Producer Companies

"Producer" means any person engaged in any activity connected with or relatable to any primary produce.

"Producer Company" means a body corporate having objects or activities specified in section 378B and registered as a Producer Company under this Act or under the Companies Act, 1956.

"Producer Institution" means a Producer Company or any other institution having only producers or Producer Companies as its members, whether incorporated or not, having any of the section 378B objects and agreeing to use the services of the Producer Company as its articles provide.

"Member" means a person or Producer Institution admitted as a Member who retains the qualifications necessary for continuance.

"Active Member", "patronage", "patronage bonus", "limited return", "withheld price", "Chief Executive", "officer", "mutual assistance principles" and "inter-State co-operative society" are defined as noted above and below.

The objects: section 378B

The objects shall relate to all or any of:

• (a) production, harvesting, procurement, grading, pooling, handling, marketing, selling and export of the primary produce of the Members, or import of goods or services for their benefit, either by itself or through other institutions;
• (b) processing, including preserving, drying, distilling, brewing, vinting, canning and packaging of Members' produce;
• (c) manufacture, sale or supply of machinery, equipment or consumables mainly to its Members;
• (d) providing education on the mutual assistance principles to Members and others;
• (e) technical services, consultancy, training, research and development and all other activities for the promotion of Members' interests; and further objects covering generation, transmission and distribution of power, revitalisation of land and water resources, insurance of producers or their primary produce, promotion of techniques of mutuality and mutual assistance, welfare measures for Members, and financing of procurement, processing, marketing or other activities including credit facilities.

Note the word "mainly" in clause (c) and "for their benefit" in clause (a): the company exists for the Members' produce, not as a general trading company.

Formation: section 378C

Section 378C(1): who may form it. Any ten or more individuals, each of them being a producer, or any two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions, desirous of forming a Producer Company having the section 378B objects, may form an incorporated company as a Producer Company.

Ten individuals, or two institutions. That asymmetry is worth remembering.

Section 378C(2). If satisfied that the requirements are complied with, the Registrar shall, within thirty days of receipt of the documents, register the memorandum, the articles and other documents and issue a certificate of incorporation.

Section 378C(3). A Producer Company so formed shall have the liability of its Members limited by the memorandum to the amount unpaid on their shares and shall be termed a company limited by shares.

Section 378C(4). It may reimburse to its promoters the direct costs associated with the promotion and registration, as the Board may decide.

And there is one thing it cannot become. A Producer Company shall not become or be deemed to become a public limited company by reason of anything in this Act.

The constitution, and its alteration: sections 378F to 378-I

Section 378F: the memorandum. The memorandum of every Producer Company shall state the name, with "Producer Company Limited" as the last words; the State in which the registered office is to be situate; the main objects, being one or more of those in section 378B; the names and addresses of the subscribers; the amount of share capital and its division into shares of a fixed amount; the names of the first directors; and the further particulars the section requires.

Section 378G: the articles. The memorandum and the articles, duly signed, are presented for registration to the Registrar of the State in which the registered office is to be situate; and the articles shall contain the mutual assistance principles the sub-section sets out, which are the co-operative principles the definition in section 378A(f) refers to.

Section 378H: amending the memorandum. A Producer Company shall not alter the conditions of its memorandum except in the cases, by the mode and to the extent for which express provision is made in this Act; it may, by special resolution not inconsistent with section 378B, alter its objects, and the amended memorandum, with the resolution, is filed with the Registrar within the time the section allows.

Section 378-I: amending the articles. Any amendment shall be proposed by not less than two-thirds of the elected directors, or by not less than one-third of the Members, and adopted by the Members by a special resolution; and a copy of the amended articles with the special resolution, both certified by two directors, shall be filed with the Registrar within fifteen days of its adoption.

Note the proposing thresholds in section 378-I. They are the co-operative idea again: the Members themselves, at one third, may put an amendment before the general meeting without the Board.

Converting an inter-State co-operative society: sections 378J to 378N

Section 378J. Notwithstanding section 378C(1), any inter-State co-operative society with objects not confined to one State may apply to the Registrar for registration as a Producer Company under this Chapter, on the conditions and with the documents the section requires, and on registration it becomes a Producer Company.

Section 378K: the shareholders. Every shareholder of the inter-State co-operative society immediately before the date of registration, called the date of transformation, is deemed to be registered from that date as a shareholder of the Producer Company to the extent of the face value of the shares held by him.

Section 378L: the undertaking. From the date of transformation, all properties and assets, movable and immovable, of or belonging to the society vest in the Producer Company; and all its rights, debts, liabilities, interests, privileges and obligations stand transferred to and become those of the Producer Company, along with contracts entered into and matters engaged to be done by, with or for the society.

Section 378M: concessions. From the same date, all fiscal and other concessions, licences, benefits, privileges and exemptions granted to the society under any law in connection with its affairs and business are deemed to have been granted to the Producer Company.

Section 378N: the people. Notwithstanding section 378-O, all the directors of the society before the incorporation continue in office for one year from the date of transformation; and the section makes corresponding provision for the officers and other employees, who continue on the same terms.

Sections 378K to 378M together are the conversion in miniature, and they follow exactly the pattern of sections 368 to 370 for a body registering under Part I of Chapter XXI: the members become members, the property vests, the liabilities survive.

Voting: section 378D

Three rules, according to who the Members are.

• (a) where the membership consists solely of individual Members, the voting rights are a single vote for every Member, irrespective of his shareholding or patronage;
• (b) where it consists only of Producer Institutions, their voting rights are determined on the basis of their participation in the business in the previous year, as the articles specify; proviso, in the first year of registration they are determined on the basis of shareholding; and
• (c) where it consists of individuals and Producer Institutions, the voting rights are a single vote for every Member.

Section 378D(2). The articles may provide the conditions on which a Member may retain membership and the manner of exercising voting rights.

Clause (a) is the co-operative principle in the Act's own words, and clause (c) shows how far it goes: even where institutions are members, if individuals are also members, everybody has one vote.

What a Member gets: section 378E

Section 378E(1): the withheld price. Every Member shall initially receive only such value for the produce or products pooled and supplied as the Board may determine, and the withheld price may be disbursed later in cash, in kind, or by allotment of equity shares, in proportion to the produce supplied during the financial year.

Section 378E(2): a limited return only. Every Member shall, on the share capital contributed, receive only a limited return, that is the maximum dividend specified by the articles; proviso, he may be allotted bonus shares under section 378ZJ.

Section 378E(3): patronage bonus. The surplus remaining after providing for the limited return and the reserves may be disbursed as patronage bonus among the Members in proportion to their participation in the business, in cash or by allotment of equity shares or both, as decided by the Members at the general meeting.

Read those three together and the economics of the form appear. The Member is paid for his produce, not for his capital; his capital earns a capped return; and the profit comes back to him in proportion to how much he traded with the company.

Management: sections 378-O to 378X

Section 378-O: the Board. At least five and not more than fifteen directors; proviso, an inter-State co-operative society incorporated as a Producer Company may have more than fifteen for one year from that incorporation.

Section 378P: appointment. The Members who sign the memorandum and articles may designate the first Board, not less than five, to govern until directors are elected; the election shall be conducted within ninety days of registration, extended to three hundred and sixty-five days for a converted inter-State co-operative society with at least five continuing directors; and every director holds office for not less than one year and not exceeding five years as the articles specify.

Section 378Q: vacation of office. The office of a director becomes vacant if he is convicted of an offence involving moral turpitude and sentenced to imprisonment for not less than six months, and on the further grounds the section sets out, including default in payments to the company and failure to attend Board meetings as the sub-section provides.

Section 378R: powers and functions of the Board. Subject to the Act and the articles, the Board shall exercise all such powers and do all such acts and things as the Company is authorised to do; and the sub-section lists the particular powers, among them the determination of the dividend payable, the admission of Members, the acquisition or disposal of property in the ordinary course, the investment of funds, and the appointment of the Chief Executive.

Section 378U: committees. The Board may constitute such number of committees as it deems fit to assist it; proviso, it shall not delegate any of its powers, or assign the powers of the Chief Executive, to any committee, and every such committee functions under the Board's general superintendence, direction and control.

Section 378S: what only the annual general meeting may do. The Board shall exercise the following powers only by resolutions passed at the annual general meeting: approval of the budget and adoption of the annual accounts; approval of patronage bonus; issue of bonus shares; declaration of limited return and the decision on distribution of patronage; specifying the conditions and limits of loans that may be given by the Board to any director; and approval of any transaction reserved by the articles.

Section 378T: liability of directors. Where directors vote for or approve anything done in contravention of this Act, any other law or the articles, they are jointly and severally liable to make good any loss or damage; and the company may recover from a director the profit he made by the contravention, and the loss or damage it suffered.

Section 378V: Board meetings. Not less than once in every three months and at least four in every year; written notice to every director in India and to the usual Indian address of every other; the Chief Executive gives not less than seven days' notice, failing which he is liable to a penalty of five thousand rupees, though a meeting may be called on shorter notice with reasons recorded in writing; and the quorum is one-third of the total strength of directors.

Section 378W: the Chief Executive. Every Producer Company shall have a full time Chief Executive appointed by the Board from among persons other than Members; he is an ex officio director who does not retire by rotation; his qualifications and terms are determined by the Board save as the articles provide; and he is entrusted with substantial powers of management, including the day-to-day affairs of the company.

Note the contrast with the rest of the Act. Elsewhere "substantial powers of management" makes a director a managing director under section 2(54); here the Chief Executive is required to be a non-Member and is an ex officio director.

Section 378X: the Secretary. Every Producer Company with an average annual turnover exceeding five crore rupees, or such other prescribed amount, in each of three consecutive financial years, shall have a whole-time secretary, who must be a member of the Institute of Company Secretaries of India. Default costs the company and every officer in default one hundred rupees for every day, subject to a maximum of one lakh rupees.

Section 378Y: the quorum. Unless the articles require a larger number, one-fourth of the total membership shall constitute the quorum at a general meeting; and by section 378Z, save as section 378D otherwise provides, every Member has one vote, the Chairman or person presiding having a casting vote in the case of equality.

Section 378ZA: the annual general meeting. One in each year, specified as such in the notice, with not more than fifteen months between one and the next, the Registrar being able to extend by up to three months for special reasons, except for the first; the first annual general meeting within ninety days of incorporation; the Members adopt the articles and appoint the directors at it; and the notice is accompanied by the agenda, the minutes of the previous meeting, and the names of candidates for election with the prescribed statement.

Capital and shares: sections 378ZB to 378ZD

Section 378ZB. The share capital shall consist of equity shares only, and the shares held by a Member shall, as far as may be, be in proportion to his patronage.

Section 378ZC: special user rights. Active Members may, if the articles so provide, have special rights, and the company may issue appropriate instruments in respect of them, transferable to any other active Member with the Board's approval. A "special right" means a right relating to the supply of additional produce by the active Member or any other right relating to his produce conferred by the Board.

Section 378ZD: transferability. The shares of a Member shall not be transferable, save that a Member may, with the previous approval of the Board, transfer the whole or part of his shares, with any special rights, to an active Member at par value; and every Member shall, within three months of becoming one, nominate a person to whom his shares shall vest on his death.

That single sub-section is the sharpest difference from an ordinary company. Shares are not transferable, and where transfer is permitted it is only to an active Member and only at par.

Finance: sections 378ZE to 378ZL

Sections 378ZE to 378ZG require books of account showing all sums received and expended, sales and purchases, assets and liabilities, and the particulars relating to loans; an internal audit at such intervals and in such manner as specified by the articles, by a chartered accountant; and add to the auditor's duties a report on the amounts of debts due, the cash balance and securities, the assets and liabilities, and any loans given to directors and their repayment.

Section 378ZH. A Producer Company may make donations or subscriptions to any institution or individual for promoting the social and economic welfare of Producer Members or producers or the general public, or for any purpose which may advance the objects of the company; but not to a political party or for a political purpose, and the aggregate in a financial year shall not exceed three per cent of the net profit of the preceding financial year.

Section 378Z-I: reserves. Every Producer Company shall maintain a general reserve in every financial year in addition to any reserve specified in the articles; and where it has insufficient funds to make the transfer, the contribution to the reserve shall be shared among the Members in proportion to their patronage in that year.

Section 378ZJ: bonus shares. On the Board's recommendation and a resolution in general meeting, bonus shares may be issued by capitalising amounts from the general reserves in proportion to the shares held on the date of issue.

Section 378ZK: loans to Members. The Board may, subject to the articles, provide financial assistance by way of (a) credit facility for a period not exceeding six months in connection with the business, and (b) loans and advances against security specified in the articles, repayable within a period exceeding three months but not exceeding seven years; proviso, a loan or advance to a director or his relative requires the approval of the Members in general meeting.

Section 378ZL. The general reserves shall be invested to secure the highest returns available from approved securities, fixed deposits, units, bonds issued by the Government, or a co-operative or scheduled bank, or as prescribed; and the section governs investment in other companies and the formation of subsidiaries.

Penalties, disputes and the closing sections

Section 378ZM. A person other than a Producer Company who carries on business under a name containing "Producer Company Limited" is punishable with fine up to ten thousand rupees for every day the name is used. A director or officer who wilfully fails to furnish information about the company's affairs required by a Member or a duly authorised person is liable to imprisonment up to six months and fine equivalent to five per cent of the turnover of the preceding financial year. Further sub-sections punish the making of false statements and the failure to comply with an order of the Registrar or Tribunal.

Section 378ZN. Provides for amalgamation, merger or division to form new Producer Companies, on a resolution passed by not less than two-thirds of the Members present and voting, with rights of dissenting Members.

Section 378Z-O: disputes. Where a dispute relating to the formation, management or business arises among Members, former Members or claimants and nominees of deceased Members; between such a person and the company, its Board, office-bearers or liquidator, past or present; or between the company or its Board and any director, office-bearer, former director or a deceased director's nominee, heir or legal representative, it shall be settled by conciliation or by arbitration as provided under the Arbitration and Conciliation Act, 1996, as if the parties had agreed in writing to refer it.

Section 378ZP. The Registrar may strike the name of a Producer Company off the register in the circumstances provided, with a right of appeal.

Section 378ZQ: overriding effect. The provisions of this Chapter have effect notwithstanding anything inconsistent contained in this Act or any other law for the time being in force or any instrument having effect by virtue of such law; but so much of any such law or instrument as is not varied by, or inconsistent with, this Chapter shall apply.

Section 378ZR: the analogy. All the limitations, restrictions and provisions of this Act, other than those specified in this Chapter, applicable to a private company, shall as far as may be apply to a Producer Company as if it were a private limited company, so far as they are not in conflict with this Chapter.

Section 378ZT: power to modify the Act. The Central Government may, by notification, direct that any provisions of this Act other than those in this Chapter shall not apply to Producer Companies or a class of them, or shall apply with such exceptions, modifications and adaptations as may be specified.

Sections 378ZS to 378ZU. Provide for the re-conversion of a Producer Company, being an erstwhile inter-State co-operative society, into such a society, on an application to the Tribunal after a resolution of not less than two-thirds of the Members present and voting, or on the request of creditors representing three-fourths in value, and for the consequences of that re-conversion.

A worked example

Fourteen mango growers of Ratnagiri and two farmer institutions wish to market and process their fruit together.

May they form a Producer Company? Yes. Section 378C(1) allows ten or more individuals each being a producer, two or more Producer Institutions, or a combination. Mangoes are primary produce, being the produce of farmers arising from horticulture.

The objects. Marketing and selling the primary produce of Members under clause (a), processing including canning and packaging under clause (b), and rendering technical services and training under clause (e): section 378B.

Registration. The Registrar, satisfied of compliance, registers the memorandum and articles and issues a certificate of incorporation within thirty days of receiving the documents; the company is limited by shares, the Members' liability being the amount unpaid on their shares: section 378C(2) and (3).

Voting. The membership consists of individuals and Producer Institutions, so under section 378D(1)(c) the voting rights are a single vote for every Member. The two institutions, however large their dealings, have one vote each, and so does the smallest grower.

What the Members get. Each is paid initially such value for the mangoes as the Board determines, the withheld price being disbursed later in cash, in kind or in equity shares in proportion to what he supplied. On his capital he receives only a limited return, that is the maximum dividend the articles specify. And the surplus left after the limited return and the reserves may be distributed as patronage bonus in proportion to his participation in the business, as the general meeting decides: section 378E.

His shares. They are not transferable. If he wishes to leave, he may, with the Board's previous approval, transfer them, with any special rights, to an active Member at par value, and no more. Within three months of becoming a Member he must nominate a person to whom the shares will vest on his death: section 378ZD.

Management. The Board is of not less than five and not more than fifteen directors, the first designated in the memorandum and articles, with elections within ninety days of registration, each director holding office for not less than one year and not more than five. The Board meets at least once in every three months and four times a year, on seven days' written notice from the Chief Executive, with a quorum of one-third of the total strength. The Chief Executive is full time, appointed by the Board from among non-Members, is an ex officio director not liable to retire by rotation, and has substantial powers of management.

What the Board cannot decide alone. The budget and annual accounts, the patronage bonus, bonus shares, the declaration of limited return and the distribution of patronage, and the conditions and limits of loans to a director may be decided only by resolution at the annual general meeting: section 378S.

The first meeting. The first annual general meeting is held within ninety days of incorporation, at which the Members adopt the articles and appoint the directors; thereafter one is held each year, with not more than fifteen months between meetings: section 378ZA.

A loan to a grower. The Board grants him a credit facility for four months in connection with the business, which is within section 378ZK(a)'s six months; and a loan for five years against security specified in the articles, which is within clause (b)'s three months to seven years. A loan to a director's son would need the approval of the Members in general meeting.

A donation. The company gives two lakh rupees to a village school. That is permitted as promoting the social and economic welfare of producers or the general public, provided the aggregate for the year does not exceed three per cent of the net profit of the preceding financial year, and provided it is not to a political party or for a political purpose: section 378ZH.

Reserves. It maintains a general reserve every financial year; in a poor year, having insufficient funds, the contribution is shared among the Members in proportion to their patronage: section 378Z-I. In a good year it issues bonus shares by capitalising the general reserve on the Board's recommendation and a resolution in general meeting: section 378ZJ.

A dispute. Two Members quarrel with the Board about the grading of their fruit. Under section 378Z-O the dispute is settled by conciliation or arbitration under the Arbitration and Conciliation Act, 1996, as if the parties had agreed in writing to refer it; it does not go to the Tribunal as an oppression petition would.

A trader who copies the name. A private firm calls itself "Konkan Fruit Producer Company Limited" without being registered as one. It is punishable with fine up to ten thousand rupees for every day the name is used: section 378ZM(1).

Which other provisions apply. By section 378ZR, the limitations and provisions of the Act applicable to a private company apply as far as may be, so far as they do not conflict with this Chapter; and by section 378ZQ, where they do conflict, this Chapter prevails, notwithstanding anything in this Act or any other law.

Distinctions that carry marks

What this does NOT mean

It does not mean a Producer Company is a co-operative society. It is a body corporate registered under the Companies Act, limited by shares.

It does not mean voting follows shareholding. Where individuals are Members, it is one vote per Member irrespective of shareholding or patronage; only where the membership is institutions alone is it based on participation, and even then on shareholding in the first year.

It does not mean Members share profits in proportion to their capital. They receive a limited return on capital and a patronage bonus in proportion to their participation in the business.

It does not mean the shares can be sold. They are not transferable, save to an active Member, at par value, with the Board's previous approval.

It does not mean the Chief Executive may be a Member. He must be appointed from among persons other than Members.

It does not mean the ordinary company law is displaced entirely. By section 378ZR the provisions applicable to a private company apply so far as they are not in conflict, and by section 378ZQ this Chapter prevails where they are.

Quick revision

• 378A: primary produce covers agriculture and its branches, handloom, handicraft and cottage industries, their products, by-products and ancillary activities, and activities to increase production or improve quality; a producer is anyone engaged in an activity connected with it; a Producer Company is a body corporate with section 378B objects registered as such; a Member retains the qualifications for continuance; an active Member meets the quantum and period of patronage the articles require; patronage is use of the company's services; a patronage bonus is paid out of surplus in proportion to patronage; limited return is the maximum dividend under the articles; withheld price is the part of the price kept back for later payment.
• 378B and 378C: objects of production, procurement, grading, pooling, marketing, selling and export of Members' produce and import for their benefit, processing, machinery and consumables mainly for Members, education on mutual assistance, technical services and research, power, land and water, insurance, welfare and financing; formed by ten or more individual producers, two or more Producer Institutions, or a combination, registered within thirty days, limited by shares, and never deemed a public company.
• 378D and 378E: one vote per Member where individuals are Members, alone or with institutions; participation in the previous year where institutions alone, shareholding in the first year; Members receive the value the Board determines with the withheld price later, a limited return on capital, and a patronage bonus out of surplus in proportion to participation.
• 378-O to 378ZA: five to fifteen directors, more for a year for a converted inter-State co-operative society; first Board designated, elections within ninety days, terms of one to five years; directors jointly and severally liable for contraventions, with recovery of profit made and loss caused; four Board meetings a year, one every three months, seven days' notice on pain of five thousand rupees, one-third quorum; a full-time Chief Executive from among non-Members, an ex officio director not retiring by rotation with substantial powers of management; a whole-time company secretary above five crore rupees average turnover; and an annual general meeting with fifteen months between meetings, the first within ninety days, at which the articles are adopted and directors appointed; section 378S reserves six matters to that meeting.
• 378ZB to 378ZD: equity shares only, held as far as may be in proportion to patronage; special user rights for active Members, transferable to another active Member with Board approval; and shares not transferable save to an active Member at par with the Board's previous approval, with a nomination within three months of becoming a Member.
• 378ZE to 378ZL: books of account, internal audit by a chartered accountant, an enlarged auditor's duty; donations up to three per cent of the preceding year's net profit, and none to a political party or for a political purpose; a general reserve every year, shared in proportion to patronage when funds are short; bonus shares by capitalising the general reserve; credit facility up to six months and loans from three months to seven years, a loan to a director or his relative needing the general meeting's approval; and investment of the general reserves in approved securities, deposits, units, Government bonds or bank deposits.
• 378ZM to 378ZU: ten thousand rupees a day for misuse of the name, six months' imprisonment and five per cent of turnover for wilfully withholding information; amalgamation, merger or division on a two-thirds resolution; disputes settled by conciliation or arbitration under the Arbitration and Conciliation Act, 1996; power to strike off; the Chapter overrides anything inconsistent in this Act or any other law; the provisions applicable to a private company otherwise apply; and re-conversion to an inter-State co-operative society on a two-thirds resolution or the request of creditors representing three-fourths in value.

Test yourself

1. Who may form a Producer Company? Any ten or more individuals, each of them being a producer, or any two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions, desirous of forming a company having the objects specified in section 378B: section 378C(1).

2. How are voting rights determined? Where the membership consists solely of individual Members, a single vote for every Member irrespective of his shareholding or patronage; where it consists only of Producer Institutions, on the basis of their participation in the business in the previous year, and in the first year of registration on the basis of shareholding; and where it consists of both, a single vote for every Member: section 378D(1).

3. What return may a Member have on his capital, and how is surplus distributed? Only a limited return, that is the maximum dividend specified by the articles, with the possibility of bonus shares under section 378ZJ. The surplus remaining after the limited return and the reserves may be distributed as patronage bonus in proportion to the Members' participation in the business, in cash or in equity shares or both, as the general meeting decides: section 378E.

4. Are the shares of a Producer Company transferable? No. The shares of a Member shall not be transferable, save that he may, with the previous approval of the Board, transfer the whole or part of them, along with any special rights, to an active Member at par value; and every Member must nominate, within three months of becoming a Member, a person to whom his shares shall vest on his death: section 378ZD.

5. Which matters may be decided only at the annual general meeting? Approval of the budget and adoption of the annual accounts; approval of the patronage bonus; issue of bonus shares; declaration of the limited return and the decision on the distribution of patronage; specifying the conditions and limits of loans that may be given by the Board to any director; and approval of any transaction reserved by the articles: section 378S.

6. How are disputes in a Producer Company settled? A dispute relating to the formation, management or business of the company, among Members, former Members, claimants or nominees of deceased Members, between such persons and the company, its Board, office-bearers or liquidator, or between the company or its Board and a director, office-bearer, former director or a deceased director's nominee, heir or legal representative, is to be settled by conciliation or by arbitration under the Arbitration and Conciliation Act, 1996, as if the parties had agreed in writing to refer it: section 378Z-O.