Home Capital Builder Part 1 – Sources of funding Part 1 – Co-operative securities

Part 1 – Co-operative securities

Shares, debentures, notes and Co-operative Capital Units (CCUs) are collectively called securities. These securities are ways by which a co-operative can raise funds. Each security has different features and represents a different type of capital on the co-operative’s balance sheet.

A co-operative’s capital comprises all of the funds and assets that it has at its disposal to carry on its enterprise. Capital is classed by reference to its permanency on a balance sheet. For example, the retained earnings of the co-operative are not required to be repaid to any person or stakeholder, and are part of the co-operative’s permanent capital. They are classed as equity. Capital that has to be repaid, such as debt, is not permanent. The permanency of the co-operative’s capital impacts on how the board makes plans or develops projects for the co-operative’s future. You can access a Capital Comparison Table as a quick reference for different types of co-operative capital.

Following is a summary of the key characteristics of different types of co-operative securities. You can learn more about co-operative securities in the Community Investment Handbook.

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Developing the business case

Shares can only be held by members as they are a requirement for membership. Not all co-operatives have share capital, those that do not have share capital require members to pay regular subscriptions.

Fixed value – All co-operative shares have a value that is limited by their issue price. The value of a co-operative share cannot increase, but it may fall if the co-operative’s net asset value falls below the total value of all shares on issue. A fixed share price is the price that the co-operative is required to pay to repurchase member shares. It also fixes the price payable to members, if the co-operative is wound up. Co-operative members may receive a higher value for their shares if they transfer the shares to another person. For example, co-operatives that have a limit on the number of members, such as members of a water irrigation co-operative with a set number of access points, may be able to sell their shares in the co-operative to a new member at a higher value than the fixed price because the water access rights have a higher value. A new member who buys shares from a retiring member will, however, only be able to claim the fixed value of the shares from the co-operative if the shares were to be repaid at some time by the co-operative.

Transfer rights – Shares can only be traded between existing members or through a sale to a new member.

No voting rights – Co-operative shares do not have any voting rights. The right to vote is a right of membership where each member has one vote.

Member shares and other classes of shares – Co-operative shares that are a requirement of membership are called member shares. Co-operatives can offer other types or classes of shares with different rights and obligations. The rights and obligations of shares are set out in the co-operative’s rules.

Shares are repayable – Members who leave the co-operative are entitled to repayment of their share capital at the fixed value, or less, if the net asset value is less than the share capital on issue. Members who hold more than the minimum number of shares required for membership may, in some circumstances, request repayment of share capital that is more than the minimum required for membership.

Distribution right – Dividends are payable when declared by the board out of any profits. Dividends are limited by regulation to 10% more than the interest rate on a 5-year bank term deposit. This constraint reflects the fact that members are primarily rewarded through actively engaging with their co-operative and receiving services or rebates based on patronage.

Classed as liability – The obligation to repay share capital means they are classed as liabilities under Australian Accounting Standards. Repayment must occur within 12 months of leaving or it can be deferred by substituting other securities. Shares are classed as long-term liabilities.

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Debt instruments – Debentures and notes are loan or debt obligations. The rights and obligations for debentures and notes are set out in a contractual document that is called an instrument. They are liabilities on the balance sheet and may be long or short term.

Redemption – Investors agree to lend an amount of money to the co-operative for a stated period of time, after which the instrument is redeemed.

Value – Each instrument has a face value. For example, the face value may be $100, and investors can buy debentures in multiples of $100. Some debentures may be purchased by investors at a discount-to-face value. The difference between the purchase price, called the issue price, and the face value at the time of redemption represents the interest over the period of the debenture.

Distribution right – Interest on the instruments can be fixed or made variable by linking the interest to other published interest rates. The interest is payable at specified times unless it is a debenture issued at a discount-to-face value. Structuring the interest obligation helps the co-operative manage interest payments to suit the expected pattern of the income stream.

Asset backing – a public issue of debentures by a co-operative must be secured against assets owned by the co-operative. A failure to pay interest or to repay the debenture would allow debenture holders to claim against the assets to recover the debt. Securing the debenture requires the co-operative to create a mortgage or other security over the asset and appoint a trustee to act as the person to look after the interests of the debenture holders. If the debenture cannot be secured against other assets, then it must be called an unsecured note.

Debentures offered to members do not have to be secured against assets.

Transfer rights – Debentures offered to members can only be transferred to other members. Debentures offered to the public are transferable to other investors.

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As a co-operative’s total capital value grows, it will have an excess of capital over and above its total share capital because the share capital has a fixed value. Under co-operative principles, this capital is referred to as the common property of the co-operative and it is controlled by the members. A CCU is an interest in the co-operative’s capital other than its share capital.

A CCU is an instrument that creates an interest in this part of the co-operative’s capital under terms specified in the instrument. There is great flexibility in the terms of issue for CCUs, which means that they may be classed as either debt or permanent capital depending on their terms of issue.

Face value – The face value of the CCU may be fixed or variable, by linking it to the underlying net capital value.

Distribution rights – CCUs may carry a regular interest payment or a dividend declared by the board out of profits.

Redemption – CCUs can have a fixed term or redemption at a specified event or at the option of the co-operative. Alternatively, they may be irredeemable. Irredeemable CCUs are permanent capital and classed as equity.

Transfer rights – CCUs offered to members can only be transferred to other members. However, CCUs offered to the public are transferable amongst investors. This feature along with the flexibility of CCU terms of issue, makes them suitable for listing on a stock exchange, provided they comply with the exchange rules.

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