Producer Companies

Producer Companies are a unique form of corporate entity in India, designed to cater to the needs of producers, particularly in the agricultural and allied sectors. Introduced as an amendment to the Companies Act, these organisations combine the efficiency of a company with the spirit of cooperative societies.

Key Elements of Producer Companies

1. Membership: Members of a Producer Company are typically producers themselves or Producer Institutions. They must actively participate in the company’s activities to maintain their membership status.
2. Primary Produce: The core focus of Producer Companies is on primary produce, which includes:
   • Agricultural products (including those from animal husbandry, horticulture, and forestry)
   • Handloom and handicraft items
   • Products resulting from any primary activity that promotes farmers’ or consumers’ interests
3. Mutual Assistance Principles: Producer Companies operate on mutual assistance principles, emphasising cooperation among members.
4. Patronage: Members are expected to use the services offered by the Producer Company, referred to as patronage. This involvement in business activities is crucial for the company’s success.
5. Limited Returns: The company’s articles specify a maximum dividend, ensuring that profits are distributed fairly and reinvested in the company’s growth.
6. Patronage Bonus: Surplus income is distributed to members as a patronage bonus, proportional to their participation in the company’s activities.
7. Governance: The company is managed by a Chief Executive and overseen by a board of directors. The Chief Executive is responsible for day-to-day operations.
8. Inter-State Cooperation: Producer Companies can operate across multiple states, facilitating broader market access and cooperation.

Incorporation of Producer Companies

Objects of a Producer Company

The primary objectives of a Producer Company, as specified in Section 378B of the Act, encompass a wide range of activities related to the agricultural and allied sectors. These include:

1. Production, harvesting, and marketing of primary produce
2. Processing and packaging of members’ produce
3. Manufacturing and supplying machinery and equipment to members
4. Providing education on mutual assistance principles
5. Offering technical services, consultancy, and training
6. Managing resources like land, water, and power related to primary produce
7. Providing insurance for producers and their produce
8. Promoting mutual assistance techniques
9. Implementing welfare measures for members
10. Financing various activities related to procurement, processing, and marketing

It’s important to note that a Producer Company must primarily deal with the produce of its active members while carrying out these objectives.

Formation and Registration of Producer Companies

The formation of a Producer Company requires:

• At least ten individuals who are producers, or
• Two or more Producer Institutions, or
• A combination of ten or more individuals and Producer Institutions

The registration process involves:

1. Submitting necessary documents to the Registrar
2. The Registrar reviewing the compliance with all requirements
3. Issuance of a certificate of incorporation within 30 days if all conditions are met

Upon registration, the Producer Company becomes a body corporate with the liability of its members limited by shares.

Membership and Voting Rights

Membership in a Producer Company can consist of individual producers, Producer Institutions, or a combination of both. The voting rights structure is designed to ensure fairness and active participation:

1. For companies with only individual members, each member gets one vote regardless of shareholding.
2. In companies with only Producer Institutions as members, voting rights are based on their business participation in the previous year.
3. For mixed membership, each member (individual or institution) gets a single vote.

The company can restrict voting rights to active members in special or general meetings. Importantly, members with conflicting business interests are not allowed to join or must be removed if such conflicts arise after joining.

Benefits to Members

Producer Companies are structured to provide various benefits to their members:

1. Initial payment for produce supplied, with the possibility of additional disbursements later.
2. Limited returns on share capital contributions.
3. Potential allocation of bonus shares.
4. Distribution of surplus as patronage bonus, proportional to members’ business participation.

Memorandum and Articles of Association

The memorandum of a Producer Company must include specific details such as the company name (ending with “Producer Company Limited”), registered office location, main objects, share capital details, and subscriber information.

The articles of association are crucial in defining the company’s operations. They must incorporate mutual assistance principles, including:

1. Voluntary membership
2. One-member-one-vote principle (with some exceptions)
3. Board accountability to members
4. Equitable surplus distribution
5. Education of members and employees
6. Cooperation with other Producer Companies

Additionally, the articles must detail membership qualifications, board constitution, voting procedures, patronage bonus distribution methods, and other operational aspects.

Governance

The governance structure of a Producer Company is designed to ensure member control and professional management:

1. The board of directors is elected or appointed by members.
2. The articles specify the number of directors, their qualifications, and terms of office.
3. A Chief Executive is appointed to manage day-to-day operations.
4. The Chairman is elected, with defined powers and responsibilities.

Financial Management

Producer Companies have specific provisions for financial management:

1. They can raise funds through various means, subject to limitations specified in the articles.
2. Reserves must be maintained as per Section 378ZI.
3. Surplus funds can be used for business development, common facilities, and distribution to members.

Shareholder Transition

Upon registration as a Producer Company, all existing shareholders of the inter-State co-operative society automatically become shareholders of the new entity. The face value of their shares remains unchanged, ensuring a seamless transition of ownership.

Asset and Liability Transfer

The transformation process involves a comprehensive transfer of the co-operative society’s assets, liabilities, and obligations to the new Producer Company. This includes:

1. All movable and immovable properties
2. Existing rights, debts, liabilities, interests, and privileges
3. Ongoing contracts and commitments
4. Outstanding dues and financial obligations

The Producer Company assumes full responsibility for these transferred elements, maintaining continuity in operations and obligations.

Organizational Continuity

To ensure operational stability, the Producer Company is mandated to:

1. Continue managing organizations previously under the co-operative society’s purview
2. Maintain financial, managerial, or technical assistance to entities that were receiving such support from the co-operative society

Legal and Regulatory Aspects

The transformation process addresses several legal and regulatory considerations:

1. References to the inter-State co-operative society in existing laws or contracts are deemed to refer to the Producer Company
2. Ongoing legal proceedings involving the co-operative society continue uninterrupted, with the Producer Company assuming the society’s position
3. Fiscal concessions, licenses, benefits, privileges, and exemptions granted to the co-operative society are transferred to the Producer Company

Human Resources Management

The transition also has significant implications for the employees and officers of the co-operative society:

1. Directors of the co-operative society continue in office for one year post-transformation
2. Employees transition to the Producer Company with the same terms, conditions, and benefits
3. Employees have the option to resign if they choose not to continue with the Producer Company
4. The transfer of services does not entitle employees to additional compensation
5. Retirement benefits and welfare schemes continue under the new structure

Financial Considerations

The transformation process ensures financial continuity in several ways:

1. The capital of the erstwhile co-operative society becomes part of the Producer Company’s capital
2. Trusts for provident funds and gratuity funds continue to function as before
3. Tax exemptions granted to these funds remain applicable to the Producer Company

Governance of Producer Companies

At the heart of the Producer Companies model lies a comprehensive governance framework, designed to ensure the effective management and oversight of these enterprises. Let us delve into the key provisions that shape the leadership, decision-making, and accountability within producer companies.

Board of Directors

The Companies Act mandates that every producer company must have a board of directors comprising a minimum of five and a maximum of fifteen members. This structure ensures a balanced and representative leadership, with diverse perspectives and expertise guiding the company’s strategic direction.

In the case of inter-state cooperative societies that have been registered as producer companies, the board may have more than fifteen directors for the first year after incorporation. This flexibility allows for a smooth transition and the continued involvement of experienced leaders during the initial phase.

The members who sign the memorandum and articles of association can designate the initial board of directors, who will then govern the affairs of the producer company until the directors are elected in accordance with the provisions of the Act. This election process must be conducted within 90 days of the company’s registration, ensuring a timely establishment of the governing body.

Tenure and Re-appointment of Directors 

The Act stipulates that each director shall hold office for a period of not less than one year, but not exceeding five years, as specified in the articles of the producer company. This provision promotes stability and continuity in the leadership, allowing for the development and implementation of long-term strategies.

Furthermore, the Act allows for the re-appointment of retiring directors, enabling the retention of experienced and knowledgeable individuals on the board. This flexibility ensures the preservation of institutional memory and the continuity of effective governance practices.

Co-option of Expert Directors and Additional Directors 

To enhance the expertise and capabilities of the board, the Act empowers the directors to co-opt one or more expert directors or appoint additional directors, not exceeding one-fifth of the total number of directors. These expert directors, while not having the right to vote in the election of the chairperson, may be eligible for election to this position if the articles of the producer company permit.

This strategic co-option of external experts and additional board members allows producer companies to leverage specialised knowledge and diverse perspectives, ultimately strengthening the decision-making process and the overall governance of the organisation.

Vacation of Office and Liability of Directors 

The Act outlines specific circumstances under which a director’s office may become vacant, including conviction for a crime involving moral turpitude, default in repayment of loans, or failure to hold annual general meetings. These provisions ensure accountability and responsible governance, safeguarding the integrity of the producer company’s leadership.

Moreover, the Act holds the directors jointly and severally liable for any loss or damage suffered by the producer company as a result of their actions in contravention of the law or the company’s articles. This provision underscores the fiduciary duties of the directors and their responsibility to act in the best interests of the organisation and its members.

Committees of Directors

Enhancing Efficiency

To facilitate the efficient discharge of its functions, the board of directors may constitute various committees. These committees, while operating under the general supervision and control of the board, can help streamline decision-making and improve the overall governance of the producer company.

The Act also allows for the co-option of external experts and the Chief Executive into these committees, further strengthening the depth of expertise and oversight. This collaborative approach ensures that the producer company can leverage specialized knowledge and diverse perspectives to address complex challenges and seize emerging opportunities.

Matters Requiring Shareholder Approval 

The Act identifies specific matters that must be approved by the members of the producer company at the annual general meeting. These include the approval of the budget and annual accounts, the declaration of limited returns, and the approval of any major transactions reserved for shareholder approval in the articles.

This requirement for shareholder involvement in key decisions ensures that the producer company remains accountable to its member-owners and that their interests are duly represented in the governance process. It promotes transparency, democratic decision-making, and the alignment of the company’s operations with the aspirations of its stakeholders.

Board of Directors Meetings

• Producer companies are required to hold board meetings at least once every three months, with a minimum of four meetings per year.
• The Chief Executive Officer (CEO) must provide written notice of the board meetings to all directors at least seven days prior to the meeting date. Failure to do so can result in a penalty of 5,000 rupees.
• The quorum for a board meeting is one-third of the total number of directors, with a minimum of three directors present.
• Directors, including co-opted directors, may be paid fees and allowances for attending board meetings, as decided by the members in a general meeting.

Chief Executive Officer (CEO)

• Every producer company must have a full-time CEO, appointed by the board, who is not a member of the company.
• The CEO is an ex-officio director on the board and is not subject to retirement by rotation.
• The board determines the qualifications, experience, and terms and conditions of the CEO’s service.
• The CEO is entrusted with substantial powers of management, including administrative tasks, bank account operations, asset management, document signing, accounting, and other functions delegated by the board.
• The CEO is accountable to the board for the performance and operations of the producer company.

Secretary

• Producer companies with an average annual turnover exceeding 5 crore rupees (or a prescribed amount) must have a whole-time secretary.
• The secretary must be a member of the Institute of Company Secretaries of India.
• Failure to appoint a whole-time secretary can result in a penalty of 100 rupees per day, up to a maximum of 1 lakh rupees, unless the company can demonstrate that it was beyond its financial capacity to do so.

General Meetings and Voting Rights

• The quorum for a general meeting is one-fourth of the total membership, unless the articles of the producer company require a larger number.
• Each member has one vote, and in the case of a tie, the chairperson or presiding officer has a casting vote, except in the case of electing the chairperson.

General Meetings for Producer Companies

As producer companies continue to play a crucial role in India’s agricultural landscape, it is imperative that they adhere to the regulatory framework outlined in the Companies Act. One such key requirement is the annual general meeting (AGM) of producer companies.

The Companies Act mandates that every producer company must hold an AGM in addition to any other meetings. This AGM must be held within 15 months of the previous one, with the Registrar having the authority to grant an extension of up to 3 months for special reasons.

The first AGM of a newly incorporated producer company must be held within 90 days of its incorporation. This initial meeting is critical, as it provides the members the opportunity to adopt the company’s articles and appoint the board of directors.

The notice calling the AGM must be accompanied by several important documents, including the agenda, minutes of the previous meeting, details of director candidates, audited financial statements, and proposals for amendments to the memorandum or articles, if any.

Interestingly, the Act also empowers one-third of the members to requisition an extraordinary general meeting, which the board must then proceed to call.

The AGM must be held during business hours, on a non-public holiday, and at the registered office or another location within the same city, town, or village. A minimum of 14 days’ prior notice in writing must be given to all members and the auditor.

The quorum for the AGM is set at one-fourth of the total number of members, unless the articles provide for a higher number. The proceedings of the AGM, along with the board’s report, audited financials, and an annual return, must be filed with the Registrar within 60 days of the meeting.

In the case of producer companies formed by producer institutions, these institutions must be represented at the general body meetings through their chairman or chief executive, who will be competent to act on their behalf.

Share Capital And Members Rights for Producer Companies

Share Capital Structure

The foundation of a producer company’s operations lies in its share capital, which, as per the Act, shall consist solely of equity shares. This strategic decision aims to ensure that the ownership and control of the company remain firmly in the hands of the producer-members, aligning with the core principles of cooperatives.

Proportional Patronage 

A distinguishing feature of producer companies is the emphasis on proportionality between the shares held by a member and their patronage of the company. This approach ensures that the economic benefits derived by the members are closely linked to their participation and contribution, fostering a sense of ownership and commitment.

Special User Rights

The Act empowers producer companies to provide their active members with special rights, granting them privileges related to the supply of additional produce or other aspects of their produce. These specialized instruments, subject to the approval of the Board, serve to recognize and incentivize the active involvement of the members, further strengthening the cooperative ethos.

Transferability of Shares

The shares of a producer company member are generally non-transferable, with a few notable exceptions. Members may, with the prior approval of the Board, transfer their shares (along with any special rights) to other active members at par value. This provision ensures that the ownership and control of the company remain within the producer community.

Nominee Mechanism

To safeguard the interests of the members and their families, the Act mandates that each member must nominate a person to whom their shares shall vest upon their demise. This mechanism ensures the seamless transfer of ownership and continuity of the member’s involvement in the producer company.

Surrender of Shares

In instances where the Board is satisfied that a member has either ceased to be a primary producer or failed to maintain the specified qualifications for membership, the Board may direct the surrender of the member’s shares (along with any special rights) to the producer company at par value or a predetermined value.

Financial Accounts and Audit of Producer Companies Under the Companies Act

Producer companies, a unique form of corporate entity in India, are subject to specific financial accounting and auditing requirements as outlined in the Companies Act. These provisions ensure transparency, accountability, and proper financial management of these organizations.

Books of Account

Section 378ZE mandates that every producer company maintain proper books of account at its registered office. These records must include:

1. All money received and spent, along with the related transactions
2. All sales and purchases of goods
3. Instruments of liability executed by or on behalf of the company
4. Assets and liabilities
5. For companies engaged in production, processing, or manufacturing, details of material and labor utilization and other cost items

The balance sheet and profit and loss accounts of producer companies should be prepared in accordance with Section 129 of the Companies Act.

Internal Audit

As per Section 378ZF, producer companies are required to conduct internal audits of their accounts. The frequency and manner of these audits should be specified in the company’s articles. The internal audit must be carried out by a chartered accountant as defined in the Chartered Accountants Act, 1949.

Auditor’s Duties

Section 378ZG outlines additional duties for auditors of producer companies, beyond those specified in Section 143 of the Companies Act. The auditor must report on:

1. Amount of debts due, including details of any bad debts
2. Verification of cash balance and securities
3. Details of assets and liabilities
4. Transactions that appear contrary to the provisions of the relevant chapter
5. Loans given by the company to its directors
6. Donations or subscriptions made by the company
7. Any other matters deemed necessary by the auditor

Donations and Subscriptions

Producer companies are allowed to make donations or subscriptions to institutions or individuals for promoting the social and economic welfare of producer members or the general public, or for promoting mutual assistance principles. However, there are restrictions:

1. Such donations require a special resolution
2. The aggregate amount in any financial year must not exceed 3% of the company’s net profit from the preceding financial year
3. Direct or indirect contributions to political parties or for political purposes are prohibited

Reserves

Producer companies are required to maintain a general reserve in every financial year, in addition to any other reserves specified in their articles. If the company lacks sufficient funds to maintain the specified reserves, the contribution is shared among members in proportion to their patronage in the company’s business that year.

Bonus Shares

Producer companies may issue bonus shares by capitalizing amounts from general reserves. This requires a recommendation from the Board and a resolution passed in the general meeting. Bonus shares are issued in proportion to the shares held by members on the date of issue.

Loans to Members and Investments of Producer Companies

Producer Companies in India have specific provisions regarding loans to members and investments, as outlined in the Companies Act. These provisions aim to support the financial needs of members while ensuring prudent financial management of the company. This section of the article explores the key aspects of loans to members and investments that Producer Companies can make.

Loans to Members

The Board of a Producer Company has the authority to provide financial assistance to its members, subject to the provisions made in the company’s articles. This assistance can take two main forms:

1. Short-term Credit Facility:
   • Can be provided to any member in connection with the company’s business.
   • Limited to a maximum period of six months.
2. Loans and Advances:
   • Must be secured as specified in the company’s articles.
   • Repayment period should be more than three months but not exceeding seven years from the date of disbursement.

Investments

Producer Companies have several investment options and restrictions:

1. General Reserves:
   • Must be invested to secure the highest returns from approved securities, fixed deposits, units, bonds issued by the Government, co-operative or scheduled banks, or other prescribed modes.
2. Shares of Other Producer Companies:
   • Can be acquired to promote the company’s objectives.
3. Subsidiary Companies or Joint Ventures:
   • Can be formed or entered into for promoting the company’s objects.
   • Requires a special resolution.
4. Investment in Non-Producer Companies:
   • Limited to 30% of the aggregate of paid-up capital and free reserves.
   • Can exceed this limit with a special resolution and prior approval from the Central Government.
5. Consistency with Objects:
   • All investments must be consistent with the Producer Company’s objects.
6. Disposal of Investments:
   • Requires previous approval of members by special resolution for investments in subsidiaries, joint ventures, or non-Producer companies.

Investment Register

Every Producer Company must maintain a register of investments containing:

• Names of companies in which shares are acquired
• Number and value of shares
• Date of acquisition
• Manner and price of subsequent disposal of shares

This register must be kept at the registered office and be open for inspection by any member.

Amalgamation, Merger or Division of Producer Companies 

Producer Companies in India have the option to restructure their operations through amalgamation, merger, or division. This process is governed by specific legal provisions that ensure the interests of all stakeholders are protected. This article explores the key aspects of these restructuring methods.

Types of Restructuring

1. Transfer of Assets and Liabilities: A Producer Company can transfer its assets and liabilities, in whole or in part, to another Producer Company.
2. Division: A Producer Company can divide itself into two or more new Producer Companies.
3. Amalgamation: Two or more Producer Companies can amalgamate to form a new Producer Company.
4. Merger: One Producer Company (the merging company) can merge with another Producer Company (the merged company).

Legal Process

1. Resolution: The restructuring process begins with a resolution passed at a general meeting of the Producer Company. This resolution must be passed by a majority of total members, with at least two-thirds of present and voting members approving it.
2. Notice to Stakeholders: Before passing the resolution, the Producer Company must give written notice to all members and creditors, along with a copy of the proposed resolution.
3. Stakeholder Rights: Members and creditors who do not consent to the resolution have specific rights:
   • Members can transfer their shares to any active member within one month of receiving notice.
   • Creditors can withdraw their deposits, loans, or advances within the same period.
4. Implementation Delay: The resolution does not take effect until one month has passed or all members and creditors have given their assent, whichever is earlier.

Key Components of the Resolution

The resolution for restructuring must address several important aspects, including:

1. Future conduct of the company’s affairs
2. Share purchase arrangements
3. Modification of existing agreements with directors, secretaries, and managers
4. Treatment of recent property transfers or payments
5. Transfer of undertakings, properties, or liabilities
6. Allotment of shares or other interests in the merged company
7. Continuation of legal proceedings
8. Provisions for dissenting members or creditors
9. Tax considerations

Legal Effects of Restructuring

1. Asset Transfer: The resolution serves as a sufficient conveyance to vest assets and liabilities in the transferee company.
2. Company Dissolution: In cases of complete transfer, merger, or amalgamation, the original company’s registration is cancelled, and it ceases to exist as a corporate body.
3. Rights and Obligations: Pre-existing rights, obligations, and legal proceedings are not affected by the restructuring process.

Appeals and Oversight

1. Any aggrieved member, creditor, or employee can file an appeal with the Tribunal within 30 days of the resolution’s passing.
2. The Tribunal has the authority to pass orders after giving reasonable opportunity to concerned parties.
3. If an appeal is filed, the restructuring process becomes subject to the Tribunal’s decision.

Resolution of Disputes under Producer Companies

To ensure smooth functioning and maintain harmony among stakeholders, the law provides a comprehensive framework for resolving conflicts. This article explores the dispute resolution mechanism for producer companies, as outlined in Section 378Z-O of the relevant legislation.

Scope of Disputes

The law recognizes a wide range of disputes that may arise within the context of producer companies. These disputes can occur between various parties, including:

1. Members, former members, or individuals claiming membership
2. Members (current or former) and the producer company itself
3. The producer company and its directors, office-bearers, or liquidators (past or present)

Moreover, the law explicitly defines certain situations as disputes, including:

• Claims for debts or other amounts due
• Claims by sureties against principal debtors
• Claims by the producer company against members for failure to supply produce
• Claims by members against the producer company for not accepting supplied goods

Resolution Mechanism

The legislation mandates that all disputes falling under the specified categories must be settled through either conciliation or arbitration. This process is governed by the Arbitration and Conciliation Act, 1996, which provides a structured approach to alternative dispute resolution.

Key Points of the Resolution Process:

1. Consent Assumption: The law assumes that all parties involved in the dispute have given written consent for resolution through conciliation or arbitration.
2. Applicability of the Arbitration Act: The provisions of the Arbitration and Conciliation Act, 1996, apply in full to these dispute resolution proceedings.
3. Determination of Dispute Nature: If any question arises about whether a particular issue relates to the formation, management, or business of the producer company, it is referred to an arbitrator. The arbitrator’s decision on this matter is considered final.

Re-Conversion of Producer Companies to Inter State Co-operative Society 

Section 378ZS of the Companies Act provides a specific legal pathway for producer companies, which were originally inter-state cooperative societies, to revert to their previous form. This provision recognizes that some producer companies may find it beneficial or necessary to return to the cooperative structure. This section examines the detailed process, requirements, and implications of this re-conversion as outlined in Section 378ZS.

The Re-conversion Process

Initiation of Re-conversion

The process of re-conversion can be initiated through two primary channels:

1. Member-driven Initiative: A resolution passed in the general meeting by at least two-thirds of the members present and voting.
2. Creditor-driven Initiative: A request made by creditors representing three-fourths of the total creditor value.

In either case, an application must be submitted to the Tribunal for consideration.

Tribunal’s Role and Proceedings

Upon receiving the application, the Tribunal plays a crucial role in overseeing the re-conversion process:

1. The Tribunal directs the holding of meetings for members or creditors, as applicable.
2. These meetings must be conducted as per the Tribunal’s guidelines.
3. For the re-conversion to proceed, it requires approval from a majority representing three-fourths in value of the creditors or members present and voting.

Tribunal Sanction and Disclosure Requirements

The Tribunal’s sanction is pivotal for the re-conversion process. However, before granting approval, the Tribunal must be satisfied with the disclosure of all material facts related to the company, including:

• The latest financial position
• The most recent auditor’s report
• Any pending investigation proceedings

This requirement ensures transparency and protects the interests of all stakeholders involved.

Post-Sanction Procedures

Once the Tribunal sanctions the re-conversion, several steps must be followed:

1. Filing with Registrar: A certified copy of the Tribunal’s order must be filed with the Registrar of Companies.
2. Documentation Update: The order must be annexed to every copy of the company’s memorandum or constitution document issued thereafter.
3. Re-registration: Within six months of the Tribunal’s sanction, the company must apply for registration as a multi-State cooperative society or cooperative society under the Multi-State Co-operative Societies Act, 2002, or any other applicable law.
4. Reporting: The company must file a report of this registration to the Tribunal, the Registrar of Companies, and the Registrar of Co-operative Societies.

Conclusion

In conclusion, Producer Companies represent a transformative opportunity for farmers to unite and leverage collective strength in their agricultural endeavors. By offering a structured framework for collaboration in production, marketing, and sales, they empower farmers to achieve greater efficiency and profitability. Governed by the Companies Act 2013, these entities benefit from a robust regulatory framework that ensures transparency and accountability, mirroring the standards of traditional companies. Through such cooperative models, we can foster sustainable agricultural growth and drive meaningful rural development, creating a more resilient and prosperous agricultural community for the future.