Sinking fund

Part 4

v     Issues & Replies

      Where the amount of sinking fund should be invested?

A.     As per Bye-law 15 and section 70 of MCS Act fund should be invested in The State Co-op. Bank i.e. The Maharashtra State Co-op. Bank or The Mumbai Dist. Central Co-op Bank Ltd. or the securities specified under section 20 of the Indian Trust Act.  Generally the funds are invested in fixed deposits in the bank, the Society should earmark this fund.

      The Builder/Developer sells the flats at different rates to the flat purchaser at different times. In such circumstances, please advise the base at which the contribution towards sinking fund should be collected from the members?

A.     It is correct that the Developer sells flats at different rates.  The Sinking Fund is to be collected at minimum rate of quarter percent on the construction cost of the building of the society.  In such circumstances, the society should appoint an Architect or a government approved valuer by passing a resolution in the General Meeting and entrust him assessment of the construction cost of the buildings of the society.  After appointment, the Architect will give a certificate setting the construction cost in terms of rupees per sq. ft. (carpet/built up area).  Simultaneously, the Architect should also be entrusted to give the area of each flat.  After getting this data from the Architect, the management should calculate the Sinking Fund at the rate decided by the General Meeting.  The rate, construction cost and the area of the flats as certified by the Architect should be taken as a base for calculating the Sinking Fund.

      There are sales and re-sales of the flats and there is appreciation in the value of the flats. Can the society charge Sinking Fund on the appreciation value of the flat?

A.  The Sinking Fund is to be collected as per the certificate given by the Architect appointed by the society and there will be no change even if there is an appreciation in the value of flats in future.

      The society’s buildings have been constructed in 1985. The previous committees did not collect Sinking Fund from the members. From the audit report present committee came to know that contribution to the Sinking Fund is compulsory Can the present committee collect Sinking Funds now with retrospective effect?

A.   The society can collect the sinking fund contribution with the retrospective effect. To facilitate recovery of the past arrears, the same may be recovered by suitable installments along with the recovery of the current contribution.

      The Sinking Fund contribution is based on the cost of a flat. At times, a society has two building one old and the other new. The cost of a flat in an old building is much more less than that of a flat in new building. Should the society recover contributions towards sinking fund from the members in the old building at the same rate at which they are received from members of the new building?

A.     There is a material difference between new constructions and old construction for the purpose of fixing the rate of contribution towards Sinking Fund. In case of new building, it has to run its full life of 60-65 years. During this long period, if the contribution towards Sinking fund at the rate given in the bye-laws in invested in a long term recurring deposit, along with the interest earned, there the accumulations to the credit of the Sinking Fund, till such time as the building is due for reconstruction, would be equal to the cost of reconstruction of building at that time.  This includes possible appreciation in the cost of materials and labour.  However, in case of an old building, which has run near about half of its life, the question of rate of contribution towards Sinking Fund has to be considered from a different angle. In such a case, the society will have to ascertain the remaining period of the life of the old building and the anticipated cost of reconstruction of the building at that time. This will lead the society to the conclusion that the contribution towards Sinking Fund from the members of the old building should be recovered in such a way, that there would be sufficient amount to the credit of the Sinking Fund for the reconstruction of the building when it is due for reconstruction.  After taking the above factors into consideration, the society should fix the rate of contribution to the Sinking Fund by members of the old building, which is bound to be more than the rate charged to members of the new building.

      In a society buildings were constructed in 1975.  Sinking was being collected at the rate of ½ percent.  The society has now adopted new Model Bye-laws according to which it is to collect only ¼ percent of the construction cost or is it compulsory to reduce it to ¼ percent.

A.     The rate of sinking fund contribution prescribed under Bye-law No. 13(b) is the minimum rate.  If the society intents to continue the rate prescribed under its old Bye-laws, that is ½ percent, it can do so by passing a general body resolution to this effect.