Part III - Present Situation and Future Trends (1997)

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This document has been made available in electronic format
by the International Co-operative Alliance (ICA)
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Part III - Present Situation and Future Trends (1997)

Source: Co-operative Laws in Asia and the Pacific
by G.K. Sharma (pp.189-208)

Present Situation and Future Needs
****************************

Present Situation
---------------------
In the second half of the present century, practically in all
countries in Asia and the Pacific, co-operatives were considered
as an instrument of bringing socio-economic development and
particularly agricultural production and rural development.
Governments provided liberal financial assistance and support to
the co-operatives. In the process while quantitatively co-operatives
grew manifold it suffered in quality. In many countries co-operatives
lost their basic character and became more of a state agency.
Co-operative laws were modified to vest more and more arbitrary
powers to co-operative department. The situation further worsened
by using these powers for the benefit of politicians and bureaucrats.
The Royal Commission on the co-operative movement of Ceylon has
this to say:

"It is notorious and scandalous that co-operative societies and the
co-operative movement generally in Ceylon have been outrageously
misused by certain politicians to serve their own ends. In some places
their machinations have gone far to undermine two levels of organisation.
In many societies the politicians are in almost absolute control of the
movement with the result that non-political initiative and leadership have
been pushed into the background and silenced. In such a situation neither
co-operators nor government can play their respective roles properly and
the whole system suffers."

The above observations are relevant not only to (Ceylon) Sri Lanka but
to many other developing countries in the region. To find out a solution
to these regrettable developments and to work out a collaborative strategy
for the growth of co-operatives in the right direction, the ICA-ROAP
decided to convene periodical conferences of Co-operative Ministers,
Co-operative Leaders and UN agencies interested in the development
of co-operatives. The first such conference was held in Sydney in
February, 1990. The conference made comprehensive and far-reaching
recommendations in this regard. The subject of role of governments
towards co-operatives was again considered by the Second Co-operative
Ministers' Conference held in Jakarta in February, 1992, and the Third
Co-operative Ministers Conference was held in Colombo in July, 1994
and the Fourth Conference in Chiangmai, Thailand in March, 1997. Many
important recommendations related to co-operative laws were made in
these conferences. Some of them are:
i. enactment of progressive co-operative laws in conformity with
Co-operative Principles (Sydney 3.5 and Chiangmai 3.9);
i. transfer of functions of audit, inspection, supervision and
responsibility for elections, etc. to co-operatives (Sydney 3.9
and Chiangmai);
i. discontinuation of the practice of ex-officio holding of elective
offices by government officers (Sydney 3.19);
i. instead of dissolving the entire elected board for any irregularities,
erring individual members of the board of director/office- bearers
should be brought to book. In the event of inevitability of removal
of board, the management should be entrusted to the concerned
federal organisation; (Sydney 3.20);
i. governments' collaboration in co-operative development is vital to
strengthen co-operative values in several ways, particularly
providing appropriate co-operative legislation and administrative
policies (Jakarta 0.5) ;
i. the co-operative values need to be safeguarded while extending
government financial and other assistance. (Colombo 0.6);
i. co-operative elections, audit, education and training should, as
far as possible, be undertaken by the co-operatives themselves.
The governments, however, may continue to extend assistance for
audit, education, and training (Colombo 1.10);
i. co-operatives by nature are autonomous institutions. The
government should play the role of a facilitator through policy
initiative and should nurse and nurture them to play their full role
as people's organisations. Giving and receiving of assistance -
financial, managerial or otherwise - itself is not infringement of
autonomy, provided it is done on mutually agreed terms
(Chiangmai 2);
i. discontinuation of the practice of ex-officio holding of elective
offices by government officers; (Chiangmai 3.19);
i. instead of dissolving the entire elected board for any irregularities,
erring individual members of the board of directors/office bearers- should be brought to book. In the event of inevitability of removal of board, the management should be entrusted to the concerned federal organisation (Chiangmai 3.20).

At the global level also, ICA was concerned with developments in
developing countries as also industrialised countries. While the problem
in developing countries has been the over involvement of Governments
with co-operatives, in industrialised countries it is the excess domination
of professionals; the effect of both being members losing their
involvement and interest. In the ICA Manchester Congress in September,
1995, not only the Co-operative Principles have been revised, but also a
universally agreed definition and co-operative values have been included
in the Statement on Co-operative Identity (Annexure-B). 

This should help distinguish between the genuine and pseudo-
co-operatives.

Challenge
------------
Thus the present co-operative laws are the product of the period when
co-operatives were extensively supported by the Government and used
for their planned development programmes. Since the introduction of
market economy and globalisation of trade, state support to co-operatives
is   constantly declining. However, no perceptible change is taking place
in the co-operative laws and government- co-operative relationship. The
government continues to exercise their control on the working of
co-operatives including interference in the day-to-day affairs in many
countries. The co-operative leadership also continues to look towards
government for guidance and financial support more than towards their
members. If this attitude is not changed, both by the Governments and
co-operative leaders co-operatives will not be able to stand long.
Co-operatives will have to compete and justify their existence by showing
efficiency, better services and competence. This will also need changes
in the existing co-operative legislative structure. With their hands and feet
tied under the existing laws, in many cases, co-operatives will not be able
to compete and stand with the market forces. Therefore, there is need to
examine the various existing co-operative laws in the countries in today's
context and changes brought, so that the co-operatives are able to stand
and play an effective role to serve their members and needs of the society
at large in matters such as environment protection, food security, gender
integration etc.

In Asia at present there are two types of Co-operative Laws prevailing,
viz (i) a Common Law for all types of co-operatives and (ii) Sectoral
Laws for specific or special co-operatives. With the exception of Japan
and South Korea, in all the countries in Asia there is one common law
for all types of co-operatives. In Japan and South Korea there are different
Co-operative Laws for different types of co-operatives and they are
regulated by different ministries. For example, there are seven separate
comprehensive co-operative laws in Japan for Agriculture Co-operatives,
Consumer Co-operatives, Fisheries Co-ops,  Forestry Co-operatives,
Labour, Credit, Credit bank, and Central Co-operative Banks,  etc. The
same is true for South Korea.  In Philippines, in the past, though there was
a general co-operative law, yet specialized co-operatives, like Sugar and
Electric Co-operatives were registered under separate statutes. But now
they have been brought under one common law. However, important thing
is not whether there is one law or mutiple laws but their approach and
contents.

Object of Co-operative Law
----------------------------------
Co-operative Law is not an absolute necessity for a country. In a country
like Denmark, co-operatives are governed by their bye-laws only. In many
European countries, the co-operatives are regulated by Commercial laws,
without any specific co-operative laws. However, practically all countries
in Asia have specific co-operative laws. Only in Australia, co-operatives
have option to get themselves registered either under the State
Co-operative Law or under the Federal Corporation law. However, only
when they have more than 90% business with members, they can get tax
benefits under the federal revenue law as co-operatives.

The object of enacting co-operative law should be to give a legal status
To the co-operatives and facilitate their working. It should also ensure that
co-operatives work as genuine co-operatives according to the universally
accepted Co-operative Principles and Statement of Identity. The legal
framework of co-operatives consists of the law, rules made under it and
the bye-laws adopted by the members of co-operatives in accordance
with the act and rules. All these together lay down procedure for the
organisation and working of co-operatives and protect and preserve
their co-operative character. The Co-operative Law, thus, should
facilitate the working and should not curtail the autonomous working
of co-operatives and change their basic character. The day-to-day
working regulations should be included in the bye-laws. Mr. P.E.
Weeraman, the Regional Director of ICA ROAP in the seventies on
The subject stated: "the greatest contribution that a government can
make to the development of a co-operative movement is to enact
legislation that would give a legal framework and the necessary
safeguards and privileges that would create an atmosphere conducive
to co-operative development".

As mentioned above, the Co-operative Law consists of Co-operative
Act enacted by the legislature of the country, in some countries Rules
framed by the Government and subsidiary of the Act and Bye-laws as
adopted by the members and registered under the Act. In case of conflict
between the three i.e., Act, Rules and the Bye-laws, the Act is supreme,
followed by the Rules and then the Bye-laws.

The Act should include the basic provisions relating to the principles
of membership, registration requirements, management pattern,
arbitration, liquidation, etc. The best law is that which is simple and
brief, which can be understood by the common man and does not need
a plethora of rules thereunder. The details of working should be left to
the members to be included in the bye-laws. Co-operative Laws are in
the process of change in many countries. It is a continuous process.
Some suggestions are made in this regard which could be useful for
consideration by framers of Co-operative Law.

Definition and Objectives
-------------------------------
The object of co-operatives, definition and preambles have been
mentioned either very differently in laws or they do not find any reference
at all. In some laws a reference is made to co-operative principles but what
is meant by principles is not included in the law. To bring clarity in
thought and action in and about co-operatives it will be desirable to
include "Identity Statement on Co-operatives" as adopted by ICA
Manchester Congress in 1995 and universally recognised in the law itself.
This will facilitate right interpretation about the working and objectives of
co-operatives as and when needed, particularly in judicial disputes. This
statement includes not only revised Co-operative Principles, but also a
definition of  co-operatives and co-operative values, which have been
adopted for the first time. The Statement is as under:

Statement on the Co-operative Identity
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Definition
------------
A co-operative is an autonomous association of persons united
voluntarily to meet their common economic, social, and cultural needs
and aspirations through a jointly owned and democratically controlled
enterprise.

Values
--------
Co-operatives are based on the values of: 
1.	Self-Help;
2.	Self-Responsibility;
3.	Democracy; 
4.	Equality; 
5.	Equity; and 
6.	Solidarity 

In the tradition of their founders, co-operative members believe in
the ethical values of honesty, openness, social responsibility and caring
for others.

Principles
------------
The Co-operative Principles are guidelines by which co-operatives
put their values into practice:
First Principle	:	Voluntary and Open Membership
Second Principle:	Democratic Member Control 
Third Principle:	Member Economic Participation 
Fourth Principle:	Autonomy and Independence 
Fifth Principle:	Education, Training & Information 
Sixth Principle:	Co-operation among co-operatives 
Seventh Principle:	Concern for community 

Registration
----------------
In all the countries in Asia without registration use of the word 
`co-operative' is an offence. However, the procedure and requirements
are different. While it is difficult to suggest about the minimum
membership for a co-operative for registration and will depend on
country situation, with regard to period allowed for registration the
minimum period allowed to dispose of an application is 2 weeks
(Kuwait, Taiwan) and in many others up to six months.

In some other countries, there is no time limit at all for registration.
A reasonable time could be two months. In case of failure of registration
within the time limit it should be deemed as registered as in the case in
laws of Japan, Philippines, etc. Alternatively, it could be treated as refusal
and appeal could be filed on expiry of this period.

Viability
-----------
In several countries the registration papers have to be with a feasibility
report about the future activities and in case the registrar is not satisfied
with the viability of the society, he could refuse registration.

The discretion on viability of a society should not be left to the
Registering Authority. The better thing would be to follow the Fiji
provision, where the registering authority, if doubtful about the viability,
is allowed to issue provisional registration, operative for a maximum
period of two years.

Registering authority should satisfy itself with two things primarily
before registration:

a. the application and bye-laws are in conformity with the laws
and co-operative identity statement, and
b. the members are capable of using the services of the proposed
co-operative. 

Membership
----------------
To make a co-operative a genuine member-oriented, member user
institution, it is necessary to ensure that a member uses the services and
if he fails to use the services his membership should cease after a year
as provided in Korean Law. If this is not feasible, then he should at least
lose his right to vote and contest elections. The principle should be "no
use of service no participation in the management".

There should also be provision in the law that if a co-operative fails
to have less than certain percentage of business with members it should
cease to be treated a co-operative. The reasonable range could be
60 to 80 percent.

Nominal/Associate Members : Provision is usually provided in the
bye-laws for those who are not users but have business dealings, to
bring them under the scope of arbitration to save the co-operatives
from long and expensive civil litigation.

Area of Operation: This indicates the area from which a co-operative
can enroll members and provide service to them. It has nothing to do
with its other business operations, which cannot have any geographical
limits. It could also not  be binding for nominal/associate members.
The area of operation is included in bye-laws of a co-operative. Most
laws prohibit non-nationals to become members of co-operatives,
except in case of Nepal, where it is provided that a member of ICA
could be admitted as a member. This restriction does not seem to be
justified particularly in case of consumer and utility co-operatives.

Annual General Meeting
------------------------------
In co-operatives, General Body is considered supreme and must meet
at least once a year. The powers and functions of AGM, by and large,
are uniform. However, while some countries provide the AGM functions
in the law, others provide this in their rules or bye-laws. For example
Sri Lanka does not mention anything about the General Meetings in main
law and  details in the rules. However, two items are provided in the law,
one is quorum and the other relates to powers of General Body. In some
countries the quorum is very low. In Fiji 25% (Section 58) and in
Philippines 25% (article 36). In Korea it is 50% and Thailand 50% or 100
(articles 29, 30). Further, if there is no quorum present, for the adjourned
meeting no quorum is needed in Fiji, India, and Bangladesh.

The minimum quorum for AGM should be not less than 50%. If the
society fails to have AGM for consecutive three years for want of quorum
it is a clear indication that members have lost interest in the society and it
should be wound up.

The General Body should be final authority in all matters of the society
and should not be subject of approval by the Registrar, including financial
matters, except under contractual obligations (Bangladesh).

Proxy within family members and through another member could be
provided. But a member be allowed only one proxy in addition to his vote.
However, in case of election and amendment of bye-laws, proxy may not
be allowed.

It should not be obligatory for the society to invite the Registrar
(Malaysia) to attend AGM. It should be at the discretion of the society.
However, there could be provision to send agenda and minutes of the
AGM to RCs. 

Societies should have the authority to conduct their own elections. They
should make their own rules for this purpose. Only when a society fails
to have elections/AGM in time or a request is made, RCs should intervene
(India).

Board, Chairperson and Chief Executive
------------------------------------------------
The powers and functional areas of Board, Chairperson, and Chief
Executive should be clearly defined in the law. The basis of this could be:
i. Board should decide on the programmes, priorities, resources,
policy directions and membership issues;
ii. Chairperson should either be a Chairperson in which case he
should preside the meetings and be a friend, philosopher and
guide to the Chief Executive and should not try to direct him or
interfere in business or administrative affairs; or in case he is to
be involved in business and administrative affairs (South Korea)
he should be a whole time person and designated accordingly
Chairperson-cum-President (Korea) Chairman-cum-Managing
Director, Chairperson-cum-Manager, Executive Chairperson, etc.

Any action on the performance of the Board should be in the purview
of General Body and not RCs, except when the Board is guilty of
contravention of Act, Rules, Bye-laws or Laws of the land. All other
irregularities observed by the department should be brought to the notice
of General Body for action.

If the irregularities are of serious nature and the General Body fails to
rectify them, action could be initiated to have fresh elections or cancel
the registration of the society and initiate civil/criminal actions against
the concerned officers. But Department should not create vested interest
by dissolving the Board and managing the society departmentally.

Powers of appointment of Chief Executive should be with the Board,
subject to rectification by the General Body and Government should
not be involved.

Provision of executive board/executive committee of whole-time
board members (employees) for taking business decisions to help
the Chief Executive be considered (Japan).

Most laws provide strength of the Board and tenure of 3 to 5 years.
However, in case of Fiji and Kuwait one- third members have to retire
every two years. This maintains continuity and fresh blood and is a
desirable provision.

Chairperson
---------------
In practically all laws no powers have been defined for the Chairperson
except in Fiji, Japan and South Korea. Thus the main function of the
Chairperson is to preside the meetings and exercise such other powers
as board may delegate to him or prescribed in the bye-laws.

However, in India and Sri Lanka a person cannot hold Chairpersonship
or Vice-chairpersonship of more than one national co-operative at a time
as also he cannot be Chairperson or Vice-chairperson for more than two
terms.

In Korea the President has  powers to run the society under the law and
bye-laws in addition to preside the Board and General Meetings and acts
as a Chief Executive also. Similar powers can also be given to the other
directors who work under the directions of the President. (Articles 47,
57.2)

Audit
-------
In some countries law provides that audit will be done by the department
either by departmental auditors or qualified auditors appointed by the
department (Bangladesh, India, Nepal, Fiji, Thailand, Sri Lanka). In
others, there  is provision of audit committee or auditors to be appointed
by the General Body (Korea, Japan, Philippines, Malaysia, Indonesia).
Audit should be the authority of General Body and department should not
get involved in the annual audit partly in view of a large number of
co-operatives involved,  increasing turnover and complexities and partly
because it is not in conformity with the character of co-operatives.
However, department may have audit periodically in the form of
management audit to ensure their supervision. 

In countries where law provides monoist system (only board) it may
be changed to dualist system (Board and audit committee) to facilitate
transfer of audit work from department to co-operatives.

Inspection
-------------
Inspection is provided in most co-operative laws at the initiative of the
Registering Authority or at request. Only in Japan it is obligatory under
the law to inspect every co-operative by the government every year.

It will be desirable that inspection is done by the Department every year
as in Japan or at least once in two years. Every co-operative should be
either inspected or management audit is done. This may include along
with others:

1.	Members' share in business turnover;
2.	Percentage of members utilising services; 
3. Expenses incurred on Board Members and AGM whether they
are within the approved budget. 
4.	To what extent annual work plan is implemented.
5.	Compliance of Act and Bye-laws. 

Dissolution of Board
-------------------------
In some laws there is provision empowering the Registrar to dissolve
the Board and appoint an administrator after an enquiry, inspection or
audit. In other laws, if the Registering Authority finds  the necessity to
do so he can order to wind up the co-operative. The best course would
be that Registering Authority should serve notice to the society to remove
the defects and in case of failure wind-up the co-operative. He should not
get involved in the management of co-operative and become vested
interest. He should act more as quasi-judicial authority. 

This provision of appointing an administrator or nominate Board or Board
members on the ground of financial support by the Government should not
be in law. It should be the part of the terms of the financial assistance,
giving the option to a co-operative to accept or not to accept these terms.

Funds
-------
Under the laws, co-operatives are encouraged to create own funds for
various purposes. Creation of reserve fund is obligatory practically in all
laws. In some laws (Indonesia) separate funds are proposed out of profits
from members and non-members. These funds, particularly reserve fund,
in most cases are not allowed to be involved in the business of the
societies and kept in low return high security investments. For its use in
business RC's approval is provided in most laws. This is not a very
satisfactory situation. The funds belong to the society/members and
General Body should have the power to allow the use of own funds in
such a way as it deems reasonable.

In Fiji under section 100, 30% of surplus from members business and
100% surplus from non-members business has to go to statutory reserve
fund. Twenty-five percent  of this fund is to go to the National Reserve
Investment Trust Fund to be administered by the National Co-operative
Federation. In addition to this the co-operatives have also to contribute to
the Central Co-operative Fund as prescribed by Registrar but not less than
dollars 40 annually.  This provision is heavily tilted towards the National
Federation.

There are limits on the borrowing by co-operatives under some laws
(MCL). This is uncalled for. These restrictions/ regulations on borrowing
have to be in the lending institutions policies or to be incorporated in
the banking laws of the country. They should not be the part of the
co-operative legislation.

Government Assistance
-----------------------------
Most laws provide concessions, facilities, tax exemptions and financial
support to the co-operatives. In some cases, these facilities are without
strings, in others, provisions are made empowering government to
involve/interfere in the management/business of the co-operative. The
right approach would be that the co-operative laws should not include
provisions of such nature, which allow the department to interfere in the
management, as this would be against the Co-operative Principles.
However, as and when any financial assistance is provided it may lay
down its lending terms and then it should be left to the co-operative to
accept the assistance or not.

Subsidiaries/Joint Ventures
---------------------------------
Many countries provide for creation of subsidiaries and joint ventures
either as co-operatives or even as companies. This provision should be
available only to secondary co-operatives and not to primaries. Further,
such bodies should be only for the purpose of providing service to the
members and not for investment.

Winding Up
---------------
While the grounds for winding up in most laws are reasonable in actual
practice, the winding up process takes too long, in some cases decades,
even though in most laws a time limit is prescribed. The suggestions
therefore are:
- In cases of voluntary dissolution the society may be allowed to
carry out its own winding up process within a prescribed period by
the Registering Authority. 

- In cases where the liquidation process takes more than one year,
they should be de-listed from the records of registered society and
a separate record of such societies be maintained. 

- It is also suggested that in case where a society has  failed to have
three Annual General Meetings consequently it should be brought
under liquidation as it is a clear indication that members are no
more interested in the society.

Conversion of Legal Entity
----------------------------------
In many laws, there is provision for allowing conversion from
co-operatives to companies (Australia, Fiji, etc.) provided it is
approved by two-thirds of members. 

In case of co-operatives, whose majority members do not use its
services for a long period, it may be better to allow them conversion,
if they cannot operate as genuine co-operatives.

Rule Making Power
------------------------
The countries which provide rule making power are Bangladesh
(Sec. 139), Fiji (Sec. 55), India (Sec. 109) Philippines (Article 123)
Sri Lanka (Article 61), Nepal (48) Malaysia (Article 86).

The countries having Act and Bye-laws only and not provided for rules
are Indonesia, Thailand, Japan and South Korea. It can be seen that in
these countries the law itself is self-contained and what is not covered
in act is provided in the bye-laws. Thus there is clear demarcation between
the intentions of the legislation and the intention of the members of the
society and the administrative authorities have only to ensure compliance
of these provisions.

In countries where the administrative authorities have been authorised
to make rules under the law, the rules at times go beyond the spirit of
the law. This is not a very healthy practice. The practice followed by
Japan, South Korea, Indonesia should be adopted by other countries
also for the sake of clarity and avoid misuse of the flexibility through
rule making.

To conclude, co-operative laws are important instruments to sculpture
the shape of co-operatives. Positive and progressive laws encourage
members to participate and involve in the activities and affairs of their
co-operatives, while regulatory and restrictive laws discourage them.
Co-operative laws ought to be development-oriented and facilitate the
working of co-operatives. They must sensitize people to work in
conformity with Co-operative Values and Co-operative Principles which,
as such, have been laid down in ICA Co-operative Identity Statement.
There should be on-going monitoring to ensure their adoption in
day-to-day working of co-operatives, otherwise they would carry no
value. In the changing socio-economic scenario of Asia-Pacific Region,
co-operatives have vast potential for expansion, development and serving
the ordinary people. Let the law support people's initiative for true and
genuine co-operatives. The existing laws do not respond to the present
changing global economic environment. Therefore, the existing laws
need changes and amendments in the light of Co-operative Ministers'
Conference recommendations and the Co-operative Identity Statement.
The earlier it is done the better it would be. It must be stressed that
co-operators have also to be responsive to the changes and  challenges of
present times. They should use co-operative laws, and their own efforts,
to strengthen the co-operative structure and system for the benefit of
millions of co-operative members, who need them to improve their living.