[ecis2016.org] With the Indian Trust Act 1882, being amended to provide for greater investment avenues for societies’ funds, we look at whether it makes sense for housing societies to consider these options
As per the provisions of the Maharashtra Cooperative Societies Act 1960, cooperative housing societies in the state have to invest their surplus funds that are not required. Also, the rules covering the products in which housing societies can invest their surplus funds, have been amended. Let us discuss the old provisions and the new laws governing the investment of housing societies.
The law regarding investments, under the Maharashtra Cooperative Societies Act
Section 70 of the Maharashtra Cooperative Societies (MCS) Act provides for investment avenues, where the surplus funds of a society can be invested. The investment avenues include deposits with central cooperative banks, state cooperative banks and cooperative, as well as commercial banks approved by the registrar of societies. This section also allows cooperative housing societies to invest their surplus funds in securities specified in Section 20 of the Indian Trust Act, 1882.
Provisions of the Indian Trust Act, 1882 and amendments
Section 20, which specifies the securities in which cooperative housing societies can invest their surplus, was amended in July 2016 and with a notification issued in April 2017, to widely expand the investment avenues for all cooperative societies, including housing societies.
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Prior to its amendment, Section 20 of the Indian Trust Act provided for very limited products and all of which were either government securities or securities guaranteed by the government. It covered only one mutual fund house, i.e., Unit Trust of India. With the amendments in Section 20 of the Indian Trust Act, housing societies in Maharashtra now have various options, for investing their surplus funds. These investment avenues include all the debt products of mutual funds and shares of companies having market capitalisation of more than Rs 5,000 crores. All the societies, including housing societies, can now invest even in units of equity funds of mutual funds, as well as exchange traded funds. Societies can also invest in passive funds like index funds, created to replicate the Sensex or Nifty.
So, these entities have choices across the spectrum of investment, from government securities, listed debts securities and scheme of debts funds, to equity shares and equity-oriented schemes of mutual funds.
Will the amendments to the Indian Trust Act benefit cooperative housing societies?
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Although the changes to the Indian Trust Act, 1882, will enable all the societies to invest in wider classes of product, whether a housing society should invest in risky assets like equity shares and equity-oriented schemes of the mutual funds, will ultimately depend on the fund position of each society. The expanded list may not benefit housing societies much but other societies like bigger credit societies, will have the opportunity to invest in high-yield asset classes like debt schemes or equity schemes of mutual funds.
A majority of the housing societies do not have enough long-term funds, which are needed for making investments in equity products. Moreover, due to fluctuations in the returns of long-term debt fund products, investing in such funds is not generally advisable, unless the decision makers at the housing society are in a position to understand the phase of interest rate cycle and its implications for investment in mutual funds’ debt fund schemes. Instead, housing societies can invest the surplus money lying in their current/saving bank accounts in liquid funds and earn better returns, while retaining liquidity.
(The author is a tax and investment expert, with 35 years’ experience)
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