Producer Company

A brief history

In India, a majority of farmers are small and marginal who cultivate small plots of land. Their income is less than their consumption expenditure due to subsequent droughts and monsoon failures, ensuing failure of crops. Other restraints such as nominal market information, high transaction costs, impeded access to credits, heft interest rates on loans add to the farmers’ deficit, hence decreasing their scale of production. Furthermore, the majority of farmers in India work in isolation.

For yearsplethora of approaches have been taken to organise farmers, especially smallholder farmers, in order to enhance their farm profitability. The concept of ‘Cooperative’ was one of the options available for the producers to organise themselves as an active player in the supply-chain by value addition and business ownership.[1]

On recommendations of an expert panel headed by Y.K. Alagh, the government amended the Companies Act, 1956, in 2003[2] to include the concept of producer companies to consort the beneficial aspects of a cooperative for the welfare of farmers. Consequently, producer companies were added in the statute by enacting Part XIA. Producer companies are basically a corporate body registered under the act which seeks to facilitate farmers to pool their resources and work as a collective team. The farmers become shareholders of such body corporate and it is run by them conjointly.

Such collectivisation is expected to reduce transaction costs and bring scale advantages through bulk purchase of inputs, exchange of knowledge and information among members, cost efficiencies in value-addition and marketing, better price realisation through aggregation and value addition, and risk reduction.[3] Such collectivisation succours farmers socio-economically. The cooperative facilitates farmers to compete in modern markets and bolsters their bargaining power.

The foremost producer company registered in India was Farmers Honey Bee India Producer Company Ltd. Following the amendment in 2003, a total of five producer companies were registered in the succeeding financial year.[4]

Producer company

Section 465 of the Companies Act, 2013 provides that the provisions of Part IXA of the 1956 act shall be applicable mutatis mutandis to a producer company in a manner as if the 1956 Act repealed until a special act is enacted for producer companies. In a producer company, the shares are held only by the producers. Furthermore, unlike in cooperatives, there is no provision of government representation on the board of directors.

Part XIA is divided into 12 chapters, comprising a total of 46 sections. As per Section 581A(l) a producer company means a body corporate having objects or activities specified in Section 581B and registered as a producer company under the Companies Act, 1956. Section 581A(k) defines a producer as a person engaged in any activity connected with or relatable to any primary produce.

Section 581A(j)defines primary produce. It includes produce of farmers, arising from agriculture animal husbandry, horticulture, floriculture, pisciculture, etc., or produce of persons engaged in handloom, handicraft and other cottage industries; or any products resulting from any of the aforementioned activities, including by-products of such products, and so forth.

Section 581B defines the objects of a producer company. Some of them include processing including preserving, drying, distilling, brewing, canning and packaging of produce of its members; manufacture, sale or supply of machinery, equipment or consumables mainly to its members; providing education on the mutual assistance principles to its members and others, and so forth.

Section 581A(d) defines members as a person or producer institution, whether incorporated or not, admitted as a member of a producer company and who retains the qualifications necessary for permanence as a member.

Furthermore, Section 581(2) states that every producer company shall deal with the produce of its active members for carrying out any of its objects specified in this section.

Some examples of a producer company include, Paayas Milk Producer Company, Anshu Agro India Producer Company Ltd., etc.

Some Salient features of a producer company

It offers a statutory and regulatory framework to cooperatives which possess the capability for producer-owned enterprises to compete in modern markets. Furthermore, a cooperative society can be converted into a producer company if 2/3rd of its members vote in favour of a resolution to that effect. This conversion is purely voluntary and the members of the company have to be the primary producers.
The producer company is treated as a private limited company. Hence they have limited liability to the extent of the amount of unpaid on shares held by them. Furthermore, each individual is given equal voting power irrespective of the shares owned by them. Moreover, shares of a producer company shall consist of equity shares only. The name of a producer company shall end with ‘Producer Company Ltd.’
The maximum number of members cannot exceed 50. The minimum number of directors should be 5 and a minimum paid up share capital of ₹5 lakhs is required to incorporate a producer company. Shares are not publicly traded, but they may be transferred with the approval of board of directors. Furthermore, it shall never be deemed as a public company. The share of profits will be in the ratio of business contribution and investment.
A producer company enjoys greater credibility as compared to unregistered farmer/agriculturalists organisations. Furthermore, it is fully entitled to accept deposits from or lend loans to its members at reasonable rates of interest.
Lastly, Companies Act, 2013 provides an opportunity to multi-state cooperative societies [Section 581A(e) to willingly opt for new form of producer companies. It facilitates mutual assistance and cooperative principles basis within a more liberal regulatory framework.

Formation and registration of a producer company:

Section 581C states that 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 can form a producer company.

Section 581A(m) defines a producer institution as a producer company or any other institution having only producer or producers or producer company or producer companies as its members whether incorporated or not having any of the objects referred to in Section 581B, and which agrees to make use of the services of the producer company or producer companies as provided in its articles.

The process of registering a producer company is similar to that of a private limited company. It includes the following steps.

Obtain digital signature certificate (DSC) and directors identification number from its directors along with self-attested copies of documents like contact details, PAN, aadhaar, etc.
Fill the proposed name in FORM-1A with the registrar of the concerned state along with prescribed fees. Once the suggested name has been approved by the registrar, an application of incorporation has to be filed in the prescribed format.
The entity has to draft memorandum of association (MoA) and articles of association (AoA), mentioning the amount of share capital to be registered and the bye-laws of the company.
Other documents like statutory declaration in FORM-1 declaring compliances of incidental matters, affidavits signed by subscribers, a declaration drafted by a professional in format of FORM INC – 8, directors consent and details under FORM DIR – 2 and FORM DIR – 8, utility bill and NOC taken from the owner whose address is to be used as the registered office has to be filed.
Once the registrar is satisfied with the application and the submitted documents, he shall within 30 days of receipt of documents required for registration, register the same and issue a certificate of incorporation. Thereafter, the company can commence its operations.

The promoting individuals or the producer institutions have to be desirous of forming a producer company having its objects elucidated in Section 581B. They will have to comply with provisions of Part IXA and provisions of the Companies Act, 1956 in regard to registration.

The liability of the members will be limited by the memorandum to the amount, if any, unpaid on shares held by them. The producer company may also reimburse to its promoters all direct costs associated with promotion and registration, including registration, legal fees, printing of AoA and MoA, and the payment thereof shall be approved by the first general meeting of the members. Upon registration, a producer company shall become a body corporate as if it is a private limited company without any ceiling on its members. A producer company, shall not, under any circumstance become or deemed to become a public company.

Membership and voting rights of members

Section 581D delineates voting rights of members. It prescribes voting rights according to who forms the producer company. In case where the ownership consists solely of individual members, the voting rights shall be based on a single vote for every member, irrespective of his shareholding or patronage of the producer company.

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Section 581A(h) defines patronage as the use of services offered by the producer company to its members by participation in its business activities.

Benefits to members

Section 581E expounds the benefits available to members. Subject to provisions made in the article, every member shall initially receive only such value for the produce or products pooled and supplied, and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares, in proportion to the produce supplied to the company during the financial year. The extent and manner of the same is to be decided by the board.

Section 581A(n) describes withheld price as part of the price due and payable for goods supplied by any member to the producer company and as withheld by the company for payment on a subsequent date.

A member shall receive only a limited return on basis of share capital contributed. Proviso to Section 581E(2) states that every such member may be allotted bonus shares in accordance with Section 581ZJ. Section 581ZJ prescribes issue of bonus shares, upon recommendations of the board and passing of resolution in a general meeting. Such bonus share shall be issued by capitalisation of amounts from general reserves in proportion to shares held by members.

Any surplus, remaining after making provision for payment of limited return and resources referred to in Section 581ZI, may be distributed as patronage bonus, amongst the members. Section 581ZI explicates that every producer company shall maintain a general reserve in every financial year. Section 581A(i) defines patronage bonus as payments made by a producer company out of its surplus income to the members in proportion to their respective patronage.

The patronage is to be paid in proportion to member’s participation in the business. It may be paid in cash or by way of allotment of equity shares, or both as decided by the members at the general meeting.

Memorandum and Articles of a producer company

Section 581F exemplifies that a memorandum of every producer company shall state the name of the company with ‘Producer Company Ltd.’ as its suffix, the state where the registered office is situated, the main objects for incorporation, name and addresses of subscribers, amount of share capital and division thereof, that the liability of its members is limited, and the number of shares opposite to each subscriber’s name, provided no subscriber shall take less than one share.

Section 581M describes the procedure of amendment of memorandum. A producer company, may by special resolution, not inconsistent with Section 581B alter its objects. The altered memorandum along with a copy of the special resolution duly certified by 2 directors shall be filed with the registrar within 30 days from date of its adoption.

Section 581(G) exemplifies that articles of every producer company shall state principles of mutual assistance, namely, the membership is voluntary, each member shall have only a single vote irrespective of the shareholding, the company shall be administered by a board and shall be accountable to its members, there shall be limited return share capital, and provisions shall be made for the education of members and employees on techniques of mutual assistance. Furthermore, it shall also state that the producer company shall actively cooperate with other producer companies at a local or national level so as to best serve the interest of the communities it purports to serve. The same shall be presented, for registration to the registrar of the state in which the registered office of the company is situated.

Section 581-I describes the procedure of amendment of articles. Any amendment shall be proposed by not less than 2/3rd of the elected directors or by not less than 1/3 of the members of the producer company, and adopted by the members by a special resolution. The amended articles along with the copy of the special resolution duly certified by 2 directors shall be filed with the registrar within 30 days from date of its adoption.

Directors in a producer company

Section 581O states that a producer company shall have at least 5 and not more than 15 directors. However, in case of an inter-state cooperative society incorporated as a producer company, such company may have more than 15 directors for a period of 1 years from the date of its incorporation.

According to Section 581P, election of directors shall be conducted within a period of 90 days of the registration of the producer company. Every person shall hold office of a director for a period not less than 1 year but no exceeding 5 years. Every director shall be eligible for reappointment after retirement. The directors shall be appointed or elected by the members in the annual general meeting. Furthermore, the board may appoint one or more expert directors not exceeding 1/5th of the total number of directors or appoint any other person as additional director as the board may deem fit. Provided such directors shall not be eligible to vote in the election of the chairman and their period of office shall not exceed such period as may ne specified in the articles.

Section 581T exemplifies the liability of directors. It states that when a director votes for a resolution in contravention with the provisions of the act, has made any profit of result of such contravention, or the company has suffered a loss or damage due to such contravention, the directors shall be held jointly and severally liable to make good the loss or damage incurred. Furthermore, the liability imposed shall be in addition to and not in derogation of a liability imposed on a director under this act.

Meetings of a producer company

Section 581Y states that unless the articles require a larger number, 1/4th of the total membership shall constitute the quorum at a general meeting. Section 581ZA necessitates a producer company to hold an annual general meeting in addition to any other meetings. Such shall be mentioned in the notices for calling such a meeting, and not more than 15 monthsshall elapse between the date of one annual general meeting and that of the next. However, the registrar may permit an extension for any special reasons.

A producer company shall hold its first annual general meeting within a period of 90 days from date of its incorporation. Such meetings are held to appoint directors, shall be called for during business hours of the day within a 14 days’ prior notice, and 14th of the total number of members of the company shall be considered as the quorum.

Section 581V states that a meeting of the board shall be held less than once in every 3 months and at least 4 such meetings shall be held in every year. Notice of the meeting shall be given 7 days prior to the date and the quorum for the meeting shall be 1/3 of the total strength of directors, subject to a minimum of 3.

Committee of directors, chief executive, and secretary

Section 581U prescribes for a committee of directors for the purpose of assisting the board. It shall function under the directions of the board and may with its approval appoint such number of persons as it deems fit.

Section 581W states that every producer company shall have a full time chief executive to be appointed by the board from amongst person’s other members. He shall be the ex-officio director of the board and is entrusted with substantial powers of management as the board may determine.

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Section 581X prescribes every producer company having an average turnover exceeding ₹five crores in each of 3 consecutive financial years to have a full-time secretary. He shall be a member of ICSI and the company shall be liable to a fine if it fails to comply with the provision.

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Members rights of a producer company

As per Section 581Z every member shall have one vote and in the case of a tie, the chairman shall have a casting vote except in cases of election of the chairman. Section 581ZB states that shares held by a member shall be in proportion to the patronage of the company.

Section 581ZD expounds that shares of a member shall not be transferrable. However, a member may after obtaining prior approval of the board transfer whole or part of his shares along with special ant rights to an active member at par value.

Section 581ZD(3) states that every member shall, within 3 months of becoming a member, nominate a person to whole his shares in the company shall vest in the event of his demise. The nominee shall, on the death of the member, become entitled to all the rights in the shares of the company and the board shall transfer the shares of the deceased member to his nominee. If such nominee is not a producer, the shares shall be surrendered with special rights.

Furthermore, where a member has ceased to a primary producer, or has failed to retain such qualifications as mentioned in the articles, the board shall direct the surrender of shares with special rights at par value as may be determined by the board.

Audits and accounts

Section 581ZE states that every producer shall keep books of account at its registered office. Section 581ZF necessitates an internal audit of such accounts, at such interval and in such manner as may be specified in articles, by a chartered accountant. Section 581ZE(2) prescribes that the balance sheet and profit and loss accounts of the producer company shall be prepared in accordance with provisions contained in Section 211. Section 581ZG elucidates the duties of the auditor. They include a report on additional matters such as the amount of debts along with particulars of bad debt, verification of cash balance and securities, details of assets and liabilities, etc.

Section 581ZI states that every producer company shall maintain a general reserve in every financial year, in addition to any reserve maintained by it as may be specified in articles. In case a company doesn’t have sufficient funds in a financial year to transfer, the contribution of the reserve shall be shared amongst members in proportion to their patronage.

A producer company may, by special resolution, make a donation to any institution or individual for the purpose of promoting the social and economic welfare of producer members or, promoting mutual assistance principles. However, Section 581ZH states that shall make donation in any financial year shall not exceed 35 of the net profit of the producer company in the financial year immediately preceding the financial year in which donation was made. Such donation shall not be made for any political purpose.

Loans to members

Section 581ZK expounds that the board of a public company, subject to its articles, provide financial assistance too its members by way of.

Credit facility: This is available to any member in connection with the business of the producer company. The period shall not exceed six months.
Loans and advances: This is available to members against security mention in the articles. It shall be repaid within a period of 3 months but not exceeding 7 years from the date of disbursement of such loan or advances. Any loan or advance to the director or his relatives shall be granted only after approval by members in a general meeting.
NABARD: It stands for national bank for agriculture and rural development. It provides financial assistance and support to meet the needs of producer companies. In 2011, it created a dedicated fund of ₹50 crore called the producer organisation development fund. It seeks to assist producer companies on 3 levels, credit facilitation, capacity building and market linkage support.

Furthermore, a ₹200 crore fund was set up by NABARD in 2014-15 called the producers’ organisation development and upliftment corpus. It aimed to build 2,000 farmer produce organisations in the country and promote new farmer producer organisations.

SFAC: Small farmer’s agri-business consortium is a society registered in 1994 to facilitate agri-business ventures by actuating private investment through venture capital assistance in close association with the financial association. It grants both equity grant scheme and credit guarantee fund scheme subject to a maximum of ₹15 lakh in two tranche within a period of 3 years to farmer produce organisations at nascent stage.

Section 581ZL states that the general reserves of a producer company shall be invested to secure the best suitable return and allows it to acquire shares of other producer companies.

Tax benefits available to producer companies

Initially producer companies were treated at par with private companies and taxed accordingly. Section 10(1) of the income tax act, 1961 exempts agricultural income. This varies on the basis of agricultural activity carried out. The government vide the finance act, 2002 reduced the customs duty on the import of agricultural equipment. Section 80P of the income tax, 1961 offers 100% deduction to farmer produce organisations registered as cooperative societies. In the 2018 budget speech[5], this benefit was sought to be extended to farmer produce companies too. Such deduction shall be for a period of 5 years and for those who have a total turnover of upto ₹100 crores during the financial year and their income is derived from marketing agricultural produce, purchase of seeds, livestock intended for agriculture, and processing of agriculture produce for its members. Such tax incentive was given to encourage operation greens and give a boost to Sampada yojana.[6]

Conclusion

Recently, the cabinet approved the companies amendment bill, 2020[7]. In the CLC report the producer companies are defined as a body corporate comprising of farmers and agriculturalists who work in cooperation with each other to promote better standards of living and gain easier access to credit, technology, market, etc.

Furthermore, the bill also supposes the insertion of chapter-XXIA in the act. The chapter will provide a framework for classification of producer companies and relaxations and benefits extended thereto similar to the 1956 act.

Moreover, in line with the 2019-20 budget speech of Hon’ble Prime Minister Narendra Modi, the centre seeks to achieve 10,000 farmer organisations in the next five years[8]. Such a scheme will help mobilise at least 3 million farmers. The scheme also postulates to reduce documentation, grant working capital for procurement, and restructure SFAC’s.[9] The centre has also allotted ₹6,868 for the new scheme and it also plans to promote 250 new farmer producer organisations in 2020-21.[10]

Producer companies are a great concept to mobilise farmers together, eliminate middlemen, with greater market viability and bargaining power. It has the potential to transform Indian agriculture. What has changed is that the government has started treating agriculture as a business[11], granting loans, formulating schemes, this helps uplift marginalised farmers. Companies like AMUL, Sayhyadri farms, Mahindra Agribusiness, etc. have had huge success in the field of agriculture as producer companies. With the latest scheme as announced in this year’s budget, it is bound to increase.

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[1] Noor, Rehana, M., Kalyanasundaram, Lily, Nazma Sultana, Mia, Mohammad Rubel, K., Shanthi Venkatesh, and Rahman, Anisur. (2020), The Paradigm Shift – India’s Journey of Corporative Act to Producer Company Act; How Sustainable the Farmers’ Producer Organization Model Has Been So Far? In: Journal of Social and Political Sciences, Vol.3, No.1, 277-2

[2] Companies (Amendment) Act, 2002

[3] Kanitkar 2016, NABARD 2019, S. Singh 2008

[4] Neti, Annapurna, Govil, Richa, and Rao, Madhushree R., (2019), “Framer Producer Companies in India: Demystifying the Numbers”, Review of Agrarian Studies, Vol. 9, No. 2

[5] Union Budget In the Company of Farmer Producers available on https://www.mca.co.in/images//FPO.pdf (Accessed on 07/14/2020), see also Farmer Producer Companies exempted from tax: Budget 2018-19, AGRICULTURE TIMES available on https://agritimes.co.in/headline-details.php?head=K65lrLIoi8q1tCj18lq3zIvKWjUoCQxoBAA= (Accessed on 07/14/2020)

[6]https://mofpi.nic.in/Schemes/pradhan-mantri-kisan-sampada-yojana (Accessed on 07/14/2020)

[7] Dheeraj Nair, Angad Baxi & Vishrutyi Sahni, Companies Act reforms amid Covid-19: A primer, THE ECONOMIC TIMES available on https://economictimes.indiatimes.com/small-biz/legal/companies-act-reforms-amid-covid-19-a-primer/articleshow/76781817.cms (Accessed on 07/14/2020)

[8] Sanjeeb Mukherjee, Govt plan to set up 10,000 groups to promote farm produce needs pruning, BUSINESS STANDARD available on https://www.business-standard.com/article/economy-policy/govt-plan-to-set-up-10-000-groups-to-promote-farm-produce-needs-pruning-120031601592_1.html (Accessed on 07/14/2020)

[9] Sanjeeb Mukherjee, Easy credit for farmer-producer organisations on cards in new policy, BUSINESS STANDARD available on https://www.business-standard.com/article/economy-policy/centre-plans-to-come-up-with-scheme-to-make-life-simpler-for-fpos-119072800795_1.html (Accessed on 07/14/2020)

[10] Sanjeeb Mukherjee, Centre plans to promote 250 new farmer-producer bodies in FY 2020-21, BUSINESS STANDARD available on https://www.business-standard.com/article/economy-policy/centre-plans-to-promote-250-new-farmer-producer-bodies-in-fy-2020-21-120022801196_1.html (Accessed on 07/14/2020)

[11] Jayshree Bhosale, How farmer producer company model can transform Indian agriculture, THE ECONOMIC TIMES avialble on https://economictimes.indiatimes.com/news/economy/agriculture/how-farmer-producer-company-model-can-transform-indian-agriculture/articleshow/66000269.cms?from=mdr (Accessed on 07/14/2020)