Various Laws Applicable to Co-op. Societies
1) The Maharashtra Co-op. Societies Act, 1960 (MCS Act) – having 167 sections effective from 26/1/1962 and The Maharashtra Co-op. Societies Rules, 1961 – having 110 rules effective from 23/12/1963.
The Co-operative Societies Act and Rules of the respective state in which the society is registered (Bihar-1935, Orissa-1935, Assam-1950, Karnataka-1959, Madhya Pradesh-1961, Tamil Nadu-1961, Gujarat-1962, Andhra Pradesh-1964, Rajasthan-1965, Kerala-1969, Himachal Pradesh-1971, Delhi-1972, West Bengal-1973).
The Co-operative Societies Act, 1912 and Rules
The Multi-State Co-op. Societies Act, 2002 and Rules (applicable to all societies whose objects are not confined to one state).
2) The Income Tax Act, 1961 and Rules.
3) The Service Tax Act and Rules
4) The Bombay Stamp Act
The Indian Stamp Act
5) The Indian Contract Act 1872, Transfer of Property Act 1882 & Sale of Goods Act 1930.
6) Law of Limitation.
7) Circulars, Notifications and directives issued from time to time by the respective departments of co-operation.
8 ) Byelaws of the Society.
9) Accounting Standards – Policies & Guidelines.
Types of Audit
- Statutory audit u/s.81(1)
- Cost or Performance audit u/s. 81(2A)
- Flying Squad audit u/s. 81(3)(b)
- Test audit u/s. 81(3)(c)
- Re-audit u/s. 81(3)(c)
- Internal audit
- Stock & Book Debt audit (provided under NPA norms)
- Revenue / Concurrent audit
Specific Features of Audit
Note: [All sections / rules stated hereinbelow pertain to MCS Act and rules unless otherwise stated].
Chapter VIII of the MCS Act and Chapter VII of the MCS Rules deal with Audit, Inquiry, Inspection and Supervision.
1) Appointment and Fees
- Sec.81(1)(a) – Certain societies to be audited by the Registrar’s auditors.
- Sec.81(1)(b) – Other societies to get accounts audited from panel of auditors maintained by the Registrar or by a C.A. holding certificate in co-operative audit issued by ICAI.
- Rule 69(1) – Audit to be conducted by Departmental Auditors or by Certified Auditors which includes Chartered Accountants, certain diploma holders and ex-staff of co-op. department.
- Under Sec. 72(1) of the Multi State Co-op. Societies Act, only Chartered Accountants can be appointed as Auditors.
- Appointment is done by the Registrar or on behalf of the Registrar and report has to be submitted to the Registrar.
- Rule 74 – The scale of fees which are fixed by the Registrar (Order No. CC/ADT/Scale of Fees of 92 dt. 15th May, 1992). The scale of fees which are fixed by the Registrar are calculated based on working capital, which is defined as “funds at the disposal of the society including its paid up share capital”. It is different from the normal concept of working capital.
- Under Sec. 70(9) of Multi-State Co-op. Societies, fees decided by the Registrar / Society
2) Rights, Duties and Reporting
- Sec. 81 and Rule 69 outline rights and duties of Auditor and report to be submitted by him.
- Sec. 81(5) – Auditor has right to receive notice of and attend Annual General Meeting.
- Rule 69(2) – Audit to be conducted for all the previous completed years for which the audit has not been done (provided no Auditor appointed or Auditor has resigned).
- Sec. 81(5B) & Rule 69(3) – Besides audit report, Auditor to submit Audit Memorandum in the prescribed format. Form 1 is a general format for all types of audit. In addition, separate formats prescribed for each type of society (Form __ for Credit Society, Form 27 for housing society, etc.)
- Rule 69(7) – Summary of Audit Memorandum prepared by the Auditors required to be read in general meeting.
- Rule 69(9) – Statutory Auditor to award audit classification (A, B, C, D) to Society based on certain criteria. For this purpose, dept. has issued certain guidelines (Cir.No.CC/ADT/A/UGB/A.B/ of 1992 dt. 29th July,1992) followed by Circular No. CC/ADT/A/ACB/AC/15/2005 dated 7th January 2005 issued by Honorable Commissioner of Co-operation of Maharashtra.
3) Books / Registers required to be maintained [in addition to regular books of accounts]
Sec.79 & Rule 65 :
- Register of Members (Form ‘I’) – Sec. 38, Rule 32
- List of Members in Form ‘J’ – Sec.39, Rule 33
- Register of shares
- Register of debentures and bonds.
- Minute books of general meetings and board meetings.
- Surety Register.
- Register of audit objections and rectifications in Form ‘O’ – Rule 73
4) Audit of Statement of Accounts
- Rule 61 – Annual statement of accounts to be prepared within 45 days of the close of the co-op. year.
- Rule 62 – The Balance Sheet and Profit & Loss Account has to be prepared in Form ‘N’ by all the societies.
- During 1st audit, the Registration Certificate with the common seal has to be verified.
- Sec.45 – Restriction on transactions of a society with non-members.
- All appropriations are entered into the books of accounts after it is approved by AGM Sec.65.
- Sec.67 – A maximum dividend of 15% can be given (Additional dividend with Registrar’s approval). Under the Multi-State Act, dividend is to be paid as specified in the Byelaws [Rule 24(2)].
- Rule 107-B – Security to be furnished by officers and employees handling cash.
- Sec. 110 – On liquidation, the balance may be divided amongst members or utilised for objects of the society.
- The Balance Sheet formats of a co-operative institution and commercial banks are quite different.
- In a co-op. institution, loan, other assets etc. are all shown at gross figures and the overdues, NPA provisions, provision for other doubtful assets are reflected on the credit side.
(i) Membership, Share Capital & Voting :
· Under this head, “individuals’ means share capital of all excluding co-operative institutions and State Government. Under Sec.22, a firm, a public trust, a local authority, a society or any body corporate can become member. Sec.25 of Multi-State Act permits any person competent to contract to become a member.
· Sec.28 – Besides verifying the books stated hereinbefore, Auditor has to ensure that no member holds shares exceeding 1/5 of the share capital of the Society or Rs.20,000/- whichever is less. Under Sec. 33 of the Multistate Act, it is as per the limit provided in the Byelaws, subject to a ceiling of 1/5 of the share capital.
· Rule 20 - Shares can be issued in joint names. Minors and persons of unsound mind, inheriting the share of a deceased member, can also be admitted as member through their legal representatives or guardians.
· Sec.29(2)(a) – A member cannot transfer his shares until he has held it for one year.
· Sec.30, Rule 25 – Nomination is permitted, including nomination of a minor or a person of unsound mind.
· Sec.29 – Society allowed to buy back its shares from its members on their resignation etc., upto a maximum of 10% of the paid-up share capital every year.
· Rule 23 – Amount to be paid back is based on the valuation of his share, which in no case can exceed the amount paid for the purchase of those shares.
· Sec.27 – There is a principle of “One Man One Vote”.
· Sec.27 – During meetings, no proxies are allowed except the ones that are specifically allowed by the Registrar.
· Rule 21 – A member can resign by giving 3 month’s notice.
· Sec.35, Rule 28 – A member can be expelled from society by a resolution passed by not less than ¾ of members, which may also involve forfeiture of his shares.
(ii) Reserve Fund & Other Reserves :
(a) Statutory Reserves :
- Sec.66 – Atleast 1/4 of the net profits to be transferred to Reserve Fund. Registrar has power to reduce it upto 1/10 only. As per this section, subject to the rules and byelaws, the Fund can be used in the business of the society.
- Rule 54 – Reserve Fund in excess of the paid up share capital only can be used in the business with the permission of the Registrar.·
- Reserve Fund has to be invested in modes specified in Sec.70 read with Rule 54.
- Rule 54(2) – These funds which are invested, cannot be drawn upon, pledged or used except with the prior written permission of the Registrar.
(b) Dividend Equalisation Fund :
Rule 52(3) – A society may create Dividend Equalisation Fund and credit to it a maximum of 2% of the paid up share capital in any year until the fund amounts to 9% of paid up share capital. The society may draw upon the fund in any year only when it is unable to maintain a uniform rate of dividend it has been paying during the last preceding 5 years or more.
(c) Bad & Doubtful Debt Reserve :
Rule 49 – Bad debts have first to be written off against this fund before being written off against Reserve Fund and Share Capital.
(d) Investment Fluctuation Fund (Investment Depreciation Reserve):
Rule 55(3) – Investment Fluctuation Fund to be created to cover anticipated loss that may arise on disposal of investments held by the society, if not less than 10% of the working capital is invested in securities. This amount is a charge on Profit & Loss Account as per Rule 51(ii).
(e) Bonus Equalisation Fund
Rule 52(1) – A fund created for payment of bonus to persons other than its paid employees, who are not its members.
(f) Education Fund of State Federal Society:
Sec.68 – A fund created out of annual contributions given by societies to State Federal Society at the rates specified in Rule 53. For Maharashtra, the federal society is Maharashtra Rajya Sahakari Sangh Ltd., Pune, which utilises this amount for education and training in co-operation. This amount is payable irrespective of whether the society earns a profit or not and whether a society has declared a dividend or not. The amount has to be paid within 3 months after the close of co-operative year.
(g) Sinking Fund / Guarantee Fund
Rule 51(I) – A fund created to ensure due fulfilment of guarantee given by Government in respect of loans raised by the society.
(h) Share Capital Redemption Fund
Rule 51(iii) – A fund created for redemption of share capital contributed by government or a federal society.
(i) Additional Funds (Optional)
Special Reserve Fund, Building Fund, Members Welfare Fund, Staff Welfare Fund, Charity Fund etc. – For all these funds, rules have to be framed for its formation, additions and use.
(iii) Deposits and Other Accounts :
· Under this head, deposits from “Individuals” means all deposits excluding those from central co-operative banks and other societies.
(iv) Borrowings :
· Sec.43 – In case of a society, which has taken any financial assistance from the Government in the form of share capital, loan or guarantee, the amount such society can receive as deposits and loans from its members and other persons is subject to restrictions laid down in Rule 35 and in its byelaws. There are also restrictions on the society for acceptance of deposits from trust, local bodies etc.
· Rule 35 – A society without the previous sanction of the Registrar cannot incur liability exceeding in total ten times the total amount of its paid up share capital, accumulated reserve fund and building fund minus accumulated losses. Any excess liability incurred is to be deposited with Central Banks and not used in business of society.
· Rule 46A – Restrictions on borrowings from non-members.
· Rule 107C – Maximum cash holding limits prescribed for certain societies. Excess cash has to be deposited in an approved bank within 3 days. No limits prescribed for Co-op. Credit Societies, but for housing societies, it is Rs.300/-.
(ii) Balance with Other Banks :
· Permission required to open bank accounts with other scheduled banks.
(iii) Investments :
· Investment of funds to be done only in modes specified in Sec.70 of the MCS Act, read with Rule 55.
(iv) Advances :
· Sec.44 – Credit Society cannot give loans to or accept guarantees of persons other than its members. However, it can lend to non-members against their deposits.
· Sec.44 – Loan against own shares not allowed. (Also Sec.20(1)(a) of B. R. Act).
· Rule 41 – Only specified portion of working capital can be used for lending.
· Rule 42 – Various regulations in respect of loans granted by society
· Rule 43 - A member applying for loan has to hold requisite number of shares.
· Rule 45 – Restrictions on members to borrow from more than one credit society.
· Rule 45A – Loan against pledge of FDR not to exceed 90% of the deposit amount and period of loan not to exceed beyond maturity date of the deposit. If the borrower does not repay the loan, principal and interest due can be adjusted against the deposit.
· Rule 46 – Managing Comm. authorised to recall loans after giving one week’s notice.
· Loans were allowed to be given to directors, committee members and their relatives. However, w.e.f. 1st October, 2003, fresh advances to these persons prohibited by RBI, while old advances to be recovered when due and not to be renewed (Circulars dt. Apr. 29, 2003 and June 24, 2003). Further, they are not allowed to stand as surety / guarantors (UBD.PCB.Cir.10/13.05.00/04-05 dt. Aug. 7, 2004). This however does not apply to employee related loans given (RBI/2005-06/175 – UBD.PCB.Cir.No.14/13.05.000/05-06 dt. Oct. 6, 2005)
· The law of limitation does not apply to the loan documents executed by a borrower, as long as he continues to be a member of the co-operative sector.
(v) Fixed Assets :
No specific provision for depreciation and its rates under the Act. However, Sec.65(1), read with Rule 49A under point (vi) states that for calculating net profit, depreciation has to be deducted from gross profit.
Income Recognition & Asset Classification – (for Co-op. Credit Societies)
· Norms prescribed by department of co-operation for Income Recognition and Asset Classification i.e. Non-Performing Assets (NPA) – Applicable from 31st March, 2005 – Circular dt. 10th November, 2004 – subsequently made applicable from 31st March, 2006 and modified from time to time. The present norms are as follows:
· Income Recognition for F.Y. 2007-08 & 2008-09
§ For F.Ys. 2007-08 & 2008-09, Account considered as NPA, if interest due for 3 quarters (9 months) is not actually received (proposed to be reduced to 2 quarters [6 months] for F.Y. 2009-10 and 1 quarter [3 months] from F.Y. 2010-11 onwards)
§ Reversal of accrued interest on account becoming NPA.
§ Thereafter, all interest to be accounted on receipt basis and not accrual basis.
· Asset Classification & Provision for F.Ys. 2007-08 & 2008-09
Performing (Standard) Asset
(Overdue upto 9 months)
(proposed to be reduced to 2 quarters [6 months] for F.Y. 2009-10 onwards & 1 quarter [3 months] from F.Y.2010-11 onwards)
Non-Performing Asset (NPA) (Overdue > 9 mths)
(proposed to be reduced to 2 quarters [6 months] for F.Y. 2009-10 onwards & 1 quarter [3 months] from F.Y.2010-11 onwards)
(NPA upto 12 months)
(NPA > 12 months)
10 / 15 / 20% for secured doubtful O/s upto 2 years/ 2-3 years / > 3 years resp.
50% for unsecured doubtful advances
(No chance of recovery)
Note: NPA provision for small loans upto Rs.10,000/- per borrower need not be provided.
§ NPA accounts considered borrowerwise and not facilitywise.
§ Advances against Term deposit receipts, National Saving Certificates, Indira Vikas Patra and Kisan Vikas Patra exempted from norms for Asset Classification, provided adequate margin available (It implies that advances agst. gold ornaments, insurance policies, govt. & other securities not exempted)
§ Above norms are minimum prescribed. Additional provision can be made on case by case basis.
§ In consortium advance, record of recovery at Society being audited only to be considered.
§ Accounts regularised with a few credits around the Balance Sheet date need to be carefully looked into (source of the credit, genuine entries, additional facilities granted in some other account etc.)
§ For all accounts classified as ‘Doubtful’, it is very essential to determine the existence and the present value of the primary and collateral securities through valuation – property valuation (once in 2 years), inspection (periodical), monthly stock statements for stocks hypothecated and depreciation @ 10-15% on plant and machinery.
§ Suit filed accounts to be classified as doubtful, unless there is a strong justification to show it is Sub-standard.
§ Make specific note and report of accounts which appear to be sticky but are not yet classified as sub-standard / doubtful.
· Upgradation of Accounts
§ Reschedulement of recovery cannot give the advance a better classification than the previous one
§ NPA accounts can be upgraded to Performing Accounts,provided all overdues adjusted
§ Upgradation within the NPA category not permitted (Eg. a Doubtful account cannot be made Sub-standard even if the overdues are reduced to less than 24 months)
Write-Off of Bad Debts
· Rule 49 – Any asset that has to be written off – 4 stages for write-off.
i) Recommended by Board.
ii) Certified by Auditor.
iii) Sanction by general body
iv) Approval by Registrar.
However, in case of societies classified as A or B at the time of last audit, Registrar’s approval is not required, if the bad debts are written off against Bad Debt fund.
Profit & Loss Account
· Sec.65 – Net Profits to be determined after deducting exps. as provided in Rule 49-A.
· As per Accounting Standards, mercantile system of accounting to be followed, but Act is silent on this aspect. However reading Rule 49A regarding depreciation, various provisions for income tax, bad and doubtful debts, investment fluctuation, retirement benefits etc., Form ‘N’ of MCS Rules and Form ‘A’ & ‘B’ of B.R. Act, it implies that accounts have to be maintained on mercantile basis.
· Sec.65 – In Profit & Loss Account, provision for Dividend Equalisation Fund and Share Capital Redemption Fund are to be made. These are considered as charges on Profit & Loss Account (Under the normal accounting principles, these would be appropriations from Profit & Loss Account).
· Sec.71A – Funds not to be utilised for certain proceedings filed or taken by or against officer in personal capacity.
· Rule 107-A – Maximum rates of travelling and daily allowance and sitting fees for committee members.
· Sec.68 – Compulsory provision for payment of Education Fund to State Federal Society to be made, which is a charge on Profit & Loss Account and has to be paid within 3 months after the close of the co-operative year (Rates given in Rule 53).
Sec.82, Rule 73 – Within 3 months from the date of the statutory audit report, the society has to submit a Rectification Report in Form ‘O’.