2015 (6) TMI 150 - HC - Companies Law

Financial and banking activities undertaken by Credit Cooperative Societies - No licence as per provisions of the Banking Regulation Act, 1949 - Held that - We are of the view that activities carried out by the respondents Nos.9 to 12 as Cooperative Societies may be within the purview of legitimate business under the Rajasthan Cooperative Societies Acdt, 2001 and the Multi-State Cooperative Societies Act, 2002 and the registered bye-laws, these activities in accepting for the purpose of lending and investment, the deposit from the public, repayment on demand and its withdrawal, fall within the definition of banking under Section 5(b) of the Act of 1949. The word public in the definition of the word banking cannot be restricted to general public. The word public will also include those persons who are nominal members, ordinary members and the members of any category under the bye-laws of the Cooperative Society so long as deposits are accepted without any restriction from such members who may be enrolled as members on the same day at the time of accepting deposits. Even the person enrolled as nominal member, does not fall outside the purview of the word public and that any deposits from the members on interest and for which amount is to be repayable on demand or otherwise, is an activity which amounts to banking activity. The activities of the Cooperative Societies in the State of Rajasthan have clearly demonstrated that the deposits and investments of general public, who can become nominal members and ordinary members of the Cooperative Societies, and for them lucrative schemes are being floated by the Cooperative Societies are at risk. Their investments are not covered by any protection. The provisions under the Multi-State Cooperative Societies Act, 2002 restrict the deposits upto ten times the paid up capital and the reserve. This condition is not sufficient to protect the deposits if the reserves can be advanced as loans without sufficient security. If such a restriction was sufficient, the entire banking activity could be carried out without obtaining licence under the Act of 1949. The Reserve Bank of India circulars and directives are binding on all the banks which are licensed under the Act of 1949. This protection must apply to all kind of banking activities which is defined under Section 5(b) of the Act of 1949. We do not agree with the submission of learned counsel appearing for the respondent No.9 that under the legislative scheme, Multi-State Cooperative Society is permitted to carry out banking activity which does not fall within the meaning of Section 5(b) of the Act of 1949. He submits that legislative policy provides Multi-State Cooperative Society to carry out the activities of taking deposits from its members on interest and that so long legislative scheme permits such activity, the respondent is not violating the provisions of the Act of 2002. The argument is devoid of any substance. So far as the allegation against the petitioner is concerned, this Court has already directed the Superintendent of Police of the concerned district to enquire about the complaints of the investors. In case the petitioner has committed any misconduct under the Regulation of Bar Council of India, a complaint can be made against him to the Bar Council of Rajasthan. These allegations against the petitioner was not detain us to decide the writ petition in the larger public interest. - Decided partly in favour of appellant.

Summary

Issues Involved:
1. Legitimacy of banking activities by Credit Cooperative Societies without a license.
2. Petitioner's standing and motives in filing the writ petition.
3. Regulatory oversight and compliance by Cooperative Societies.
4. Protection of public interest and deposits.

Issue-wise Detailed Analysis:

1. Legitimacy of Banking Activities by Credit Cooperative Societies without a License:
The petitioner argued that various Credit Cooperative Societies, including respondents Nos. 9 to 12, were conducting banking activities without obtaining the necessary license under Section 22 of the Banking Regulation Act, 1949. The court noted that these societies were accepting deposits, offering interest, and providing ATM facilities, which are considered banking activities. The court referenced the Supreme Court's decision in Apex Co-operative Bank of Urban Bank of Maharashtra and Goa Ltd. Vs. Maharashtra State Cooperative Bank Ltd. & Ors., which held that Multi-State Cooperative Societies cannot conduct banking business without a license from the Reserve Bank of India (RBI). The RBI also clarified that any cooperative society engaging in banking activities must obtain a license.

2. Petitioner's Standing and Motives in Filing the Writ Petition:
The respondents raised a preliminary objection regarding the petitioner's standing, arguing that he was previously involved in similar banking activities and had several FIRs lodged against him. The petitioner countered that he had ceased such activities and settled all accounts. The court found no ulterior motive or ill will on the petitioner's part and overruled the objections, allowing the petition to proceed.

3. Regulatory Oversight and Compliance by Cooperative Societies:
The respondents contended that they were operating within the legal framework of the Rajasthan Cooperative Societies Act, 2001, and the Multi-State Cooperative Societies Act, 2002. However, they failed to provide clear sources of capital and purposes for loans. The RBI stated that it had limited regulatory oversight over cooperative societies not accepting deposits from the public but emphasized that those engaging in banking activities must obtain a license. The court directed the RBI, Central Registrar of Multi-Cooperative Society, and Registrar, Rajasthan Cooperative Society to file replies and ensure compliance with the regulations.

4. Protection of Public Interest and Deposits:
The court expressed concern over the protection of public deposits, noting that many cooperative societies were offering attractive but risky schemes. The court highlighted that the activities of accepting deposits and offering loans fell within the definition of "banking" under Section 5(b) of the Banking Regulation Act, 1949, and required a license. The court emphasized the need for regulatory oversight to protect investors' funds and prevent fraudulent activities.

Judgment:
The court issued several interim measures to ensure compliance and protect public interest:
1. No cooperative society shall carry on banking activities without a license under the Banking Regulation Act, 1949.
2. Cooperative societies may continue their activities as per their by-laws but must ensure compliance with applicable laws.
3. Societies must confine their activities to their existing members and avoid misleading advertisements.
4. Directors and office bearers of the societies must furnish their details to the court.
5. The Registrar of Cooperative Societies must conduct periodic inspections and report to the court.

The court partially allowed the writ petition, directing that respondents Nos. 9 to 12 and other cooperative societies must not accept deposits from the public or members without obtaining a license under Section 22 of the Banking Regulation Act, 1949. The restriction on accepting deposits would not apply for three months to allow societies to obtain the necessary licenses. The authorities of the State of Rajasthan were instructed to strictly enforce these directions.