Amendments to the Indian Trusts Act, 1882 have opened doors for co-operative societies in Maharashtra (including housing societies) to invest in mutual funds. There are large numbers of housing societies in cities like Mumbai, Pune and Nagpur which could hitherto only park their money in co-operative banks or other co-operative societies.
What type of funds can Co-operative Societies invest in?
A notification issued by the Department of Economic Affairs on 22nd April 2017 specifies the following list of eligible securities:
Government Securities or those guaranteed by the Government
Debt Mutual Funds
Listed debt securities with a residual maturity of three years or more; Basel III, Tier I bonds issued by scheduled commercial banks and infrastructure related debt securities. However, these must be rated AA and above by at least two rating agencies.
Shares of companies with a market capitalisation greater than Rs 5,000 crore
Equity Mutual Funds (those investing at least 65% of their assets in equities)
You can find the original text of the notification here.
The Legal Structure
Co-operative societies in Maharashtra, including co-operative housing societies, are popularly known as ‘CHS.’ They are governed by the Maharashtra Co-operative Societies Act, 1960. Section 70 of this Act specifies the list of securities that a co-operative society may invest in which earlier included central and state co-operative banks and other co-operative societies. The section also permitted investment in the securities specified under Section 20 of the Indian Trusts Act, 1882.
Prior to the 2016 amendment, the Trusts Act specified mostly obsolete and incongruous investments such as ‘promissory notes, debentures, stock or other securities of any State Government, Central Government or of the United Kingdom of Great Britain and Ireland.’ The 2016 Act replaced this out-dated section with ‘securities or class of securities expressly authorised by the instrument of trust or as specified by the Central Government, by notification in the Official Gazette.’
The Central Government issued a notification specifying the list of eligible securities on 22nd April, the details of which you can find above.
Implications of the change
Co-operative societies are not likely to rush into equity or debt mutual funds. These bodies tend to be conservative and their governing bodies are wary of lawsuits or accusations of mismanagement of money. Mutual funds by definition are subject to market risks, leaving governing committees vulnerable to these types of accusations. However, it is possible these institutions will gradually enter mutual funds as their members grow more conscious of the risks and rewards of mutual fund investments.