Producer Company Concept

Producer Company Concept

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The new concept of producer companies
TILL RECENTLY, the Companies Act, 1956 (the Act), recognized only three types of companies, namely, companies limited by shares (sub-divided into public limited and private limited companies), companies limited by guarantees and unlimited companies. With the coming into force on February 6 of the Companies (Amendment) Act 2002, (1 of 2003), a fourth category, `producer companies,' finds a place in the Act.
For this, a new Part IXA, divided into 12 chapters, has been included in the Act, comprising 46 sections, interestingly numbered as 581A to 581Z and 581ZA to 581ZT. However, the section that defines the various types of companies that can be incorporated under the Act remains unaltered.
The new concept of producer companies is based on the recommendations of an expert committee led by noted economist, Y. K. Alagh. The committee was asked (a) to frame a legislation that would enable incorporation of cooperatives as companies and conversion of existing cooperatives into companies and (b) to ensure that the proposed legislation accommodated the unique elements of cooperative business with a regulatory framework similar to that of companies.
The new type is termed as `producer company', to indicate that only certain categories of persons can participate in the ownership of such companies. The members have necessarily to be `primary producers,' that is, persons engaged in an activity connected with, or related to, primary produce.
What is primary produce? In terms of the Act it is a produce of farmers arising from agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products: produce of persons engaged in handloom, handicraft and other cottage industries: by - products of such products; and products arising out of ancillary industries.
The 46 new sections respectively deal with incorporation of producer companies: their management; general meetings; share capital and members rights; finance, accounts and audit; loan to members and investments; penalties; amalgamation, merger or division; resolution of disputes; and reconversion of producer company to inter-State cooperative society. A few salient features are now briefly described.
Formation
Any ten or more individuals, each of them being a producer, that is, any person engaged in any activity connected with primary produce, any two or more producer institutions, that is, producer companies or any other institution having only producers or producer companies as its members or a combination of ten or more individuals and producer institutions, can get a producer company incorporated under the Act.

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The companies shall be termed as limited and the liability of the members will be limited to the amount, if any, unpaid on the shares. On registration, the producer company shall become as if it is a private limited company with the significant difference that a minimum of two persons cannot get them registered, the provision relating to a minimum paid-up capital of Rs. 1 lakh will not apply and the maximum number of members can also exceed 50.
Members' equity cannot be publicly traded but be only transferred. As such, "producer companies would not be vulnerable to takeover by other companies or by MNCs.''
Objects
The objects of producer companies shall include one or more of the eleven items specified in the Act, the more important being:
(i) Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of members or import of goods or services for their benefit;
(ii) Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its members; and
(iii) Manufacture, sale or supply of machinery, equipment or consumables mainly to its members.
The other objects include rendering technical or consultancy services, insurance, generation, transmission and distribution of power and revitalisation of land and water resources; promoting techniques of mutuality and mutual assistance; welfare measures and providing education on mutual assistance principles.
It is to be noted that private limited or public limited companies are not hamstrung by such restrictions as to their objectives, provided they are legal.
Management
(a) Every producer company is to have at least five and not more than 15 directors. Minimum prescribed for private limited is two and for public limited three, while the maximum will depend on the number mentioned in the respective Articles. Usually the maximum is pegged at twelve.
(b) A full time chief executive, by whatever name called, is to be appointed by the board. He shall be an ex-officio director and will not be liable to retire by rotation. He shall be entrusted with substantial powers of management as the board may determine. This provision differs from that applicable to limited companies — a private limited need not have any chief executive while public limited companies, only with paid-up capital exceeding Rs. 5 crores, have to have a managing director.
(c) A stipulation that could dismay company secretaries is that only producer companies having an average annual turnover exceeding Rs. 5 crores in each of three consecutive years need have a whole-time secretary. It is not mentioned what would happen to the incumbent, if the turnover falls below this minimum. This is in contrast to the mandate that private and public limited companies having a paid-up capital of Rs. 2 crores or more should have a whole-time secretary.
Members' benefits
Members will initially receive only such value for the produce or products pooled and supplied as the directors may determine. The withheld amount may be disbursed later either in cash or in kind or by allotment of equity shares.
Members will be eligible to receive bonus shares.
An interesting provision is for the distribution of patronage bonus (akin to dividend) after the annual accounts are approved — patronage bonus means payment out of surplus income to members in proportion to their respective patronage (not shareholding). Patronage, in turn, is defined as the use of services offered by producer companies to their members by participation in their business activities. Incidentally, there is an error in drafting — the powers of the board include "determination of the dividend payable'' — it should have been "patronage bonus payable.''
Reserves
Every producer company has to maintain a general reserve in every financial year and in case there is not sufficient funds in any year for such transfer, the shortfall has to be made up by members' contribution in proportion to their patronage in the business This is a well-thought out provision.
Audit
An unnecessary stipulation is that "without prejudice to the concerned sections in the Act,'' the auditors of producer companies have to specially report on some additional items such as debts due and bad debts, verification of cash balances and securities, details of assets and liabilities, loans extended to directors and details of donations and subscriptions. These are all integral parts of any audit, both statutory and internal and one fails to understand the logic behind this stipulation.
Internal audit
It is mandated that every producer company should carry out internal audit of its accounts by chartered accountants. The Act has not so far made it compulsory for limited companies to carry out internal audit, although listed companies, by virtue of the clause in the listing agreement relating to corporate governance, are to have a full-scale internal audit system.
Resolution of disputes
Any dispute relating to the formation, management or business of producers companies is to be settled by conciliation or by arbitration under the Arbitration and Conciliation Act, 1996 as if the parties to the dispute have consented in writing to such procedure. The arbitrator's decision shall be final. This seems to be inequitable since usually an arbitration award can be appealed against in high courts.
Inter-State cooperative societies
With objects not confined to one State may make an application to the Registrar for recognition as producer companies. The statute also provides for reconversion of such producer companies to their former status as inter-State cooperative societies subject to the approval of High Court.
In conclusion, it is to be noted that "all the limitations, restrictions and provision of the Act, other than those specified in Part IXA, applicable to a private limited company, shall, as far as may be, apply to a producer company, as if it is a private limited company under the Act in so far as they are not in conflict with the provisions of this Part.'' In other words, a producer company is a hybrid between a private limited company and a cooperative society.
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