Producer Companies

Formation and registration. Section 378C prescribes who may form one, ten or more individual producers, or two or more producer institutions, or a combination, and provides for registration, on which the Registrar issues a certificate and the company is registered as if it were a private company but without the limit on the number of members. Section 378D governs membership and voting rights: where the members are all individuals, voting is one member one vote irrespective of shareholding; where all are producer institutions, voting is in proportion to their participation in business in the previous year; and where membership is mixed, voting is one vote per member, with the section providing for the position in the first year. Section 378E sets out the benefits to members, including that produce supplied may be paid for with a withheld price disbursed later in cash or in kind or by equity shares, and that members may receive limited return on share capital and patronage bonus distributed by the Board out of surplus.

Constitution. Section 378F prescribes the contents of the memorandum; section 378G the articles, which must contain the mutual assistance principles; section 378H the amendment of memorandum, requiring a special resolution and, where the objects change, the prescribed conditions; and section 378-I the amendment of articles, again by special resolution with a copy filed with the Registrar.

Conversion of inter-State co-operative societies. This is the block that gives the Chapter its historical shape, and it must be named rather than skipped. Section 378J gives an inter-State co-operative society the option to become a producer company; section 378K states the effect of incorporation, the society ceasing to be one and becoming a producer company; section 378L provides for the vesting of the undertaking, all property, assets, rights, debts and liabilities passing to the new company; section 378M deems concessions, licences, exemptions and benefits granted to the society to continue to the producer company; and section 378N protects the officers and employees, whose service continues on terms not less favourable.

Management. Section 378-O fixes the number of directors, at least five and not more than fifteen, with a proviso for a converted inter-State co-operative society. Section 378P governs appointment of directors, including the term, the appointment of expert directors and additional directors, and the requirement that the first directors be named in the articles. Section 378Q lists the grounds for vacation of office. Section 378R sets out the powers and functions of the Board, from determination of dividend and patronage bonus to admission of members and control over investments. Section 378S lists the matters to be transacted at a general meeting, which include approval of the budget, adoption of accounts, disposal of surplus and declaration of patronage bonus. Section 378T imposes liability of directors where the company's business is conducted in a manner prejudicial to its interests, and section 378U permits the constitution of committees of directors. Section 378V governs meetings of the Board and quorum, requiring at least four meetings a year and not less than one in every three months. Section 378W provides for the Chief Executive and his functions, who is to be appointed by the Board, is an ex officio director, and manages the company's affairs subject to the Board's superintendence. Section 378X requires a Secretary for a producer company with an average annual turnover above the prescribed figure.

Meetings. Section 378Y prescribes the quorum for a general meeting, and section 378Z the voting rights in it. Section 378ZA governs annual general meetings, including the period within which the first is to be held, the notice, and the business to be transacted.

Capital and accounts. Section 378ZB deals with share capital, which is to consist of equity shares only, with the possibility of special rights. Section 378ZC provides for special user rights to members holding those shares. Section 378ZD governs transferability of shares and attendant rights, providing that shares are not transferable except with the Board's previous approval and only to an active member at par value, with a nomination requirement, which is the co-operative principle protecting the membership from outside acquisition. Section 378ZE requires books of account to be kept, including of receipts and utilisation of the produce, of services rendered, and of the cost of production. Section 378ZF requires an internal audit at the prescribed intervals by a chartered accountant. Section 378ZG imposes additional duties of the auditor under the Chapter, requiring the audit report to state, among other things, the amount of debts due with their classification, verification of cash balance and securities, details of assets and liabilities, loans given to directors, donations and subscriptions, and any other prescribed matter.

Surplus and its uses. Section 378ZH limits donation or subscription, permitting them for promoting the members' social and economic welfare or the producer company's objects, and expressly prohibiting any contribution to a political party or for a political purpose. Section 378Z-I requires general and other reserves to be maintained, the section providing for contribution in proportion to patronage where a producer company has insufficient funds to meet the reserve requirement. Section 378ZJ permits the issue of bonus shares out of general reserves in proportion to shares held. Section 378ZK permits loans to members who are active members, and section 378ZL governs investment in other companies and formation of subsidiaries, capping the general reserves that may be so invested and requiring a special resolution for investments beyond the prescribed limit.

Enforcement and exit. Section 378ZM prescribes the penalty for contravention of the Chapter. Section 378ZN provides for amalgamation, merger or division of producer companies into new ones, the whole process being between producer companies. Section 378Z-O requires disputes relating to the formation, management or business of a producer company to be settled by conciliation or arbitration under the Arbitration and Conciliation Act 1996, as if the parties had agreed in writing to refer. Section 378ZP empowers the Registrar to strike off the name of a producer company that has not commenced business within one year or has not carried on business for two consecutive financial years, subject to notice and an opportunity of representation. Section 378ZQ gives the Chapter overriding effect over other laws. Section 378ZR applies the provisions relating to private companies to a producer company. Section 378ZS allows re-conversion into an inter-State co-operative society. Section 378ZT empowers the Central Government to modify the Act in its application to producer companies, and section 378ZU to make rules for the Chapter.

A worked example

Two hundred and forty mango growers in Ratnagiri wish to build a common grading and pulping facility and to sell under one label.

Formation. They cannot use s.3's ordinary route and expect the co-operative features; they form a producer company under s.378C, needing only ten individual producers, each of whom must be a producer as defined in s.378A. The memorandum follows s.378F and the objects come from s.378B: procurement, grading, pooling and marketing of the primary produce of members, processing including preserving and canning, and financing of procurement and marketing.

Who decides. Membership being all individuals, s.378D gives each member one vote regardless of holding, so the largest grower cannot control the company. That single rule is the co-operative principle in operation, and it is the answer to any question asking how a producer company differs from an ordinary private company with the same members.

Who gets what. The company pays growers a withheld price for the fruit under s.378E, holding back part of the value until the season's results are known, and distributes the remainder as patronage bonus in proportion to produce supplied, not to shares held. Members may also receive a limited return on their shares. The distinction is worth stating: a dividend rewards capital, a patronage bonus rewards participation.

Who cannot get in. A Mumbai investor offers to buy shares from a grower at three times par. Section 378ZD forbids it: shares are not transferable except with the Board's previous approval, only to an active member, and only at par value. The company is therefore protected from being taken over by people who supply no mangoes, which is precisely what happened to co-operatives that were allowed open share transfer.

If it goes wrong. A dispute between a member and the Board about admission or patronage goes to conciliation or arbitration under s.378Z-O, not to a suit. If the company never commences business, the Registrar may strike it off under s.378ZP after notice. If the growers later wish to return to the co-operative fold, s.378ZS permits re-conversion into an inter-State co-operative society.

Distinctions

What it does NOT mean

Not a co-operative society. It is a company registered under this Act, and the Registrar of Companies, not the Registrar of Co-operative Societies, is its authority; s.378ZQ gives the Chapter overriding effect.

Not a private company in every respect. Section 378ZR applies the private-company provisions, but the membership cap does not apply and Chapter XXIA's own rules prevail where they differ.

Not a vehicle for outside investors. Section 378ZD's transfer restriction and s.378D's voting rule together make outside control practically impossible, which is the design rather than an oversight.

Quick revision

Chapter XXIA, ss.378A to 378ZU, inserted 2020, reproducing Part IXA of the 1956 Act. s.378A definitions; s.378B objects; s.378C formation by ten producers or two producer institutions; s.378D one member one vote; s.378E withheld price, limited return, patronage bonus; s.378F memorandum, s.378G articles, s.378H and s.378-I amendments; s.378J option to convert an inter-State co-operative society, s.378K effect of incorporation, s.378L vesting of the undertaking, s.378M concessions deemed granted, s.378N officers and employees protected; s.378-O five to fifteen directors; s.378P appointment of directors, s.378Q vacation of office, s.378R Board powers and functions, s.378S general-meeting matters, s.378T directors' liability, s.378U committees; s.378V Board meetings, four a year; s.378W Chief Executive; s.378X Secretary; s.378Y quorum, s.378Z voting, s.378ZA annual general meeting; s.378ZB equity share capital, s.378ZC special user rights, s.378ZD non-transferability except to active members at par; s.378ZE books, s.378ZF internal audit, s.378ZG auditor's additional duties; s.378ZH donations, no political contribution; s.378Z-I reserves; s.378ZJ bonus shares; s.378ZK loans to active members; s.378ZL investments and subsidiaries; s.378ZM penalty; s.378ZN amalgamation; s.378Z-O arbitration of disputes; s.378ZP strike off; s.378ZQ overriding effect; s.378ZR private-company provisions apply; s.378ZS re-conversion; s.378ZT modification; s.378ZU rules.

Test yourself

1. How is voting power determined in a producer company all of whose members are individuals? One member, one vote, irrespective of shareholding, under s.378D, which is the co-operative principle rather than the corporate one.

2. A member wishes to sell his shares to an outsider at a premium. Advise. Not permitted: s.378ZD makes shares transferable only with the previous approval of the Board, only to an active member, and only at par value.

3. Distinguish a patronage bonus from a dividend. A patronage bonus, s.378E, is distributed out of surplus in proportion to the produce supplied by the member, rewarding participation; a dividend rewards capital. A producer company may also pay a limited return on share capital.

4. Where does a dispute about the management of a producer company go? To conciliation or arbitration under s.378Z-O, applying the Arbitration and Conciliation Act 1996 as if the parties had agreed in writing to refer.

5. Why does Chapter XXIA use section numbers with hyphens, such as 378-I and 378Z-O? Because the Legislative Department hyphenates a lettered section where the bare letter would read as a digit; the hyphen is part of the section number, and a student must cite it as the Act prints it.