Preserving Trust, Ensuring Transparency and Countering Financial Frauds in Cooperative Housing
Richa Mittal*
(Asian Independent)- Cooperative housing societies have long been recognized as a valuable solution to address housing needs, foster community development, and ensure affordable and equitable housing for residents. These societies operate on the principles of collective ownership and shared responsibility, offering numerous advantages. The primary objective of these housing societies is to provide affordable housing solutions to their members. By pooling resources and adopting cooperative principles, members can collectively develop housing projects, which can often be more cost-effective than individual homeownership or private real estate options. Members of these housing societies typically have equity ownership in the cooperative’s assets, including housing units and common facilities. This ownership model allows individuals to build wealth over time while ensuring that housing is not solely a speculative investment.
Living in a cooperative housing environment fosters a strong sense of community and social cohesion. Members often participate in cooperative activities and decision-making processes, leading to a greater sense of belonging and mutual support among residents. Moreover, these Cooperative housing societies may also receive financial benefits, including tax advantages, access to government subsidies, and favorable financing terms. These incentives make homeownership more accessible and affordable for a broader range of people. This support helps in the growth and sustainability of cooperative housing societies in the state.
However, despite their potential benefits, there is a growing concern about financial frauds and irregularities plaguing some of these cooperative housing ventures. Instances such as the Adarsh scam, Gomti Nagar, Lucknow, as well as in Kanpur, Ghaziabad of Uttar Pradesh, and many other regions of India have cast a shadow over the sector, highlighting the need for enhanced vigilance and transparency.
The issue of multiple flat ownership within families has arisen in numerous housing societies across India, where different branches of a family acquire independent flats within the same building. Regulations prohibit individuals from circumventing the purpose of the law by possessing multiple properties in cooperative housing societies in Delhi under the names of their spouses and/or children. This restriction on membership applies regardless of whether the property is registered in the individual’s name, the name of their spouse, or their dependent child. It is applicable to properties held on a leasehold or freehold basis and whether held through power of attorney or an agreement for sale. When these members submitted their nominations for society elections, their nominations were rejected. Subsequently, they appealed to the deputy registrar of cooperative societies, only to have their appeals dismissed.
The dispute escalated to the Bombay High Court, which ruled against the society. The matter eventually reached the Supreme Court. On November 2, 2007, in a decision rendered by Justice S. B. Sinha and Justice Harjit Singh Bedi, it was held that Section 27 of the Maharashtra Co-operative Societies Act of 1960 explicitly stipulates one vote per member.[1] Furthermore, the Supreme Court ruled that cooperative housing societies have the authority to expel a member for owning more than one property, emphasizing that acquiring concessional government land should not be a pretext for amassing wealth. In their judgment, a Bench of Justices Mukundakam Sharma and A. R. Dave stated, “Experience has shown that voluntary organizations like cooperative societies are the best system which can suit the needs of poor and weaker sections.” [2] Despite the order of the Supreme Court, there are instances of individuals submitting false affidavits to acquire flats in cooperative housing.
Audits and inspections of these housing societies have revealed significant irregularities, especially in the handling of society funds. These irregularities have resulted in economic and financial fraud, allegedly perpetrated by the office bearers. These irregularities include diverting funds, withdrawal of interest from fixed deposits, and misusing money in the form of substantial arrears in maintenance charges. Instead of depositing these arrears, they are retained by the office bearers for unauthorized purposes. Furthermore, there are instances where office bearers, in collusion, unlawfully and fraudulently withdraw substantial amounts of cash through self-bearer checks from the society’s bank account or via a hypothetical invoice. These actions represent well-planned attempts to defraud the society and its resident members, diverting their hard-earned money intended for maintenance and other charges.
Remarkably, these irregularities have often gone undetected for extended periods, with no mention in managing committee meetings or special general meetings. Members are often unaware of these withdrawals, which occur without proper documentation, signatures, or supporting bills.
However, an essential question arises here: Will the auditors appointed be willing to take such a bold step against erring Office Bearers? In the context of our country, laws often fall short, merely serving as window dressing and failing to address core issues. Numerous commercial audits have uncovered corporate entities involved in financial scandals of considerable magnitude. Yet, the enforcement of punitive actions remains limited.
The amendment, among its provisions, designates auditors, including Chartered Accountants, Certified Auditors, or Government Auditors, as responsible for submitting a special report concerning financial losses to the members of the society. This inclusion raises the question of why such measures were not in place until now. Were the Balance Sheets and Profit & Loss Accounts, accompanied by auditors’ reports, not presented during Annual General Meetings (AGMs)?
Furthermore, the amendment stipulates that for cases of willful mismanagement, auditors must submit an additional report specifying the offenses against those responsible, following the Registrar’s permission. Failure on the part of the auditor to comply with this directive would also constitute an offense. However, the amendment does not clarify the authority responsible for holding auditors accountable for their actions.
To address such fraudulent financial management, Members have the option to appoint external chartered accountants to scrutinize Audited Accounts. Maintaining open channels of communication between Members and Office Bearers, monthly informal meetings, and seeking explanations for unsatisfactory responses are also essential steps to prevent fraud. If necessary, Members can escalate concerns to the Dy. Registrar, Joint Registrar, or Registrar and, as a last resort, approach the Co-operative Court.
Under Section 83 of the MCS Act, financial losses incurred by the Society due to fraudulent acts of Office Bearers are recoverable and constitute a punishable offense. Members can file a complaint with the Dy. Registrar of the Co-op. Department under Section 83 for an investigation and recovery of losses caused to the Society.
To initiate a complaint under Section 83, the Act requires the signatures of one-third of the Members. Therefore, if one-third of the Members of a Society request the Dy. Registrar to inquire into financial mismanagement, the Officer or his Nominee is obligated to conduct such an investigation. The Dy. Registrar may request the complainants to deposit a nominal amount, which may be forfeited if the allegations against the Office Bearers are found to be malicious.
In Uttar Pradesh, the governance and control of cooperative housing societies are vested in the Housing Commissioners (Co-operative), with lower-level cooperative officers managing affairs at the district level. The limited control and accountability of district magistrates (DMs), Additional District Magistrates (ADMs), and Sub-Divisional Magistrates (SDMs) to intervene in matters related to cooperative housing societies have inadvertently created opportunities for a free hand to the district-level cooperative officers. The decisions made by cooperative officers can have a far-reaching impact on the functioning of entire societies, affecting a large section of the population. Unfortunately, such practices have given rise to a series of scams and pose a significant challenge for the future.
The challenges faced by cooperative housing societies demand urgent attention and reforms. The government can plan for a more robust regulatory framework and increased oversight of cooperative housing societies by DMs, ADMs, and SDMs, which is essential to curb irregularities, as is done in other housing societies. Encouraging transparency in the operations and financial dealings of these societies is vital to prevent the misuse of power and fraud. Establishing mechanisms for reporting irregularities without fear of reprisal and conducting regular independent audits overseen by the district magistrate can help uncover financial irregularities.
[1] https://timesofindia.indiatimes.com/india/one-flat-one-vote-rules-sc/articleshow/2583352.cms
(*Richa Mittal, Advocate Delhi High Court, is a distinguished professional with a multifaceted background as an economist and advocate practicing at the Delhi High Court. Her extensive expertise in both the legal and economic domains has positioned her as a leading authority in navigating the intricate intersection of law and economics. With a profound commitment to justice and a keen analytical mind, Richa has made remarkable contributions to the legal and economic landscape in India)
