Cooperatives and stock markets: Can the twain meet?

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As per government data, there are more than 8 Lakh co-operative institutions in India.

By Neelam Rani and Akshat Bhargava

The International Cooperative Alliance defines a cooperative as an “autonomous associate of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise”. At the core of a cooperative is its principles and values that seek sustainable development, especially of the marginalised communities, and not any commercial motive.

The Indian ethos was always about community service. And communities have been effective in helping marginalised sections of the society. India’s co-operative societies are offshoots of the country’s cooperative movement that existed since 1904. The co-operative movement was popularised by Operation Flood, India’s milk revolution driven by AMUL under the leadership of Verghese Kurien. Keeping in view the important role co-operatives played in the socio-economic development, especially in agriculture and rural sectors of economy, the government created and promoted farmer producer organisations (FPOs) such as farmers cooperatives, self-help groups and farmer producer companies.

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As per government data, there are more than 8 Lakh co-operative institutions in India. The Narendra Modi government’s strategy for doubling farmers income by 2022 is based on an enterprise approach, entailing the formation of more FPOs and bringing them together to boost farm exports. Thus, there is a clear need to trigger a new form of co-operative social movement to create a successful farm-to-market model via co-operatives, replicating the success stories such as Amul, Indian Farmers Fertilizer Cooperative Ltd (IFFCO) and Krishak Bharati Cooperative Limited (KRIBHCO).

What stops co-operatives from hitting the market

Co-operatives in India have never been offered an option to tap the stock market. The reasons are two-fold. Firstly, the stock markets are designed to facilitate investor ownership and control, which is antithetical to co-operative values and principles. As per media reports in the year 2015, SEBI had sought legal opinion regarding listing of co-operatives on Indian stock exchanges in line with the practices followed in countries such as the UK, USA and Australia. But these efforts did could not fructify. Also, there was opposition from National Federation of Urban Co-operative Banks & Credit Societies, which expressed concerns that such initiative was antithetical to the co-operative values and principles.

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Since the facets relating to banking activities are regulated by the Reserve Bank of India (RBI) and National Bank for Agriculture and Rural Development (NABARD) under the Banking Regulation Act, 1949 (as applicable to cooperative societies), finance minister Nirmala Sitharaman has moved Banking Regulations (Amendment) Bill in the Lok Sabha to bring cooperative banks under the RBI in view of deteriorating condition of co-operative banks in India. The bill has been passed by the Lok Sabha.
This takes us to the second reason. As per the Indian Constitution, Cooperation is a state subject governed by the respective State Cooperatives Societies’ Act. This dual control acts a major obstacle to shape co-operatives’ business legal form and subsequent conflict in listing of securities on the stock exchange.

Can stock market motivate co-operatives to do better

Co-operatives in India are still in a transitory stage. The progress of their development is slow. The main obstacles that co-operatives face while operating under state co-operative societies acts are: narrow awareness, lack of professionalism and unnecessary government interference bordering on manipulation besides inadequate capital requirements to expand the activities including education of farmers at large. So, stock market as a regulated platform and as an alternative financing mechanism is potentially seen as a motivator by management of co-operatives to accelerate and create value in terms of achieving long-term sustainability for the co-operatives given its inherent co-operative principles can put them at risk.

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Alternative: Social stock exchanges

Social stock exchanges (SSE) represent a major shift in the focus of the government’s policy in the social sector that emphasises listing social enterprises and voluntary organisations on the regulated electronic fundraising platform. But what is apparently missing from the agenda of the social stock exchange is the inclusion of the co-operative, as an institution distinct from both for profit and nonprofit types of social enterprises’- as categorised in the report submitted by working group on SSE via regulator SEBI (Securities Exchange Board of India) to the government of India. As the government takes steps for building impact investing market via social stock exchange (SSE) based on the recommendations contained in the report, it is important for policy makers to consider how the cooperatives can adapt to the market? Essentially, this common system would require changes in the regulatory norms by seeking legal opinion supporting co-operatives in meeting the listing requirements on SSEs in India.

There is a need to change the way one looks at the co-operatives — as an isolated collective entity. One should learn from Peter F. Drucker who emphasised on the “social ecology mindset” to both change and balance change with stability. This shift in thinking must be demonstrated by re-engineering the co-operative’s values and principles to assist their transformation into a hybrid social enterprise (HSE).
A research report titled “ Roadmap of Social Enterprise Ecosystem as a Precursor for a Viable Stock Exchange in India”, published by Grassroots Research And Advocacy Movement (GRAAM), it is suggested that even the recent new legal form for co-operatives under the provisions of the Companies Act, 1956 (enabled by a special amendment), producer companies are not allowed to raise external equity capital.

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The study by GRAAM emphasizes the need for new legal form for social enterprises in India and suggests a roadmap for the establishment of a new legal form. It says social enterprises must be structured to leverage benefits of both equity and debt instruments.

HSE as a mix collaborative organisational arrangement that fosters more inclusive participation of marginalized communities and small farmers at the “bottom of the pyramid”. HSE can potentially help reduce social inequality as well. In the process, the role of the government would be to create an enabling impact investing market infrastructure that helps connect these HSE of aggregated farmers with broader groups of collective actors present in the social eco-system. In its facilitative role, the government can steer necessary amendments in the existing Securities Contract (Regulations) Rules, the Companies Act, 1956 and other related Indian laws to evolve a new legal form for cooperatives.

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In the long term, the rate of return on localised first-hand knowledge could become a crucial factor in trading of securities by HSE on the SSE. In this way, the burden of the capital market can be shared by all social players to correct the imperfections in the capital market in the long term.

A hard choice?

Can co-operatives help create capitalism with human face? This dilemma of Indian co-operatives can be resolved not unilaterally. This can be done with the support from the Union government, and diverse stakeholders such as impact investors, investees, communities, suppliers and organisations like NABARD, industry bodies and SEBI. Big co-operatives like Gujarat Co-operative Milk Marketing Federation Ltd (GCMMF) can be motivated to list on stock exchanges, while smaller co-operatives can be inspired to become big through social innovation.

(Prof. Neelam Rani is Associate Professor at IIM Shillong. Akshat Bhargava is a doctoral scholar at IIM Shillong.)