More options for housing societies

There are an estimated 70,000 cooperative housing societies (CHS) in Maharashtra, ranging from those with members in single digits to a few mammoth societies with hundreds of members. So far, these societies had limited choices to invest their long-term funds such as sinking funds and repair funds. A society's investment avenues are strictly governed by the Maharashtra Co-operative Societies Act, 1960. The Act provided that the society could invest either in any other good cooperative bank (as defined there) or in any of the securities specified in the Indian Trust Act (ITA), 1882. Turning to the ITA was like travelling through a time machine back to the British Raj days.

Until some time back the only practical options available under the ITA Act were central and state government securities. Besides the interest on government securities being taxable, purchasing government securities is administratively quite difficult. As a result, almost the entire investment from all the CHS in Maharashtra was in cooperative banks, which paid higher interest rates. Besides, the interest earned by the CHS from a cooperative bank is also eligible for deduction under Section 80P, making it tax-free for the CHS. If you assume a conservative Rs 1 crore per society, we are talking of a massive Rs 70,000 crore invested in cooperative banks throughout Maharashtra by CHS’s.

Unfortunately, a lot of this money lands up in the cooperative banks controlled by politicians. No wonder cooperative bank board elections are fought with as much fervour as local bodies' elections, if not more. Despite these risks, societies had very little choice but to keep their money in such cooperative banks.

Now, the central government has issued a notification under the ITA (dated April 21, 2017) which allows societies to invest in debt mutual funds, most equity and balanced mutual funds, listed bonds rated AA and above, even equity shares of companies if market capitalisation is more than Rs 5,000 crore, infrastructure securities, etc.

The more-aware housing societies are already shifting their investment to debt mutual funds and arbitrage mutual funds, which are quite safe and provide post-tax return equivalent to what they would get on deposit with a cooperative bank. As awareness levels increase, more managing committees will decide to shift their deposits from cooperative banks to these safer avenues which provide a competitive post-tax return. Some of the money would also shift to avenues with some element of equity in them (such as equity savings funds or balanced funds) which can generate much higher returns over the long term.

But on the flip side though it will also put pressure on all cooperative banks, including some of the well-run ones. In fact, the dependence of a cooperative bank on deposits from cooperative societies will add yet another significant risk factor that regulators will need to keep in mind while evaluating their health. Of course, it is a good opportunity for the mutual fund industry to add to its burgeoning kitty by getting cooperative housing societies as clients.

The author is a Sebi-registered fee-only  investment advisor