Rejuvenate cooperatives for economic recovery

Cooperatives hold promise for collectivization and formalization of the informal economy.

The importance of cooperatives in supporting microenterprises and the resulting economic growth can hardly be overstated.

The idea of ​​cooperation to survive and thrive is intuitive and ingrained within us. We grew up with sayings like how two people with cast hands can feed each other or how a lame man and a blind man can travel together.

After companies governed by the Companies Act, cooperatives – with the mutual benefit of the members within them – have the second highest contribution to the national economy.

A cooperative is a legal entity owned and democratically controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employees. Membership is open so that anyone meeting certain non-discriminatory conditions can register. Cooperatives are formed by groups of workers, consumers, farmers, producers or owners. We also have super-cooperatives formed by cooperatives as members.

New generation cooperatives are the adaptation of traditional cooperative structures to modern capital-intensive industries, a hybrid between traditional cooperatives and limited liability companies or non-profit companies or agricultural producer companies under the Companies Act.

The cooperative movement influenced leaders during the struggle for freedom in India as they considered what policy instruments to use for the benefit of the common man. As the economy was then mainly agrarian, the cooperatives joined forces with agriculture.

Two recent developments will have a major impact on the cooperative movement in India.

The first is a significant reengineering of the government by transferring the work of cooperative societies from the Ministry of Agriculture to a newly created Ministry of Cooperation.

Second, the start of Supreme Court hearings on the validity of the 97th Constitutional Amendment (2012) which limited the power of states to regulate cooperative societies.

The cooperative movement made significant milestones in 1904 with the enactment of the Agricultural Credit Cooperative Societies Act and the registration of the first urban cooperative credit society in Kanjivaram. Another important step was the Cooperative Societies Act of 1912. Under the Montague-Chelmsford reforms of 1919, provincial assemblies were authorized to legislate on cooperatives.

Under the Constitution, the subject of “cooperative societies” falls within the exclusive legislative and executive competence of States.

Societies with membership and scope of business spanning more than one state – multi-state cooperative societies (MSCS) – are governed by a special central law promulgated in 1942 and revised in 1984 and 2002 (MSCS Act 2002). . A senior official from the Ministry of Agriculture is given the role / responsibility of Central Registrar of MSCS to regulate governance of MSCS.

The 97th Constitutional Amendment of 2011 made the right to form cooperative societies a fundamental right (Article 19) and included a new guiding principle of state policy on the promotion of cooperative societies (Article 43-B).

However, the controversial part of this amendment was the insertion of a new Part IX-B in the Constitution which contained specific provisions on how cooperative societies should be regulated. In 2013, the High Court of Gujarat quashed this inserted part, declaring that this part of the amendment was not valid without the ratification of at least half of the states, as it infringed on the power of states to regulate cooperatives. The Supreme Court is currently hearing an appeal challenging this High Court order.

We have some great examples of successful collectivization of ordinary people into successful business organizations. The best known is AMUL, born in 1946, Anand Milk Federation Union Limited, one of the most valuable local AMULYA / brands created by India, symbolized by the adorable daughter Utterly Butterly Amul. AMUL is a three-tier structure with village-level dairy cooperative societies forming a cooperative – district-level dairy union – which form another state-level super cooperative. The pioneering contribution of Dr Verghese Kurien in building this great institution and launching the white revolution in India was immortalized in the film directed by Shyam Benegal Manthan.

Indian Farmers Fertilizer Cooperative (IFFCO) is a super cooperative with over 30,000 member cooperatives.

As industrial capitalism spread throughout the 19th century, workers formed cooperative societies to deal with widespread debt and dependency and to expand community life amidst social fragmentation and growing individualism.

In 1844, the Rochdale pioneers founded the modern cooperative movement in Lancashire, England to provide an affordable alternative to poor quality and falsified food and provisions using the surpluses for the benefit of the community. Since then, the cooperative movement has flourished across the world covering all sectors of the economy. The International Cooperative Alliance was founded in London on August 19, 1895.

One of the recent crises in the cooperative sector has been the bankruptcy of the Punjab & Maharashtra Co-operative Bank (PMC), a multi-state urban cooperative bank.

Many cooperative societies also carry out banking activities as “cooperative banks” and are regulated by the Reserve Bank of India. The failure of the Punjab and Maharashtra (PMC) Bank – an MSCS under dual regulation by the RBI and the Central Registrar of the Ministry of Agriculture – highlighted the regulatory weaknesses of cooperative banks. The Center thus has an active role in the regulation and management of governance issues in MSCS cooperative banks.

On September 24, 2019, RBI stepped in to impose a moratorium / restriction on withdrawals and appointed an administrator. At that time, PMC Bank had deposits of Rs 11,600 crore with 137 branches in seven states, although it started in 1984 as a local one-branch bank in Mumbai by a group of businessmen. A resolution plan under the Insolvency and Bankruptcy Code has recently been approved.

The last time a large cooperative bank went bankrupt was Madhavpura Mercantile Cooperative Bank in Gujarat, which loaned 90 percent of its deposits to broker Ketan Parekh who could barely return anything afterwards. the 2001 stock market crash.

Co-operative banks owe their origin to co-operative credit societies where members of a community generally familiar with one another come together to create a pool of funds from which temporary loans can be drawn by needy members. This avoids chasing after bank loans, pledging real estate and financial guarantees and going through elaborate contracts.

As long as the membership is limited and they behave honorably, such an arrangement is a good source of credit. The problems start when they expand their operations to start accepting deposits from strangers and may even lend to strangers, either directly or through dishonest members.

Unlike commercial banks, which are limited liability companies, UCBs are organized as cooperative societies whose members are indefinitely responsible. All cooperative societies are regulated by state governments under the respective Cooperative Societies Act.

Unlike commercial banks, UCBs are only partially regulated by the RBI. While their banking operations are regulated by the RBI, which sets their standards for capital adequacy, risk control and lending, their management matters are regulated by the Registrar of Cooperative Societies (State if its operations are confined to the state) or by the central registrar (if it is a multi-state corporation.)

The Enron scandal (October 2001) ultimately led not only to the bankruptcy of Enron Corporation, but also to the de facto dissolution of Arthur Andersen, which was one of the five largest auditing and accounting partnerships in the world. . The Enron bankruptcy was the biggest bankruptcy in American history and the biggest audit failure (at this time or all time? No one knows). In recent years, the special interventions required to save ILFS and Yes Bank have highlighted audit failures.

Poor corporate governance, lack of transparency, erroneous / misleading reports, failing to follow up on reports received; withholding information from auditors and the board of directors; there are so many avenues through which wrongdoing can sneak up. In addition, the justice delivery system is failing. The witness protection system is broken. The cases related to the stock market scams of 1992 (Harshad Mehta) or 2001 (Ketan Parekh) have still not been concluded.

Cooperatives hold promise for collectivization and formalization of the informal economy. Besides AMUL, we have another successful model to mention.

Kanan Devan Hills Plantations Company is the first employee-owned plantation company in India that took over the Tata Tea estate at Nilgiri Hills in Munnar (Kerala) in 2005. It emerged from the Kanan Devan Planters Association established in 1888 to unite tea planters. Models like AMUL and KDHPC are to be replicated across India.

The cooperative can help distressed sections of distressed informal economic agents such as marginal small farmers, street vendors, individual businesses, unorganized sector workers. As a business organization, cooperatives hold great promise but suffer from adequate regulation and supervision.

In this context, it is important that doubts about the constitutional validity of the 97th Constitutional Amendment are promptly resolved, that uniformity of cooperative laws between different states is ensured and that a certain minimum national level of corporate governance is ensured. be introduced in all cooperatives.

It should also facilitate the creation of more agricultural producer organizations to improve the terms of trade in favor of farmers by allowing them greater bargaining power and greater ability to set prices. on the open market.

The importance of cooperatives in supporting microenterprises and the resulting economic growth can hardly be overstated.

This note was originally posted by the author on his Facebook page.

About Charles D. Goolsby

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