Sinking Fund Calculation and Utilization

Sinking Fund is not a new word in Co-operative Housing Society. Most of the members/managing committee members to make a suggestion to use such sinking fund for society related activities or debate its utilization/calculation without understanding its legal implication.

So lets’ understand how the word “Sinking Fund” is defined;

• As per Wikipedia “A sinking fund is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense or repayment of a long-term debt.”
• Merriam Webster defines Sinking fund as “a fund set up and accumulated by usually regular deposits for paying off the principal of a debt when it falls due”

In the context of Cooperative Housing Society, “Sinking Fund” provisions have been made under Bye-Law No. 13 (C) for reconstruction of the building when the existing building is not safe for human habitation since it is difficult for the Cooperative Housing Society (service & non-profit organization having no other source of income) to generate such a huge fund in short period of time.

This provision helps cooperative housing society to collect contribution towards this sinking fund from the society members on month on month basis and keep on accumulating year after year by long term investment in accordance with Bye Law No. 15 and directions given under section 70 of the Maharashtra Co-operative Housing Societies Act, 1960.

An outgoing member cannot ask for the reimbursement of his accumulated contribution towards the Sinking fund under any circumstance / pretext however the new buyer / member may request to know the accumulated contribution accrued against the account of the intended flat to be purchased. As and when the flat is sold or the membership is transferred this amount invariably gets automatically transferred to the buyer’s account.

Calculation of Sinking Fund Contribution:

In accordance with Bye Law No. 13 (C), the General Body can decide the Sinking Fund contribution, subject to the minimum of 0.25% per annum of the construction cost of each flat incurred during the construction of the building of the Society and certified by the Architect, excluding the proportionate cost of the land.

Most of the Cooperative Housing Society takes the decision on the Sinking Fund Contribution at the time of taking over from the builder / developer / inception, which remains constant for years together, while the construction cost of the flat keeps on increasing.

It is therefore suggested that the Managing Committee should conduct a valuation of the construction cost of each flat by  a certified Architect once in 5 year and decide the revision in sinking fund contribution in General Body Meeting.

In case of an open plot type co-operative housing society (which has purchased or taken a place of land on lease and constructed building / buildings thereon) it is not difficult to work out the cost of construction of a flat only. Most of the Cooperative Housing Society faces difficulty in working out the cost of construction of a flat in certain cases, particularly the flat owner’s society in which flats are taken by purchasers under agreements under section 4 of the Maharashtra Owners Flats (Regulation of the Promotion of Construction, Sale, Management and Transfer) Act 1963. A builder/ promoter / developer sells the flats on different occasions to different purchasers with a different cost for the identical sizes flats and no difference in the type of construction and the amenities provided.

The price paid for a flat proportionate land also and further that the cost of construction of a flat is not on the basis of actuals. In the majority of cases, the actual price paid by a purchaser is more than that mentioned in the agreement. It would thus be wrong to recover contribution form members at the fixed rate towards the Sinking Fund on the basis of the value shown in the agreements. In most of the cases, the builder/developer may be most unwilling to give the actual cost of construction. We therefore suggest that Cooperative society should employ the agency of an architect or a valuer, appointed by the general body meeting of the construction of the building and apportion such cost amongst costs of a flat so arrived at may be taken as the basis for fixing the amount of contribution to the sinking fund in respect of the flat/shop/garage etc.

Utilization:

On the Resolution passed at the meeting of the general body of the Cooperative Housing Society, the Sinking Fund may be used by the society for reconstruction of its building/buildings or for carrying out such structural additions or alteration to the building/buildings, as in the opinion of the Society’s Architect, would be necessary to strengthen them or for carrying out such heavy repairs as may be certified by the Architect and on approval of General Body.

Sudha Saxena