Wednesday, 29 July 2015

PROVISIONS IN BYE-LAWS FOR CREATION OF SINKING FUND


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 from its members in a short spell of time, it becomes necessary to establish a Sinking Fund right from the inception of 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 per cent per annum of the cost (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 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.

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 piece 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 from 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 in 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.,

Investment of sinking fund contribution with interest earned thereon:
Investment of  Sinking  Fund made  Obligatory:
The amount in the sinking fund is required to be utilized 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 are received from members towards sinking fund on long term basis from time to time.

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 from members towards sinking fund at the rate of ¼ per cent per annum of the cost of construction of the flats and utilize 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.

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., of the securities specified under section 20 of Indian Trusts Act. Although the Registrar can permit Co-op. Housing Societies to invest their funds in the National banks or 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.

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