Rejuvenating Cooperatives For Economic Revival

The idea of cooperation to survive and prosper is intuitive and hardwired in us. We have grown up on sayings like how two persons with plastered hands can feed each other or how a lame and a blind person can travel together.

After companies governed by Companies Act, the cooperatives – with mutual interest of members at their core - have the second highest contribution to the national economy.

A cooperative is a legal entity owned and democratically controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employees. Membership is open so anyone satisfying certain non-discriminatory conditions may join. Cooperatives are formed by groups of workers, consumers, farmers, producers, or house owners. We also have super-cooperatives formed by cooperatives as members.

New generation cooperatives are adaptation of traditional cooperative structures to modern, capital intensive industries, a hybrid between traditional co-ops and limited liability companies or not-for-profit companies or Farmer Producer Companies under the Companies Act.

The cooperative movement influenced leaders during India’s Freedom Struggle as they brainstormed over policy instruments to be used to benefit the common man. As the economy was then predominantly agrarian, the cooperatives got tagged with agriculture.

Two recent developments will a have major impact on the cooperative movement in India.

First is a significant reengineering of government by transfer of work of cooperative societies from the Agriculture Ministry to a newly created Ministry of Cooperation.

Second is the commencement of hearings in the Supreme Court on the validity of 97th Constitutional Amendment (2012) that limited the power of States to regulate cooperative societies.

Cooperative movement achieved major milestones in 1904 with enactment of Agricultural Credit Co-operative Societies Act and registration of first urban cooperative credit society in Kanjivaram. The Co-operative Societies Act, 1912 was another milestone. Under Montague-Chelmsford Reforms 1919, provincial assemblies were authorised to legislate on cooperatives.

Under the Constitution, the subject of ‘cooperative societies’ falls under the exclusive legislative and executive jurisdiction of States.

The societies whose membership and area of operation spreads over several States - Multi-State Co-operative Societies (MSCS) – are governed by a special Central law enacted in 1942 and revised in 1984 and 2002. (MSCS Act 2002). A senior officer of the Agriculture Ministry is assigned the role/responsibility of Central Registrar of MSCSs to regulate the governance of MSCSs.

The 97th Constitutional Amendment 2011 made the right to form cooperative societies a fundamental right (Article 19) and included a new Directive Principle of State Policy on promotion of cooperative societies (Article 43-B).

However, the controversial part of this Amendment was the insertion of a new Part IX-B in the Constitution which contained specific provisions about how cooperative societies should be regulated. In 2013, the Gujarat High Court struck down this inserted part saying that this part of Amendment was not valid without ratification by at least half of the States on account of it being an encroachment on States’ power to regulate cooperatives. Supreme Court is now hearing an appeal challenging this High Court order.

We have some prime examples of successful collectivisation of ordinary people into successful business organisations. Best known is the 1946-born AMUL –the Anand Milk Federation Union Limited, one of the most AMULYA/valuable homegrown brands India has created, symbolised by the adorable Utterly Butterly Amul girl. AMUL is a three-tiered structure with dairy cooperative societies at village level forming a coop - district level milk union – which form another super coop at State level. The pioneering contribution of Dr Verghese Kurien in building this great institution and ushering the White Revolution in India has been immortalised in the Shyam Benegal directed film Manthan.

Indian Farmers Fertiliser Cooperative (IFFCO) is a super cooperative having more than 30,000 member co-operatives.

As industrial capitalism spread during the nineteenth century, workers formed cooperative societies to deal with widespread debt and dependency and to expand community life in the context of increasing social fragmentation and individualism.

In 1844, Rochdale Pioneers founded the modern cooperative movement in Lancashire, England, to provide an affordable alternative to poor-quality and adulterated food and provisions using surplus to benefit the community. Since then, cooperative movement has flourished across the globe covering all sectors of economy. The International Cooperative Alliance was founded in London on 19 August 1895.

One of the recent crises in the cooperative sector has been the failure of the Punjab & Maharashtra Co-operative (PMC) Bank, a Multi-State Scheduled Urban Co-operative Bank.

Many cooperative societies are also engaged in banking business as ‘cooperative banks’ and are regulated by the Reserve Bank of India. The failure of the Punjab and Maharashtra (PMC) Bank - an MSCS under dual regulation of RBI and the Central Registrar in Agriculture Ministry – has put the spotlight on weaknesses in regulation of cooperative banks. Centre thus has an active role in regulating and managing governance problems in MSCS cooperative banks.

On 24 September 2019, RBI intervened to impose a moratorium/restriction on withdrawals and appointed an administrator. At that time, the PMC bank had deposits of Rs.11,600 crore having 137 branches across seven States though it had started in 1984 as a single branch local Mumbai bank by a group of businessmen. A Resolution Plan under Insolvency and Bankruptcy Code has recently been approved.

The last time a large cooperative bank went belly up was the case of the Madhavpura Mercantile Cooperative Bank in Gujarat, which had lent 90 percent of its deposits to broker Ketan Parekh who could barely return anything after the market crash of 2001.

The cooperative banks owe their origin to cooperative credit societies where members from a community generally familiar with each other come together to create a pool of funds from which temporary loans may be drawn by needy members. This saves the hassle of running after bank loans, pledging immovable properties and financial securities and going through elaborate contracting.

So long as the membership is limited and they behave honourably, such an arrangement is a good source of credit. Problems start when they expand operations to start accepting deposits from strangers and may be even lending to strangers, directly or through some dishonest members.

Unlike commercial banks, which are limited liability companies, UCBs are organised as cooperatives societies with members carrying unlimited liability. All the cooperative societies are regulated by State governments under the respective State cooperative societies Act.

Unlike commercial banks, UCBs are only partly regulated by the RBI. While their banking operations are regulated by the RBI, which lays down their capital adequacy, risk control and lending norms, their management issues are regulated by the Registrar of Co-operative Societies (of the State if its operations are confined to the State) or by the Central Registrar (in case it is a multi-State society.)

The Enron scandal ( October 2001) eventually led not just to the bankruptcy of the Enron Corporation, but also to the de-facto dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world. Enron’s was the largest bankruptcy in American history and the biggest audit failure (at that time or all-time? No one knows). In recent years, the special interventions required to salvage the ILFS and the Yes Bank have brought audit failures to the fore.

Poor corporate governance, lack of transparency, wrong/misleading reporting, not acting on reports received; withholding information from auditors and board of directors; there are so many avenues though which wrongdoing can slip through. On top of it, the justice delivery system is broken. Witness protection system is broken. The cases related to stock market scams of 1992 ( Harshad Mehta) or 2001 (Ketan Parekh) have still not reached final closure.

Cooperatives hold the promise of collectivisation and formalisation of informal economy. Besides AMUL, we have another successful model to cite.

Kanan Devan Hills Plantations Company is the first employee-owned plantation company in India which took over the Tata Tea estate at Nilgiri Hills in Munnar (Kerala) in 2005. It evolved from the Kanan Devan Planters Association created in1888 to unite the tea planters. Models like AMUL and KDHPC need to be replicated all over India.

Cooperative can help the pandemic-distressed sections of informal economic agents like the small and marginal farmers, street vendors, proprietorship ventures, unorganised sector workers. As a business organisation, coops are very promising but suffer from proper regulation and oversight.

In this background, it is important that the doubts on the Constitutional validity of the 97th Constitutional Amendment are cleared soon, uniformity in cooperative laws among different States is ensured and a certain national minimum level of corporate governance is introduced in all cooperatives.

This should also facilitate creation of more Farmers Producers Organizations to improve the terms of trade in favour of farmers by allowing them greater bargaining power and ability to set prices in open market.

The significance of cooperatives in supporting micro-enterprises and resultant economic growth can hardly be over-emphasised.

This note was originally published by the author on his Facebook page.