Cooperatives incorporated

Amendment aims to free them from registrar’s stranglehold

Kumkum Sen

In 1993 and 1997, two bills were introduced in Parliament for amending the Companies Act, 1956. Some provisions have now been covered in the Companies (Amendment) Act, 2000. In the meantime, various ad hoc amendments have been effected through ordinances, creating loopholes in an already unwieldy piece of legislation. In 2001, two more Amendment Bills were introduced. The first, based on the Eradi committee report, is essentially aimed at replacing SICA, the Company Law Board and the high courts in their respective exercise of company jurisdiction.

The Second Amendment Bill is an attempt in experimenting with grafting of cooperative principles on company law, based on the Alagh committee report. From a credit pool, cooperative movements have expanded their areas and scope of activities beyond narrow local limits, ultimately occasioning the introduction of the Multi State Cooperative Societies Act, 1984, in addition to the various state enactments. The purpose of this 1984 Act was to regulate the operation of cooperatives — at an inter-state or national level — in areas such as banking, housing, agriculture, forestry, animal husbandry etc. The 1984 Act provides for cooperative charters, amalgamation and demergers, exercise of voting rights, transfer of shares, holding of general meetings, office of a chief executive, payment of dividends — all the concomitants of a corporate structure.

The intent and purpose of the Second Amendment Bill has to be viewed against the provisions of the 1984 Act. The first impression is that it is an unnecessary duplication of legislation. The concept of a cooperative which is introduced in the Second Amendment Bill is to be interpreted within the meaning of the definition in Section 3 of the 1984 Act. The management of a “producer company” under the new Amendment Bill is by a board of directors. Chapter 14 of the 1984 Act also deals with management of cooperatives by a board of directors, its functions, disqualification of directors, mode of appointment and removal, which are virtually analogous to Section 581 O to 581 Z of the Amendment Bill.

Under the 1984 Act, societies are required to hold annual meetings of the general body for consideration of audit report and annual report, for disposal of net profit, election of the members of the board, and the usual business which is transacted by the organisation. Similar clauses are provided in the Bill worded in more up-to-date corporate jargon, with some new concepts such as patronage and patronage bonus. The amalgamation procedure under the Amendment Bill is identical and the provisions of Section 391 and 394 of the Companies Act are not applicable.

It is pertinent to note that the amended Bill is intended to provide a code within a code for the producer companies and is not intended to bring them fully within the fold of the Companies Act as it exists. The Amendment Bill does not envisage the public listing of the producer companies. Its essence appears to lie in emancipating cooperatives from the stranglehold of the central registrar of societies, under the 1984 Act and in the case of localised cooperatives, the state registrar.

The high court can interfere only in accordance with articles 226 and 227 of the Constitution. The registrar also has suo moto power to order the winding up of a society. Vesting such wide powers in a single authority makes societies vulnerable to the registrar’s whims and fancies. Under the Companies Act, on the other hand, there are separate adjudication and administration fora. The Company Law Board is a quasi-judicial tribunal and the Department of Company Affairs is a distinct administrative body. Concentration of all powers in one authority, as in the case of the registrar of societies, necessarily gives it an onerous character. The Amendment Bill, in contrast, provides for appointment of auditors, resolution of disputes in accordance with the Arbitration & Conciliation Act, 1996 and the label of a limited company under the framework of the Companies Act.

The Alagh committee, whose recommendations are based on responses from cooperatives, tries to offer the cooperatives a more flexible regulatory framework of the Companies Act. Obviously, a need has been felt within the cooperative system itself that the existing regulatory framework is insufficiently flexible. Could this not have been achieved within the framework of the existing legislation? Amendments could have been made to the 1984 Act and the other state acts instead of creating a further appendage to the cumbersome Companies Act, 1956.

The answer probably lies in the fact that making these changes in the existing legislation would have necessitated the creation of further infrastructure, something which a cash-strapped government can ill-afford. Finally the acquisition of a corporate label is also a clear sign of cooperatives having arrived. But let’s await the implementation in order to test its efficacy.

Kumkum Sen is a practising corporate lawyer, and a partner of Khaitan & Khaitan, a Delhi law firm