Investments by Co-

Operative SOCIETIES-
NEW AREAS WITH ISSUES & Enhanced
DUTIES FOR AUDITORS (Tax Implications ignored)
Presentation at WIRC (BKC) of the institute of chartered
accountants of India : on 24-MAY-2018.

CA Rajendra Joshi
B.Com(Hons).,LL.B,FCA,CAIIB
 Foreign Pensions Funds do invest in MF/ Equity shares
in India (as rate of interests are lower in their countries
compared to India) . We are aware that in the recent past
Indian Pensions Funds have been encouraged to invest in
Capital Market.

The co-operative housing societies are governed by the

Maharashtra State Cooperative Societies Act 1960. The Act
states that a cooperative housing society can invest its funds
in cooperative bank or securities described under the Trust
Act. Now amendment in Trust Act, 1882 enables co-
operative Societies to Invest in MFs/Shares .
Issue is whether co-op Soc are prepared?

 Issues begin with those who Manage the Co-

operative Societies (M.C. Members of Society);

 Regulator here i.e. Malhotra House for our

purpose those who regulates and monitors the
co-operative Societies affairs. New Are for
Regulator to Monitor as so far limited to Bank
accounts,FDs etc.

 Investment committee, Empowerment and

fixation of stop-loss limits(%) and cut-loss (%
or/and amount)
Whether Regulator is prepared?

 Investment Mix ( MFs /Equity )

 Prudential limits /cap for Investment Mix (

MFs /Equity).

 Minutes of meetings will carry more

significance. Whether prior approval
/subsequent ratification.
Whether Auditors is prepared?

 Revenue may or may not improve as such Issues are

sensitive/ delicate in nature and importance for co-
op Societies in public image may rake up a new
debate and future prospects of the co-operative
Societies in question.

Final impact is on Auditor as his duties will get

increased, as Co-op Society is not a Corporate , so
human assets required to manage Investments,
records, reporting & submission of Returns may be
weaker till as the same is streamlined.
 The Amendments to the Indian
Trusts Act, 1882 have opened doors for co-
operative societies in Maharashtra
(including housing societies) to invest in
mutual funds.

There are large numbers of housing

societies in cities like Mumbai, Pune and
Nagpur which could hitherto only park their
money in co-operative banks or other co-
operative societies, these are new
openings.
 This opens up new area hitherto a restricted entry
for Co-operatives. Realization to inculcate a strong foundation
of good governance culture among Co-Operatives Societies.
Initially and or upto next 5 years is susceptible. It is doubtful that
that Office-bearers of Co-Operatives Societies will be able to
do justice due to the following :

a) Majority/ or all office-bearers are only in Hon. capacity & who

generally at the most could spend their Saturday/Sunday or
evening hours on weekends towards Society admin work.

b) Majority of Members not skilled enough to be aware of intricacies

of Market Risks or may become vulnerable to Agents.

c) Conflict of interests.
d) Admin part is records to be maintained ,Investment decision
making process, Investment Committee in place etc.
 Notification no: 1124 dated 21-April-2017 by MINISTRY OF
FINANCE (Department of Economic Affairs) states :
In pursuance of section 20 of the Indian Trusts Act, 1882 (2 of
1882), the Central Government hereby specifies the following
securities for the purposes of the said section, namely:—
(a) Government securities;
(b) securities, the principal whereof and the interest whereon is
fully and unconditionally guaranteed by the Central Government
or any State Government;
(c) units of debt mutual funds regulated by the Securities and
Exchange Board of India established by section 3 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
 Eligible Investments

(d) listed (or proposed to be listed on exchanges in case of fresh issue)

debt securities issued by any body corporate, including a bank and a
public financial institution as defined in clause (72) of Section 2 of the
Companies Act, 2013 (18 of 2013), which have a minimum residual
maturity period of three years from the date of investment;

(e) Basel III Tier-I bonds issued by a scheduled commercial bank under
guidelines issued by the Reserve Bank of India, which are either listed
or are proposed to be listed on an exchange;
Eligible Investments

(f) the infrastructure related debt instruments listed or

proposed to be listed in case of fresh issue:—

(i) debt securities issued by a body corporate engaged mainly

in the business of development or operation and
maintenance of infrastructure, or development,
construction or finance of low cost housing;
(ii) securities issued by an infrastructure debt fund operating
as a non-banking financial company and regulated by the
Reserve Bank of India; or
(iii) units issued by an infrastructure Debt Fund operating as a
Mutual Fund and regulated by the Securities and Exchange
Board of India;
Eligible Investments :
(g) shares of body corporates listed on any recognised stock
exchange which has a market capitalisation of not less than five
thousand crore rupees as on the date of investment;

(h) units of mutual funds regulated by the Securities and

Exchange Board of India, which have minimum sixty-five per
cent of their investment in shares of body corporates listed on a
recognized stock exchanges; or
(i) exchange traded funds or index funds regulated by the
Securities and Exchange Board of India which replicate the
portfolio of the Bombay Stock Exchange Sensex Index or the
National Stock Exchange Nifty Index, or those constructed
specifically for disinvestment of shareholding of the Government
of India in a body corporate:
SCOPES CONTD.

 Eligible Investments
 Provided that the investment under clauses (d), (e) and (f)
shall be made only in such securities which have minimum AA
rating or equivalent in the applicable rating scale from at least
two credit rating agencies registered with the Securities and
Exchange Board of India under the Securities and Exchange
Board of India (Credit Rating Agency) Regulations, 1999:
 Provided further that in case of investment under sub-
clause (ii) of clause (f), the ratings shall relate to the non-
banking financial company and for that sub-clause, the ratings
shall relate to the investment in eligible securities rated above
investment grade of the scheme of the fund:
 Provided also that if the securities or entities have been
rated by more than two rating agencies, the two lowest of all
the ratings shall be considered.
Investment in Shares
 The amendment also allows the cooperative housing
societies to invest in shares listed either on Bombay
Stock Exchange or National Stock Exchange of such
companies whose market capitalisation is not less than
Rs 5,000crores.

 This is going to activate some of M.C. Members ,

whether the Company’s whose shares they propose to
buy, has market capitalisation not less than
Rs 5000crores. And Auditors to report if subsequent
market capitalisation. They may form Investment
committee for speedy decisions with approvals.
 PL. NOTE THAT RATING CRITERIA IS NOT APPLICABLE IN EQUITY
Issues:starts with Demat.

Demat : Opening, Operating Demat Account as also

implementation of decisions through Demat.

Rating : While Investing not less than AA rating is a requisite.

Whether Rating by one agency or two Agencies as lower
one is to be taken, when rated by 2 agencies.
Monitoring subsequent to rating is of equal significance.
And it is an on going activity to take a call, whether to
retain or exit.
Downward migration records need to be maintained
as it affects provisioning.
Issues : on Investments Demat

>Valuation : NAV for MFs. But for other Securities

whether MTM (Mark to Market), Last day Closing Value,
Average Cost etc.

>Market Capitalization : When Market Capitalization falls below

Rs.5000crs.

>Provision : Depreciation in Value of Investments.

>Accounting for Valuation, Provisioning, losses, Classification as NPI

and most important is frequency thereof.
>Taxation & Accounting for Taxation is another issues. All these will
increase Auditors responsibility (but fee may not!!).
THANK YOU