Statutory Restrictions and Requirements in Co-operative Societies
## Statutory Restrictions and Requirements in Co-operative Societies
Co-operative societies operate under statutory constraints that an auditor must verify. Key areas are:
### 1. Restrictions on Share Holdings
No member (other than a registered society) can hold:
More than 20% of total number of shares, OR
Shares of value exceeding ₹1,000
Whichever limit is breached first applies.
### 2. Restrictions on Loans
A registered society shall not make a loan to any person other than a member.
Exception: With special sanction of the Registrar, a loan may be made to another registered society.
The State Government may impose additional restrictions.
### 3. Restrictions on Borrowings
A society may accept loans and deposits from non-members, subject to bye-law restrictions and limits.
### 4. Investment of Funds — Section 32 of the Central Act
A society may invest its funds in:
Central or State Co-operative Bank
Securities under Section 20 of the Indian Trusts Act, 1882
Shares/securities/bonds/debentures of another society with limited liability
Any co-operative bank approved by the Registrar on specified terms
Any other money permitted by Central/State Government
### 5. Appropriation of Profits
A prescribed percentage must be transferred to the Reserve Fund before any dividend or bonus is distributed to members.
### 6. Contributions to Charitable Purposes
With sanction of the Registrar, a society may contribute up to 10% of net profits (after compulsory Reserve Fund transfer) to any charitable purpose.
### 7. Investment of Reserve Fund
State Acts may allow the Reserve Fund to be:
Used as working capital in the society's business
Invested as per Act provisions
Used for public purposes promoting the object of the society
> The auditor must ensure strict compliance with the State Act and Rules regarding use of Reserve Fund.
### 8. Contribution to Education Fund
Some State Acts require every society to contribute annually to the Education Fund of the State Federal Society.
This is a charge on profits, not an appropriation (i.e., it ranks before profit distribution).
### Subsidiary Registers the Auditor Should Examine
Register
Applicability
Daily cash sales summary register
All societies
Collection from debtors register
If credit sales permitted by bye-laws
Recovery of loans register
Credit societies
Loan disbursement register
Credit societies
Other columnar subsidiaries
As per nature and function
Worked example
### Example 1
Example — Shareholding Limit: A co-operative housing society has total share capital of ₹50,000 divided into 500 shares of ₹100 each. Member X applies to hold 120 shares worth ₹12,000. Can X hold this?
Solution: The limit is the LOWER of 20% of total shares (20% × 500 = 100 shares) or ₹1,000 in value. X cannot hold more than 100 shares or shares worth ₹1,000, whichever is less — so X cannot hold 120 shares. The application must be rejected.
### Example 2
Example — Charitable Contribution: A co-operative society earns net profit of ₹5,00,000. After compulsory transfer of 25% (₹1,25,000) to Reserve Fund, the remaining profit is ₹3,75,000. What is the maximum charitable contribution the society can make?
Solution: Maximum = 10% of net profits after Reserve Fund transfer = 10% × ₹3,75,000 = ₹37,500. The society also requires the Registrar's sanction for any such contribution.
### Example 3
Example — Education Fund Classification: During audit of a co-operative credit society, you notice that the Education Fund contribution was charged to 'Appropriation Account' instead of 'Profit & Loss Account'. Is this correct?
Solution: No. Education Fund contribution is a charge on profits (like a statutory expense), not an appropriation. It must appear in the Profit & Loss Account before arriving at distributable profits. The auditor should point out this misclassification.
⚠️ Common exam mistakes
Treating Education Fund contribution as an appropriation of profits — it is a charge on profits and must be debited before arriving at net distributable profit.
Ignoring the dual test for shareholding restriction — students often apply only the 20% test and forget the ₹1,000 value cap. Both limits apply simultaneously.
Assuming a co-operative society can freely lend to non-members — loans to non-members are prohibited unless the Registrar gives special sanction.
Confusing Reserve Fund investment rules with general investment rules under Section 32 — the Reserve Fund has additional restrictions under State Acts.
Bare-Act text Section 32 — Investment of Funds · Co-operative Societies Act (Central Act) · click to expand
A society may invest or deposit its funds, or any part thereof, in or with— (a) the Central Co-operative Bank or the State Co-operative Bank to which the society is affiliated; (b) any of the securities specified in section 20 of the Indian Trusts Act, 1882; (c) shares or debentures of, or deposits with, any other society with limited liability; (d) any other co-operative bank approved by the Registrar; (e) any other mode permitted by the Central or State Government.