<b>Street Food: </b>Dealing with multi-purpose monsters

The society floated by Sahara employees had grown into a beast of massive proportions

One of the less discussed parts of the finance minister’s Budget speech was his proposal to amend the Multi State Cooperative Societies (MSCS) Act.

“There is an urgent need to protect the poor and gullible investors from another set of dubious schemes, operated by unscrupulous entities who exploit the regulatory gaps in the (MSCS) Act, 2002. We will amend this Act in consultation with various stakeholders, as part of our ‘Clean India’ agenda,” Jaitley said last week.

Away from public eyes, much seems to have been happening in the area. My own tryst with this department, tucked away under the ministry of agriculture, came with this story over five years earlier (https://www.business-standard.com/article/companies/sahara-takes-co-op-route-to-beat-sebi-rbi-bans-111042600066_1.html).

Over the next three years, this society floated by Sahara employees had grown into a beast of massive proportions (Rs 36,000 crore). Have a look at https://www.business-standard.com/article/markets/a-new-beast-and-some-old-questions-115012600812_1.html.

Yet, not much was known about the sector, as the ministry was busy with other things. This part has now been addressed, with a very good, dedicated, portal put up by the ministry for MSCS.

Let us see some numbers. There were 1,269 registered MSCS in the country as of October. Of these, 792 or close to two-thirds were registered 2012 onwards. If one adds the 95 registered in 2011, the number swells to 887. It seems the Sahara move to the sector in 2011 opened the eyes of many, triggering a boom. In only three years — 2012, 2013 and 2014 — there were 691 registrations.

In terms of sectors, 493 of these societies deal with credit. Which suggests a number of them could be spurious, peddling deposit and investment schemes to their members. Agro (223), housing (136) and dairy (95) are other popular sectors. About a 100 societies are multi-purpose.

Like many financial innovations of a spurious kind, Maharashtra leads the way with 567 such societies. Followed by Delhi (145) and Uttar Pradesh (137). Tamil Nadu and Rajasthan also had a high two-digit population.

Based on observations made by the Reserve Bank of India, the Central Registrar of Cooperative Societies on March 26, 2014, instructed these societies to discontinue accepting deposits from nominal members. This and restrictions on registration such as no-objection certificates from state registrars brought down the numbers. In 2015, 83 societies were registered, followed by 19 in 2016.

Further, in a notification in August, the ministry has further tightened rules under the Act to better identify and verify the credentials and record of the chief promoter and promoters of MSCS which have 'credit' or 'multipurpose' as their objective. It has also restricted the number of states such credit and multi-purpose societies may operate initially to two.

Yet, the mess in the registrations that have already happened seems to need some cleaning. News reports over the past couple of years have talked about several unscrupulous money raising schemes having floated such societies and having thriving operations, in Odisha and Jharkhand, beside other northern states, where penetration of the formal financial sector is not that great.

One major issue needs compliance. The ministry of statistics showed only a fraction of these societies file their annual returns. Just about a fifth of these (258) filed their annual return for 2015-16. The previous year was slightly better, at 330. The website shows several societies have got notices for not doing so.

And, a cursory look into some of the returns filed by the credit societies show some of these have hundreds of thousands of subscribers and are dealing in hundreds of crores of loans and deposits. Such entities cannot get away without proper supervision and scrutiny by a competent regulator. One hopes the government acts fast on these amendments.