How RWAs and housing societies invest

Most apartment complexes are managed either by Resident Welfare Associations (RWAs) or co-operative housing societies (CHS) that are empowered to collect maintenance charges from the occupants of the flats. Much of this amount is used by the housing societies, as they are commonly known, to pay salaries of staff engaged in maintenance works such as sweeping, cleaning, and gardening in the common areas that serve all residents. It is also used for paying monthly bills pertaining to the use of electricity in common areas, fuel for gensets, water supply to flats and garbage disposal charges. The rest of the money goes into a corpus fund and is used for exigencies, including repairs and painting of the common areas.

The corpus fund is typically deposited in banks, either in savings accounts or fixed deposits (FDs), but can be used effectively to generate good returns in the current market scenario. But, some housing societies are so conservative that they keep the FDs only in nationalized banks. Some prefer to park the funds in state co-operative banks as theinterest earned by a housing society from deposits with co-operative banks is eligible for tax deduction under section 80P(2)(d) of the Income Tax Act, 1961. But residents are now beginning to question these conservative methods of utilizing the society funds, especially because some societies now have funds that run into crores of rupees and the return on investment is negligible. Besides, inflation depletes the money on a post-tax basis. They want to know if the society funds could be efficiently managed by diversifying into other financial instruments that fetch better returns?

 

“There is a misconception that housing societies can only invest in fixed deposits. Most by-laws are restrictive and from the time when other investment avenues were not popular. I went through the Co-operative Societies Act of Maharashtra and found that housing societies can very well invest in government securities, mutual funds and debentures, among others," says Puneet Agarwal, a chartered accountant and an active volunteer at Arum Allamanda CHS in Mumbai.

What the law says

The residents of a housing complex can either institute an RWA or opt for a CHS structure. The RWA, also called apartment owner association, has to be registered with the government under the Societies Registration Act of 1860. It will need to elect from among the residents a president, treasurer, secretary, and a few executive members to the core committee. Other residents are ordinary members.

The RWA has to frame a model bye-law that aligns with the Co-operative Societies Act, depending on which state in the country they are based, and residents have to adhere to the rules laid out. These bye-laws, however, do not devolve much power to the management committee in terms of investment options. “The society bye-law is mostly a copy-paste job. Hardly any association puts in efforts to edit it in tune with the changing times. The RWA in my society was set up in the early Nineties. The rules haven't changed since then. It is only recently that we put out a motion to amend the bye-laws and residents will vote on this motion soon," says Harish Bhargava, president, RWA-Sarita Vihar pocket C in New Delhi.

Model bye-laws typically have similar guidelines for the investment of society funds. The Maharashtra Co-operative Societies Act, 1960, has specified the following avenues for the investment:

(a) in a district central co-operative bank or state co-operative bank, having awarded at least “A" Audit Class in the last three consecutive years

(b) in any of the securities specified in section 20 of the Indian Trusts Act, 1882;

(c) in the shares, or security bonds, or debentures, issued by any other society with limited liability

(d) in any other mode permitted by the rules, or by general or special order in that behalf by the state government

“Section 20 of the Indian Trusts Act, 1882, is key here. This section stipulates that housing societies can invest in securities specified by the government in the official gazette. I looked up the gazette of India issued in 2017 which says that securities specified therein include government securities, debt mutual funds, minimum AA-rated debt securities by a corporate, Basel III Tier-I bonds, infrastructure debt instruments, listed companies having a market cap of not less than ₹5,000 crore as on the date of investment, mutual funds having at least 65% equity allocation and ETFs (exchange traded funds) and index funds," says Agarwal.

The common practice

While the law offers several options as investment avenues, committee members have yet to understand its potential. A few people, however, have picked up the baton to unlock its value. Ashwini Kapila, a member of the investment committee of Lodha Bellissimo CHS Ltd. says, “Our investment committee managed to convince the housing society to invest the funds in favour of mutual funds and active risk management. The members were keen to continue their relationship with the riskier co-operative banks in 2019 as they offered higher interest rates and a tax benefit, but having experienced liquidity risks in my banking career, I could see it was a bad idea to continue with such deposits. Thankfully, we got the members to agree just before some of those banks went bust in the following months."

Lodha Bellissimo CHS currently invests a portion of the society funds in gilt funds, banking and PSU funds, corporate bond funds, short term funds and liquid funds for working capital management. “These funds are safe if chosen correctly. We can diversify among different fund houses and types and duration of funds. They are liquid because the money will be available the very next day of withdrawal. There is no penalty on early withdrawals either unlike in the case of FDs," says Shailendra Mundra, treasurer and managing committee member of Lodha Bellissimo CHS.

Not all societies, however, welcome such fresh ideas. “It is a behavioural issue where the tax- free interest offered by co-operative banks deters them from experimenting with something new. They seek guaranteed returns. They do not appreciate the fact that the principal amount could be lost or locked in co-operative banks." says Agarwal.

That is exactly what happened in 2019 when the Punjab and Maharashtra Cooperative (PMC) Bank went bust. “All funds of my society were parked with PMC bank. We are yet to recover it. We invested whatever incremental money we were left with in SBI," says Vandana Trivedi, a resident of Kshitij Apartments in Mumbai. PMC Bank was later merged with Unity Small Finance Bank.

Capital preservation is the main agenda for the corpus of the society. There is no intention to maximize returns on the corpus. "With indexation benefits also taken away in debt mutual funds, convincing all owners to invest in debt mutual funds over FDs would also be difficult. Should markets turn for the worse, a few committee members will be answerable to all owners who have differing views and risk appetite on handling funds. Building consensus with all owners for changing the investment pattern will be next to impossible," says Shriram Subramanian, Founder and MD of InGovern Research Services and a treasurer of his society.

Another trouble is the pro-bono nature of the committee members. “These are honorary positions that people take up as volunteers without any financial interest and usually with generalist rather than specialist knowledge. If something goes well, nobody gives them credit, but if something goes bad, residents can take them to court. In one instance, owners of a prominent South Bangalore apartment complex had tried making the committee members liable for possible losses on mutual funds investments made with Franklin Templeton when the firm froze redemptions in 2020," says Kazi Arif Zaman, former secretary at Sobha Petunia, and a private equity professional in his day job.

Hiring investment professionals, the way the society hires charted accountants and auditors for auditing its account books and meet its regulatory requirement, could be a way out. But there are hurdles.

TanmayGupta, ex-treasurer of Prestige Lakeside Habitat home owner’s association, was willing to hire a registered investor advisor (RIA) to invest 20% of the funds in government bonds and equity and debt mutual funds. “I spoke to at least 10 RIAs, but none of them could understand our requirements. We are not individuals but a body of individuals. Every time association members change, their risk appetite too change. We need to figure out a way to maintain continuity in the association's risk profile," says Gupta.

More awareness and willingness to change the status quo are needed to unlock the value that housing society funds hold.