Re-Orienting The Legal Framework For Co-Operative Society Organisations

Deva Prasad M and Praveen S
2 Jun 2018 5:33 AM GMT
Re-Orienting The Legal Framework For Co-Operative Society Organisations
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Co-operative societies are formed in India as vehicles for the purpose of collective ownership of the business and commercial activities. The stakeholder responsibility could be best implemented using the co-operative model of organising business and commercial activities. But post- liberalisation of the market in India, company as a format has got maximum prominence. Of late, the new form of organising business Limited Liability Partnership also have got emphasis. A reality check towards the co-operative society sector, provides an understanding that the larger emphasis upon this model has slowly eroded. Companies act as a tool for shareholder profit maximisation and is important for society and economy. But in company form of doing business, profits are usually concentrated in handful of people. On the other hand, co-operatives provide an option for collective ownership as well as distribution of the profit.  The Agricultural co-operatives, credit co-operatives as well as workers co-operatives have been a popular mode of collectively owning and running a business. As far as co-operative societies are concerned, the purpose of running the business have been not always oriented on shareholder profit maximisation but rather oriented towards welfare of the stakeholders of the co-operative society.

The fragmented legislative framework could be seen as one of the important reason for the lack of co-operative society model to be adopted by business organisations. The co-operative legislative framework in India is not yet well evolved like the company law framework. Legislative framework regarding companies are revamped and revised consistently. Especially the corporate governance norms are quite strong due to the company law framework as well as the Securities and Exchange Board of India stipulations for public listed companies. The corporate governance norms regarding director’s responsibility as well as requirement of independent directors ensure that functioning of companies is well regulated. Moreover, the white-collar crimes and corporate fraud is also regulated strongly using the Companies Act, 2013. Similar development for the effective governance framework in the co-operative society organisations need to be evolved.

In case of co-operatives, the legal framework in India needs to be re-looked from the perspective of financing options. At present the co-operatives being funded by the contribution of the members would not be in a position to scale up its operation. This would be hindering the co-operatives from moving into sectors which require large capital investment. Moreover, the need for enabling legal framework encouraging them to scale into new forms of commercial venture is essential. Incentive structure from companies which are formed as subsidiaries of co-operatives could be an ideal start for this. At present, there is no enabling legal mechanism for the co-operative societies in India to be holding entities. The potential of using co-operative societies as holding entities for subsidiary corporate entities needs to be seriously considered.

Another major drawback that is evident in the present form of legal framework for co-operative organizations is the difficulty of forming multi-purpose co-operatives. Due to the lack of enabling legal framework most of the co-operatives are not expanding into multiple business/commercial activities. The practical difficulty in forming and registering the co-operatives is also a hurdle in many states. The registration process is handled at the state level needs to be revamped. A federal level legislation and agency overlooking the registration and filing of annual report like the registrar of companies would be helpful in ensuring effective governance norms in co-operative societies.

The potential of co-operative society organizations is yet to be completely explored in the Indian context. In case of sunrise sectors such as platform-based services such as taxi or door-step food delivery services co-operative society format could be useful. Hence as noted above the enabling legal framework for co-operative societies need to implement at the earliest.

Author’s are faculty at Indian Institute of Management, Kozhikode. Views are personal and do not necessarily reflect institute viewpoint.
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