By I C Naik
A new trend is emerging pretty fast in MAHA-CHS; Planning self redevelopment well before society buildings are declared dilapidated. We had initiated discussion on this trend some time back in the Coffee Shop. On legal front in the latest move the MAHA- State Government promulgated an ordinance last October and inserted an exclusive chapter “Cooperative Housing Societies” in the MCS Act 1960. There appears a better opportunity for self redevelopment; let us pick up the thread.
Very serious flaw in the financial management in most Housing Societies is being analyzed thread bear. Self redevelopment needs two critical things; extraordinarily cooperative members and strong financial base. Housing Society is a non-profit mutual interest enterprise run on funds contributed by its members. These funds are known as per their purposes depending on the objects to be attained as specified in the bye-laws; the usual being Sinking Fund, Normal Repair Fund, Major Repair Fund, Common Amenities & Services Fund, Welfare Fund etc. etc. and a statutory Reserve fund required to be established out of surplus of income over expenditure incurred for running the Society. Disastrous consequence on the financial strength of almost every housing society because of just one error of omission in every model bye-laws has completely gone unnoticed. The omission is in specifying the Principal object of the Society in the registered bye-laws. Principal object qualifies the Society to be classified under one of nine classes of cooperative societies ..Rule 10 of the MCR 1961reads
“After registration of a society, the Registrar shall classify the society into one or other of the following classes and sub-classes of societies prescribed below according to the principal object provided in its bye-laws.”
One omission led to another, that is no Housing Society established “Common Amenities and Services fund” extremely important fund of housing societies necessary for attaining the principal object. Consequential error is far more serious; amounts contributed by the members to procure common amenities and services are erroneously accounted as income earned by the Society. It is reported as income earned from members though several other amounts contributed were directly credited to corresponding fund account. If there was a specific purpose Fund namely “Common Amenities and Services fund” in the Accounting system this error would not have occurred. A few members of Housing Societies I talked about this error their contention was it was the way of smart committees of subsidizing the maintenance cost to the members. Chartered Accountants also accepted this erroneous accounting policy. Every Housing Society over looked a basic character of cooperative societies that they are mutual interest organizations [the Apex Court Judgment dated 12th March 2018. in the case of Venkatesh Premises C S Ltd [C A NO.2706 OF 2018] [SLP (C) No.30194 of 2010][Styles vs. New York Life Insurance Company, (1889) 2 T.C. 460, by Lord Watson in the House of Lords] . The implication is contribution received from members do not partake character of income of the Society. Seehttp://www.indiancooperative.com/cooperative-coffee-shop/doctrine-of-mutuality-in-cooperative-housing-societies/ The audited financial statements of every Housing Society reports profit/loss having members’ contribution a part of it and is certified by the auditor as income earned by the Society. The housing societies being no profit no loss societies, and to be true to that notion, the Housing Society managements adjust the amount called from member’s as contribution clubbing interest income and fix lower rate of contribution to society charges bypassing the bye-law requirement. No bye laws empower the Management Committee to adjust any income to expenses incurred for attaining objects of the Society. Expenses and contribution to funds as specified in the registered bye laws must be recovered from members as society charges. This is the reserved territory for general body of members via appropriation of profit rules to choose the purposes to which they can be put to. Surplus arising out of interest earned on invested funds is to be appropriated as specified in the registered bye-laws which requires creation of Statutory Reserve Fund by transferring not less than 25% of such Surplus every year. Section 66 of the MCS Act 1960 also mandates this transfer and the investment and utilization thereof is also governed by the MCR 1961.This provision is desecrated by every housing society. Under a strict compliance environment committees could have been in serious trouble of compensating the Society for short charge.
Unlike the MCS Act 1960 which is silent on establishing specific society funds, except Section 66 for mandatory Reserve Fund, the ordinance in Section 154B-15 provides that “Every society shall establish funds as may be prescribed” [under the MCR 1961] and also such other funds as the Society may, from time to time, decide. The State Government should not overlook correcting this serious error of omission of establishing Common Amenities and Services Fund after inserting a corresponding object as principal object in bye-laws. Such a step is inconsonance with the definition of Housing Society under Sub-Clause (17) of Section 154B1 in Chapter III Cooperative Housing Societies” [Section 2(27) of the MCS Act 1960]. Even if the State Government does not act as aforesaid, every Housing Society which have dwellings already allotted to the members is advised to amend its bye-laws for establishing Common Amenities and Services Fund. Many housing societies have a practice of charging in maintenance bills the expenses incurred on social welfare activities a Housing Society undertakes as provided under its bye-laws. This is a breach of bye-laws because such activities are to be undertaken using surplus income transferred to welfare fund. If a complaint is made to the Cooperative Court the office bearers will have tough time defending a claim on them to reimburse the Society for maintenance contribution diverted to social activities.
And last but not the least, every Housing Society will get richer to prepare itself for self redevelopment in terms of financial strength.
There will be surplus in every Housing Society which means the members in Annual General Meeting will become active in participating in the management. This will help strengthen membership discipline.
As the State Government has been empowered to make rules to establish funds there under by every Housing Society, the State should amend the form N to do correct accounting of members’ contribution reckoning the doctrine of mutuality.
One reason for housing societies to opt for smaller funds is the fear of losing them under frauds by cooperative banks where they have to be invested. The RBI should increase the insured sum of bank deposits under DIGC scheme from Rs 1 lac to at least Rs 25 Lacs per one account in every District or State Cooperative Bank as a broader safety net. It can insure unlimited sum under contributory scheme charging token premium to depositor housing societies.