 1.3.1966; once it was repealed and subsequently substituted by Act 61 of 1981 with effect from 1.5.1982. Pursuant to Section 65, the co-operative banks, co-operative credit societies, co-operative societies,, primary agricultural credit societies, etc. dealing with the banking activities have been brought within the meaning of "banking Companies". Since then, the Banking Regulation Act, 1949 is applicable and thereby the Reserve Bank of India has the power to give direction under Section 35A in certain matters in the public interest, in the interest of the banking policy, etc, as quoted hereunder :-
"35A. Power of the Reserve Bank to give directions, - (1) Where the Reserve Bank is satisfied that -
(a) in the public interest; or (aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors or in a manner prejudicial to the interests of the banking company; or
(c) to secure the proper management of any banking company generally, it is necessary to issue directions to banking companies generally or to any banking company in particular, it may, from time to time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound to comply with such directions.
(2) The Reserve Bank may, on representation made to it or on its own motion, modify or cancel any direction issued under sub-section (1), and in so modifying or cancelling any direction may impose such conditions as it thinks fit, subject to which the modification or cancellation shall have effect."
31. Under the aforesaid provisions, though the Reserve Bank of India has power to issue certain directions in the public interest or in the interest of the banking policy or to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors, etc. but under the aforesaid provisions, it has not been empowered to issue directions to prescribe qualifications for appointment to the post of Directors or Chief Executive Officers, etc. Therefore, when initially the Reserve Bank of India issued guidelines on 10.7.2007 and 29.4.2008, the challenge was made on the ground that the Reserve Bank of India has no jurisdiction to issue such guidelines, as the power to frame law with regard to the co-operative societies is vested in the State in view of Entry 32 in List II of the 7th Schedule of the Constitution. It was in this background that the Reserve Bank of India recalled their earlier guidelines and for the said reason, the challenge to the earlier guidelines dated 10.7.2007 and 29.4.2008 were not pressed.
32. As the State Government has the power to frame law with regard to the co-operative societies in view of Entry 32 in List II of the 7th Schedule, taking into consideration the report of the Task Force based on the recommendations of the Vaidyanathan Committee and in light of the Memorandum of Understanding reached by the State Government with the Central Government and NABARD, the State Government enacted the Gujarat Co-operative Societies (Amendment) Act, 2008 and inserted the 2nd and 3rd proviso below the existing proviso to Section 76 of the Gujarat Co-operative Societies Act, 1961. By such amendment, the Reserve Bank of India, an expert body, having knowledge with regard to the qualifications and other experience required for professionals to manage the business of the banking of a co-operative society, has been empowered to determine such qualifications including experience for appointment of Chief Executive Officer and Directors of the Central Co-operative banks, State Co-operative Bank, etc.
33. It cannot be said that the legislatures have abdicated its power. The legislatures may not have to take note of all the relevant facts and expertise to determine the qualifications as may be required and may be required to be enhanced from time to time including the experience for many professional posts of Chief Executive Officer and Directors of a bank, namely, Central Co-operative Bank and the State Co-operative Bank. Therefore, it is always open to ask an expert body like Reserve Bank of India to determine such qualifications for appointment of Chief Executive Officer and Directors of such co-operative banks from time to time. If it is to be determined taking into consideration the requirements of a co-operative bank, it is always open to the legislatures to empower an expert body to determine the same instead of fixing one time qualification by a statute.
34. In the case of Ram Krishna Dalmia vs. Justice Tendulkar, reported in AIR 1958 SC 538, the Supreme Court held as follows :-
"(a) ... ... ... ... ... ... ...
(b) that there is always a presumption in favour of the constitutionality of an enactment and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles;
(c) that it must be presumed that the legislature understands and correctly appreciates the needs of its own people, that its law are directed to problems made manifest by experience and that its discriminations are based on adequate grounds;
(d) that the legislature is free to recognize degrees of harm and may confine its restrictions to those cases where the need is deemed to be the clearest;
(e) that in order to sustain the presumption of constitutionality the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation;"
35. Therefore, the presumption goes in favour of the constitutionality of the enactment in question i.e. Section 76 of the Gujarat Co-operative Societies Act, 1961 as made by Section 18 of the Amending Act, 2008 inserting provisos below the existing proviso to Section 76 of the Principal Act. The petitioners who have challenged the said provisions have failed to show that there has been any transgression of the constitutional principles. No arbitrariness has been shown to allege violation of Article 14 of the Constitution. The provisions also do not interfere with the freedom of the banks to form an association or to practice trade or business and thereby does not infringe its rights guaranteed under Article 19(1)(c) or Article 19(1)(g) of the Constitution. In absence of any merit, we uphold the provisions as made in these cases, particularly Section 15 of the Amending Act, 2008 whereby Section 73A of the Gujarat Co-operative Societies Act, 1961 has been inserted and Section 18 of the Amending Act whereby two provisos below the existing proviso to Section 76 has been inserted. In absence of any merit, the writ petitions are dismissed, but there shall be no order as to costs.
[S. J.
MUKHOPADHAYA, CJ.] [ANANT S. DAVE, J.] sundar/-
Top