Sinking fund, its propriety, utilisation, investment and withdrawal thereof

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MCHST research Bureau

 

Every Co-operative society, in particular a housing Society, should invariably create sinking fund by setting a part of the income on monthly basis. This is necessary for incurring expenditure required for undertaking major repair or reconstruction of the ageing building. Unfortunately, majority of the Co-operative Housing Societies make nominal provision or no provision at all for sinking fund. And when major repair is necessary for the building, flat owners are called upon to contribute required amount for undertaking repairs. This creates difficulties. Hence every Housing Society should make provision for sinking fund is monthly bills.

 

  1. Proprietary of sinking fund. :

A sinking fund is usually created by setting a part of income to accumulate at interest for paying of a debt. In some business organizations such a fund is created for making a provision for replacement of wasting assets. In a co-operative housing society, the necessity of creating such a fund is to provide for sum of money, required for reconstruction of the building, when the existing building, is not safe for human habitation. A co-operative housing society being merely a service organisation has no source of income and naturally it cannot build up such a fund by setting aside a part of income for the purpose. The alternative is to collect contributions from members in such manner as is provided under the bye-laws towards this fund.

  1. PROVISIONS IN THE BYE-LAWS FOR CREATION OF SINKING FUND
  2. The basis on which sinking fund contribution is fixed

Every building has its normal life. Its life is extended by some more years by carrying out certain repairs. It is however risky to continue in occupation of the building which has run its life. A Co-operative housing society has therefore to reconstruct the building after it has run its life. As it may be difficult for any co-operative housing society to raise the funds for reconstructing the building form its members in a short spell of time, it becomes necessary to establish a Sinking Fund right form the inception of society. A provision has, therefore, been made in the bye-laws, enabling a co-operative housing society. A provision has, therefore, been made in the bye-laws, enabling a co-operative housing society to collect contribution towards this fund from its members at a fixed rate per month. The rate fixed under the bye-laws is ¼ percent per annum of the cost (b) A flat includes a godown, showroom shop or a law No. 13 (b). A flat includes a godown, showroom shop or a garage. It may be noted that the contributions at the rate mentioned above are to be collected only on the cost of construction and the value of the land included in the cost of construction and the value of the land included in the cost of construction has to be excluded. A building sinks in course of time due to its wear and tear but the land remains as it is even if the building collapses.

 

  1. The procedure for ascertaining the cost of construction of a flat in an flat owners’ society.

In case of an open plot type co-operative housing society (which has purchased or taken a place of land on lease and constructed building / buildings thereon) it is not difficult to work out the cost of construction of a flat only. The difficulty in working out the cost of construction of a flat arises in certain cases, particularly the flat owner’s society (in which flats are taken by purchasers under agreements under section 4 of the Maharashtra Owners Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act 1963. A builder-promoter sells the flats on different occasions to different purchasers for different prices, even though the flats are of identical sizes and there is no difference in the type of construction and the amenities provided. The price paid for a flat proportionate land also and further that the cost of construction of a flat is not on the basis of actuals. In majority of cases the actual price paid by a purchaser is more than that mentioned in the agreement. It would thus be wrong to recover contribution form members at the fixed rate towards the Sinking Fund on the basis of value shown in the agreements. The builder may be most unwilling to give the actual cost of construction. A Co-operative society has therefore to employ the agency of an architect or a valuer, appointed by the general body meeting of the construction of the building and apportion such cost amongst costs of a flat so arrived at may be taken as the basis for fixing the amount of contribution to the sinking fund in respect of the flat/shop/garage etc.

  1. Investment of sinking fund contribution with interest earned thereon
  2. Investment of Sinking Fund made Obligatory

The amount in the sinking fund is required to be utilised when the reconstruction of the building is due. This is a very long period. During this period the contribution received from members by a society should stand invested on long term basis so that such an investment will fetch substantial return to the society. As per Bye-law No. 15 and Section 70 of M.C.S. Act. 1960. However, the societies which have not adopted the new provision, regarding investment of sinking fund contribution on long term basis, need not put off the questions of the said bye-law because it is in their own interest to ensure that the contributions received form members towards sinking fund on long term basis from time to time.

  1. The need for investing interest on Sinking Fund Investment

It is brought to the notice of the Co-operative housing societies that if they go on investing only the contribution form members towards sinking fund at the rate of ¼ per cent per annum of the cost of construction of the flats and utilise the interest earned on such investments in their businesses, the total amount to the creation of sinking fund will not be sufficient to meet the cost of reconstruction of the building only if the sinking fund is invested on long term basis, along with the interest earned on such investment.

  1. Modes of investment of Sinking Fund

A Co-operative housing society can invest its fund in the state Co-operative Bank i.e. the Maharashtra State Co-operative Bank Ltd., Bombay or the district Co-operative Bank i.e. The Bombay District Central Co-operative Bank Ltd. or the securities specified under section 20 of the Indian Trust Act. Although the Registrar can permit Co-op. Housing Societies to invest their funds in the Nationalised banks for other commercial banks or the Urban Co-operative Banks. This facility is given only for facilitating day to day banking transactions. A long-term investment has, therefore to be made by Co-operative Housing Societies with either of the two banks named above. All Co-operative Housing Societies should therefore, note that they have to invest their sinking fund collection is one of the above two banks. So far as securities under section 20 of the Indian Trustees Act are concerned, the list of the securities in which Co-operative housing can invest their sinking fund is published in the new bye-law.

 

  1. Utilisation of the sinking fund
  2. For Structural Repairs
  3. As stated earlier, the sinking fund is meant for reconstruction of the building. However, if it becomes necessary for a Co-operative Housing Society to make any structural additions to and / or alterations in the building which should strengthen it and if it has no funds to carry such alterations if can fall back upon its sinking fund.

 

Procedure for withdrawing Sinking Fund

In case of withdrawal from the sinking fund, either for structural repairs or for reconstruction’s of the building, prior permission of the Registering Authority is necessary. A Co-operative Housing Society which has no funds or is not able to raise the funds required for sinking fund or for creating charge on the sinking fund investment.

  • An appointment of an Architect should be made at a general body meeting on such terms and conditions as are suggested by it for inspection of the building and bringing out the nature of the structural repairs necessary.
  • After entering into a contract with the Architect subject to the items and conditions approved by the general body meeting the Architect should be called upon to prepare plans estimates with specifications of the structural changes required to be carried out.
  • On getting the report from the Architect about the repairs necessary, with plans, estimates and specifications, the Managing Committee should invite tenders for the work in consultation with the Architect, examine the tenders received and prepare its own report on the tenders received and make its recommendations as to the tender which in its opinion may be accepted.
  • The plans, estimates with specifications the tenders received and the committee’s report thereon should be placed before the general body meeting called for considering the above documents and taking decision thereon. The general body meeting should also authorise the committee to make an application to the Registering authority for grant of permission for drawing the required amount from the Sinking Fund/creating charge on the sinking fund investments to the extent required.
  • The committee should then enter into a contract with the contractor whose tender is accepted by the general body meeting, on the terms and conditions set out by the general body meeting.
  • The Registering Authority should then be requested to grant necessary permission to withdraw the requested amount from the Sinking fund/create charge on the sinking fund investment.