International Labour Organization (ILO) defines a cooperative as a group of people or organizations who work together to achieve their common economic, social, and cultural goals and objectives through a democratically governed company/enterprise.

Cooperatives In India – Constitutional Provisions

  • The Constitution (97th Amendment) Act of 2011 created a new Part IXB (Cooperatives) following Part IXA (Municipalities) regarding cooperatives in India.
  • In Part III of the Constitution, Article 19(1)(c), the word “cooperatives” was added after “unions and associations” which enabled citizens the right to form cooperative societies as their Fundamental Right.
  • The Act protected cooperatives by inserting Article 43 B and Part IX B related to them.
  • The Directive Principles of State Policy (Part IV) now include a new Article 43B on the “development of cooperative societies.”
  • Supreme Court’s Ruling: The Supreme Court ruled down certain portions of the 97th Amendment Act, 2011, in July 2021 and concluded that states have the sole authority to legislate on matters reserved exclusively to them as cooperatives are a part of State list.

Features Of Cooperative Societies

  • It is a non-capitalist association of people.
  • It is a business, not a charitable organization.
  • Members not only share the profit, but they also share the risk.
  • It is a non-profit organization with democratic management.
  • The primary goal is not profit, but rather service to the members.
  • All cooperative organizations are involved in the socio-economic movement.
  • It supports the weaker section of the community.
  • It abolishes all sorts of exploitation.
  • It generates employment.
  • It educates people the values of equality, mutuality, and cooperation

Constitution Ninety Seventh Amendment

  • Article 19(1)(c): Freedom to form cooperatives
  • Article 43B in DPSC (PART IV) cast duty on state promotion of voluntary formation, autonomous functioning, democratic control and professional management of co-operative societies.
  • PART IXB – was added in the constitution which provided for Article 243ZH to Article 243ZT for professional management of co-operative societies by state legislature, determining the functioning and tenure of members of Board along with their regular election, audit and accounts, maximum number of directors in each society, reservation for seats for SCs, or STs, and women, multi-state co-operatives and application of Part IX-B to Union Territories.
  • Did not define cooperatives.

Reason to Enact Constitution 97th Amendment

In the Constitution, cooperatives are expressly provided in State List and kept expressly outside the realm of Union List. It was expected that cooperatives will function under the State Laws.

Cooperatives were seen as an alternative model of economic growth as a middle path between the private sector and public sector. Its growth was envisaged for securing social and economic justice and equitable distribution of the fruits of development. Some of the challenges facing the cooperative sector are:

  • Regional disparity in cooperative development: Cooperative structure has managed to flourish only in a handful of States like Maharashtra, Gujarat, Karnataka etc. Currently, the central government provides equity and credit support to cooperative societies. This benefit thus gets concentrated in a few states where cooperatives have developed. Regions where cooperatives are developed are already relatively well-off states; there is a need to focus on development of cooperatives in poorer parts of the country.
  • Issues of membership: Inability to ensure active membership, speedy exit of non-user members, lack of member communication and awareness building measures
  • Governance challenges: Serious inadequacies in governance including that related to Boards’ roles and responsibilities
  • Cooperatives not seen as economic institutions: A general lack of recognition of cooperatives as economic institutions both amongst the policy makers and public at large
  • Inability to attract and retain competent professionals leading to poor services and low productivity.
  • Lack of efforts for capital formation particularly that concerning with enhancing member equity and thus member stake
  • Lack of cost competitiveness arising out of issues such as overstaffing, a general top-down approach in forming cooperatives including the tiered structures
  • Politicization and excessive role of the government chiefly arising out of the loopholes and restrictive provisions in the Cooperative Acts
  • Irregular elections make office bearers remain in office indefinitely, reducing their accountability and increasing corruption.  
  • Thus, need was felt for fundamental reforms in the functioning of co-operatives to:
    • Revitalize the institutions to ensure their contribution in the economic development of the country.
    • Serve the interests of members and public at large.
    • Ensure their autonomy, democratic functioning and professional management.

SC Judgement In Rajendra N Shah Case              

  • The Supreme Court upheld the Gujarat High Court judgment but did not strike down Part IXB in its entirety. The Court by applying Doctrine of Severability held Article 243ZI to 243ZQ as unconstitutional leaving aside Article 243ZR and 243ZS.
  • Supreme Court struck down part IX B of the Constitution related to cooperative societies but declared the part related to multi-State cooperative societies both within the various States and in the Union territories of India as valid.     
  • The Court also referred to the Kihoto Hollohan judgment where Doctrine of Severability was applied on Tenth Schedule to render Paragraph 7 of Tenth Schedule of the Indian Constitution as invalid.  

Suggestions for strengthening Cooperatives

1. States should amend their cooperative legislations in the spirit of the Model Cooperatives Act proposed by the Brahm Prakash committee. Such a law should be member centric and based on cooperative principles.

2. For enhancing member participation: Definition of ‘Active members’ should be introduced in cooperative legislations, right to vote and contest should be given only to active members and enabling provision for speedy exit of non-user members.

3. Effectiveness of Boards: Cooperative legislations should clearly define the role and responsibilities of cooperative board vis-à-vis that of paid executives/managers.

4. Enhancing Professionalism: Cooperatives should be enabled for co-option of experts, subject matter experts. Also, any person elected as a Director on the Board should undergo a set of prescribed training programs.

5. Checking Politicization: Cooperatives law should provide for rotational retirement of Board members and restriction on contribution to political and religious organizations.

6. Enhancing competitiveness: Cooperatives should have freedom to decide their organizational structure and staffing policies, they should be enabled to form joint ventures, partnerships etc. with cooperatives and other corporates and have flexibility in business decisions, mobilizing funds etc.

7. State Governments should put in place a policy framework for facilitating the functioning of cooperatives with free and fair means. States should refrain from deputing officers to occupy key positions in cooperatives.

8.  Full income tax exemption is therefore recommended for all cooperative societies. This will be a major incentive for the cooperatives to strengthen their capital base.

9.  The office of registrar of cooperatives should be restructured as a developmental office which handholds and guides cooperatives.

A well-functioning cooperative sector can work wonders especially in the agricultural and rural development sector. The example of Amul needs to be kept in mind. Steps need to be taken to empower cooperatives further.

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