Tapuriah Jain & Associates

PRODUCER COMPANY

A producer company is a company incorporated under Companies Act 2013 (formerly the Companies Act 1956) and shall carry on following activities as mentioned in section 581B of Companies Act 1956:

• Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the Members or import goods for their benefit.

• Processing including preserving, drying, distilling, brewing, venting, 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 Rendering technical services, consultancy services, training, research and development and all other activities for the promotion of interest of its members.

• Generation, transmission and distribution of power, revitalisation of land and water resources, their use, conservation and communications relatable to primary produce.

• Insurance of producers or their primary produce.

• Promoting techniques of mutuality and mutual assistance.

• Welfare measures or facilities for the benefit of Members as may be decided by the Board.

• Any other activity, ancillary or incidental to any of the activities referred to in above clauses which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner.

• Financing of procurement, processing, marketing or other activities specified in above clauses which include extending credit facilities or any other financial services to its members.

Producer Companies as an Institution have been conceptualised and structured, taking into the considerations of farmers, agriculturists (termed as ‘Producers’), with a view that the business activities relating to agriculture, be channelized and governed in a formal manner. Sections 581A to 581 ZT of the Companies Act 1956 cover the provisions of producer companies. Section 581 of Companies Act 1956- Provisions of Part IX A of the Companies Act 1956 shall be applicable mutatis mutandis to producer companies in the manner as if the Companies Act 1956 has not been repealed.

The Policy makers realised that, inspite of India being an Agrarian Economy since ages, formalisation and good governance have not even touched the Agricultural Sector. The challenges faced by primary producers, farmers due to their limited asset and capital base, climate issues, mobilisation of resources, issues relating to agricultural labour, policy changes, technological advancements, transparency, governance and systems have been taken into consideration here by the policy makers.

Silent Condition for Producer Companies:

i. Only persons engaged in an activity connected with, or related to, primary produce can participate in the ownership.

ii. The members have necessarily to be primary producers.

iii. Termed as “Companies with Limited Liability” and the liability of the members will be limited to the amount, if any, unpaid on the shares.

iv. Name of the company shall end with the words “Producer Company Limited“.

v. On registration, the producer company shall become as if it is a Private Limited Company for the purpose of application of law and administration of the company.

vi. However, it shall comply with the specific provisions of part IXA.

vii. The limit of maximum number of members is not applicable to these Companies.

Share Capital:

i. Share capital of a Producer Company shall consist of equity shares only.

ii. Members’ equity cannot be publicly traded but only transferred.

iii. Voting

a. Only of individuals, then voting rights shall be based on a single vote for every member.

b. Only of producer institutions, then voting rights on the basis of their participation.

c. Combination of both individuals and producer institutions then voting rights shall be based on a single vote for every member.

Director:

Every producer company is to have

i. At least 5 and not more than 15 directors.

ii. A full time chief executive should (CEO) be appointed by the board and

iii. shall be entrusted with substantial powers of management as the board may determine.

If any director resigns from his post the election shall be conducted within 90 days from the date of resignation of such director.  The Director shall hold his office for a period not less than 1 year but not more than 5 years as may be specified in the articles.  Every director shall be eligible for reappointment.  The Directors of the Board are elected by the members in the Annual General Meeting.  The Board may co-opt one or more expert directors or additional directors not exceeding one fifth of the total number of directors.   The expert director and additional director shall hold the post for the period as prescribed in the articles.

Reserves:

i. Every producer company has to maintain a general reserve in every financial year.

ii. Where there are no sufficient funds in any year for such transfer,

iii. The shortfall has to be made up by members’ contribution in proportion to their patronage in the business.

Members’ benefits:

i. Members will initially receive only such value for the produce or products pooled and supplied as the directors may determine.

ii. The withheld amount may be disbursed later either in cash or in kind or by allotment of equity shares.

iii. Members will be eligible to receive bonus shares.

iv. An interesting provision is for the distribution of patronage bonus [2](akin to dividend) after the annual accounts is approved — patronage bonus means payment out of surplus income to members in proportion to their respective patronage (not shareholding).

Audit:

i. Producer Companies shall carry out an internal audit of its accounts, at regular intervals in accordance with its articles of association and such an audit shall be carried on by a Chartered Accountant.

ii. The auditor shall make an annual audit report to the members of the company on the accounts examined by him.

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.

Striking of name:

The Registrar shall strike the name of the Producer Company if the company fails to commence its business within one year from the date of registration or ceases it transactions after giving a notice to the company.  Any Member of the Producer Company is aggrieved against such order.

KEY POINTS FOR PRODUCER COMPANY:

 i. The members have necessarily to be primary producers.

 ii. Name of the company shall end with the words “Producer Company Limited”.

 iii. The limit of maximum number of members is not applicable to these Companies.

 iv. On registration, the producer company shall become as if it is a Private Limited Company for the purpose of application of law and administration of the company.

 v. Minimum No. of 10 member (individual).

 vi. Share capital of a Producer Company shall consist of equity shares only.

 vii. Minimum 5 and not more than 15 directors.

 viii. Producer Company can carry only activity prescribed under the Act.

 ix. Only of individuals, then voting rights shall be based on a single vote for every member.

 x. A full time chief executive should (CEO) be appointed by the board.

Pre-Incorporation Checklist

• Any 10 or more producers (Individuals) can join together to form a production company but there is no upper limit on the number of members.

• Or, any 2 or more producer institutions can form a producer company.

• A minimum capital of Rs. 500,000 is required to incorporate a producer company.

• There should be minimum 5 directors (maximum of 15) in a producer company.

• It can never be converted into a public company however it can be converted into a multi-state co-operative society.

Procedure and Documentation required to incorporate a Producer Company

a. The first step is to obtain a Digital Signature Certificate (DSC) by all the directors.

Documents required to obtain a DSC are:

PAN Card of the Director

• Aadhaar Card of the Director

• Photo

• Email Id

• Contact Number

b. After obtaining the DSC, the next step is to obtain the Director Identification Number (DIN) by filing form DIR – 3 along with a self-attested Identity proof, address proof, and a photo

c. Then the name of the production company is to be finalized. For that, Form INC – 1 to the Registrar of Companies (ROC) is to be filed by giving 6 names in the order of preference along with the significance of the names. The name shall have the words PRODUCER COMPANY at the end

d. After the name is approved by the ROC, the following documents are to be prepared:

• The Memorandum of Association is to be drafted by incorporating all the objects that the company intends to follow

• The Articles of Association is to be drafted containing all the by-laws of the company

• A declaration by a professional has to be drafted in the format of form INC – 8

• An affidavit has to be signed by all the subscribers of the proposed company declaring their legal competency to act as the subscribers

• A utility bill and a NOC have to be taken from the owner whose address is to be used as the registered office of the company. If it is not owned, a lease agreement will be attached to the form

• The directors will give their consent to act in the Form DIR – 2 and details in DIR – 8

e. All the drafted documents will be attached to Form INC – 7, INC – 22 and DIR – 12 and uploaded to the ROC website. On proper verification, the ROC will issue a Certificate of Incorporation and the company can start its business operations.

This form of establishment promotes the primary producer who is in a low-income group to optimize their income with collective bargaining and by selling the products directly to consumers.

FAQ

1. Management of Producer Companies.

Principally, a Producer Company being a Company, a body corporate in itself, the aspect of management and ownership is differentiated by the statute itself.The Management of the Producer Company is vested in the Board of Directors and the ownership of the Company is vested in the Shareholders/Members. The Board of Directors in a Producer Company manage and operate the day to day affairs of the Company. An additional post of a Chief Executive is provided for as a linkage in the said Producer Company. A Producer Company shall have the liability of its Members limited and can neither be limited by guarantee with or without share capital nor unlimited liability companies.

2. How is a director appointed in a Producer Company?

As per Section 581P of the Companies Act, 1956, save as provided in section 581N, the Members who sign the memorandum and the articles may designate therein the Board of directors (not less than five) who shall govern the affairs of the Producer Company until the directors are elected in accordance with the provisions of this section.

The election of directors shall be conducted within a period of ninety days of the registration of the Producer Company.

Above provision needs clarification and needs to be aligned with existing provisions of Chapter of “Appointment and Disqualification of Directors” under Companies Act 2013.

Reasons – As per current procedure of formation of Companies, First Directors are already mentioned in Articles of Association and also Form DIR – 12 with consent to act as Directors in Form DIR – 2 is filled with Registrar at the time of Incorporation and thus the First Directors are already appointed.

There is no point in taking elections within 90 days of the Registration of Company for Appointment of Directors.

3. What are the circumstances for vacation of office by director?

As per section 581Q of the Companies Act, 1956, the office of director of Producer Company shall become vacant if:

(a) he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months.

(b) the Producer Company in which he is director has made default in repayment of any advances or loans taken from any company or institution or any other person and such default continues for ninety days.

(c) he has made a default in repayment of any advances or loans taken from the Producer Company in which he is a director.

(d) the Producer Company, in which he is a director.

• has not filed the annual accounts and annual return for any continuous three financial years commencing on or after the 1st day of April, 2002 ; or

• has failed to, repay its deposit or withheld price or patronage bonus or interest thereon on due date, or pay dividend and such failure continues for one year or more

(e) default is made in holding election for the office of director, in the Producer Company in which he is a director in accordance with the provisions of this Act and articles.

(f) the annual general meeting or extraordinary general meeting of the Producer Company, in which he is a director, is not called in accordance with the provisions of this Act except due to natural calamity or such other reason.

The above provisions shall, as far as may be, apply to the director of a Producer institution which is a member of a Producer Company.

Above provisions need to be aligned as per section of 164 of the Companies, 2013, in clause (d)(i) of the above provisions it is mentioned the office of Director shall become vacant if the Producer Company in which he is director has not filed the annual accounts and annual return for any continuous period of three financial years.

As per section 164(2)(a) of the Companies, 2013, a person shall not be eligible for appointment as Director of a Company if he has not field financial statements or annual return for continuous period of the three financial years.

In first instance director will be disqualified if he has not filed both annual accounts and annual return for a period of continuous three in financial years and in second instance he is disqualified if either of financial statement or annual return are not filed for a continuous period of three financial years.

4. What are the powers and functions of the Board of Directors of a Producer Company?

The Board of directors of Producer Company shall do all such acts and things and exercise all such powers as is authorised by the Articles and by the provisions of this Act.

Certain powers which shall be exercised by the Board of Directors of Producer Company are:

• day to day management functions of the Producer Company such as formulation of the organisational policies & objectives including longterm and annual objectives,

• formulation of corporate strategies and financial plans;

• determination of the dividend payable;

• determination of the quantum of withheld price and recommendation of patronage Bonus; admission of new Members;

• appointment of officers of the Producer Company including Chief Executive, Company Secretary & exercise of superintendence, direction and control over Chief Executive and other officers appointed;

• maintenance of books of accounts;

• preparation of annual accounts to be placed before the annual general meeting with the auditor’s report and the replies on qualifications, if any, made by the auditors;

• acquisition or disposal of property in the ordinary course of business of Producer Company;

• investment of the funds in the ordinary course of business ;

• sanction any loan or advance to any Member not being a director or his relative ;

• such other measures as may be required in the discharge of functions or exercise of powers.

All the above mentioned powers shall be exercised by means of resolution passed at the Board. The persons who are not in the Board shall not exercise any of the above mentioned powers. Therefore the ex officio directors like Chief Executive Officer cannot exercise above powers.

The Board of Directors of Producer Company cannot transact business reserved for General Body as mentioned u/s 581S.

5. What is the Liability of the Directors in a Producer Company?

Liabilities of directors in a Producer Company:

• Section 581T of the Companies Act, 1956, provides that any contravention of the provisions of this Act or any other law or provisions of articles, done by the directors of Producer Company, either by way of voting on a resolution or approving by any other means, shall make such directors either jointly or severally liable towards the Producer Company to make good any loss or damage suffered by such Company.

• In all such cases, the Producer Company shall have the right to recover from its directors and if such director has made any profit (with ill intention), the Producer Company shall have the right to recover an amount equal to said profits from such directors and if in case of a loss or damage an amount equal to that loss or damage.

• The liability so imposed shall be in addition to and not in derogation of a liability imposed under this Act or any other law for the time being in force. However all acts done by the directors in the general interest of the company and its members and in accordance with the provisions of Memorandum, Articles and provisions of this act and loss or damage, if any suffered by company, then such loss or damage shall not be considered as personal liability of the directors and they shall not be required to make good such loss or damage.

• There can be various Committees of Directors which can be formed as a means of improving board effectiveness and efficiency, in areas where more focused, specialised and technical discussions are required. There commendation of the committee has to be approved by the Board.

• Section 581U of the Companies Act, 1956, states that the Board may constitute such number of committees as it may deem fit for the purposes of assisting the Board in efficient discharge of its functions. However, the Board of directors shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee of directors.

• Every such committee may with the approval of the Board, co-opt such number of persons, as it deems fit, as the members of the committee. However in every such committee the Chief Executive appointed under Section 581W or a director of Producer Committee shall be a member.

• Every such committee shall be subject to general superintendence, direction and control of the Board. The Board may decide the duration, functioning and the fees and allowances to be paid to the members of the committee. The minutes of every Committee meeting shall be placed before the next Board meeting.

4. Whether appointment of Chief Executive is mandatory?

Yes, as per Section 581W of the Companies Act, 1956, every Producer Company shall have a full time Chief Executive, by whatever name called, to be appointed by the Board from amongst persons other than Members.

The Chief Executive shall be ex officio director of the Board and such director shall not retire by rotation.

In the above section 581W, time period within which a Producer Company shall comply with the provisions of appointment of Chief Executive is not mentioned, as per general practice we should comply it before closure of first financial year as in Form MGT – 7 we have to mention whether Company has complied with all the provisions of Companies Act or not.

5. Who is the Chief Executive of a Producer Company?

The Chief Executive Officer shall be an ex-officio director and shall not retire by rotation.

The qualifications, experience and the terms and conditions of Chief Executive Officer shall be such as may be determined by the Board subject to the provisions contained in the Articles. The chief executive, who shall be entrusted with substantial powers of the management, shall manage the affairs of the Producer Company but subject to the superintendence, direction and control of the Board and is accountable to the Board for the performance of the Producer Company.

Unless the articles otherwise provide to the contrary, the Chief Executive Officer need not be a Producer.

6. What are the powers and functions of Chief Executive?

The Chief Executive shall be entrusted with substantial powers of management and may exercise powers and discharge the following functions:

(a) do administrative acts of a routine nature including managing the day-today affairs of the Producer Company.

(b) operate bank accounts or authorise any person, subject to the general or special approval of the Board in this behalf to operate the bank account.

(c) make arrangements for safe custody of cash and other assets of the Producer Company.

(d) sign such documents as may be authorised by the Board, for and on behalf of the company.

(e) maintain proper books of account ; prepare annual accounts and audit thereof ; place the audited accounts before the Board and in the annual general meeting of the Members.

(f) furnish Members with periodic information to appraise them of the operation and functions of the Producer Company.

(g) make appointments to posts in accordance with the powers delegated to him by the Board.

(h) assist the Board in the formulation of goals, objectives, strategies, plans and policies.

(i) advise the Board with respect to legal and regulatory matters concerning the proposed and on going activities and take necessary action in respect thereof.

(j) exercise the powers as may be necessary in the ordinary course of business.

(k) discharge such other functions, and exercise such other powers, as may be delegated by the Board.

7. Whether appointment of Company Secretary is applicable to Producer Company?

As per Section 581K of the Companies Act, 1956, every Producer Company having an average annual turnover exceeding five crore rupees in each of three consecutive financial years shall have a whole-time secretary.

No individual shall be appointed as whole-time secretary unless he possesses membership of the Institute of Company Secretaries of India constituted under the Company Secretaries Act, 1980.

Clarification needed from MCA as in the above section appointment of Company Secretary is based on average annual turnover of the Company of preceding three consecutive financial years whereas Section 203 of Companies Act, 2013, states every company whose paid-up capital is 5 crores or more need to appoint a Whole time Company Secretary in Employment.

8. Whether Producer Companies can appoint Committees?

The Board may constitute such number of committees as it may deem fit for the purpose of assisting the Board in the efficient discharge of its functions provided that the Board shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee.

A committee constituted under with the approval of the Board, co-opt such number of persons as it deems fit as members of the committee provided that the Chief Executive appointed under section 581W or a director of the Producer Company shall be a member of such committee.

The Chief Executive appointed under section 581W or a director of the Producer Company shall be a member of such committee.

The fee and allowances to be paid to the members of the committee shall be such as may be determined by the Board.

The minutes of each meeting of the committee shall be placed before the Board at its next meeting.

9. How many Board Meetings shall held in a financial year?

As per section 581V of the Companies Act, 1956, meetings of the Board shall be held not less than once in every three months and at least four such meetings shall be held in every year.

Above provisions need clarification and need to be aligned with Section 173 of Companies Act, 2013 and Secretarial Standard I, as per Secretarial Standard I read with Companies Act, 2013, every company shall hold 4 Board meetings in a calendar year and gap between 2 Board Meetings shall not be more than 120 days, in case of one person company and small company are required to hold one Board Meeting in each of calendar year and gap between 2 Board Meetings shall not be less than 90 days.

10. What are the provisions with respect to Annual General Meeting for Producer Company?

As per section 581ZA of the Companies Act, 1956, every Producer Company shall in each year, hold, in addition to any other meetings, a general meeting, as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than fifteen months shall elapse between the date of one annual general meeting of a Producer Company and that of the next.

The Registrar may, for any special reason, permit extension of the time for holding any annual general meeting (not being the first annual general meeting) by a period not exceeding three months.

A Producer Company shall hold its first annual general meeting within a period of ninety days from the date of its incorporation.

Above clause 2 of Section 581ZA states that the first Annual General Meeting shall be held within a period of 90 days from the date if its incorporation which is different from existing Companies Act 2013.

As per section 96 of Companies Act, 2013, first Annual General Meeting shall held within 9 months of close of first financial year.

11. What is the business to be transacted in First Annual General Meeting of the Producer Company?

The members shall adopt the articles of the Producer Company and appoint directors of its Board in the Annual General Meeting.

The Ministry may consider deletion of clause 2 of section 581ZA and aligned with clause 1 of section 96 of Companies Act 2013 where clause 1 states that the first Annual General Meeting of the Company shall be held within 9 months of the closure of first financial year.

Justification with practical difficulty is briefed hereunder:

Business to be transacted at the first Annual General Meeting, i.e. Adoption of Articles of Association, as per the procedure followed under Companies Act 2013, the Articles are already subscribed by the proposed promoters at the time of incorporation and said subscribed articles are attached in Form INC – 7.

Adopting already subscribed Articles in the Annual General Meeting by the same persons is of no use and redundancy of procedure.

Secondly the provision says about appointment of Directors, as per the procedure of formation of Companies under Companies Act, 2013, First Directors are already mentioned in Articles of Association which are already subscribed by all the promoters and also Form DIR – 12 with consent to Act as Directors in Form DIR – 2 is filed with Registrar at the time of Incorporation and thus this Directors are already appointed.

Appointing already appointed Directors in the first Annual General Meetings is again redundancy of procedure.

i) Appointment of First Auditors – As per clause 6 of section 139 first Auditors shall be appointed by the Board of Directors within 30 days from the date of its incorporation and such auditor shall hold office till the conclusion of First Annual General Meeting.

So in case of a Producer Company the term of first Auditor shall be only of 90 days as the producer company has to hold its first Annual General Meeting in 90 days from the date of its incorporation. So if we go by the provisions of 581ZA then an auditor has to be again appointed in that First Annual General Meeting or will he continue to be the Auditor till the end of financial year is a part of confusion.

ii) Case 1 say a Company is incorporated on 25th December 2016 and as per the provisions of the Companies Act 2013, the Company has to end its financial year on 31st March 2017.

In above case as per Clause 2 of 581ZA Company has to hold its first annual general meeting within 90 days, lets say company held its First Annual General Meeting on 20th March 2017, but within a period 6 months Company has to again hold its Annual General Meeting before 30th September for Adoption Accounts of first financial year. It cannot take benefit of taking Annual General Meeting within 9 months as per the section 96 of Companies Act as practically this will be second Annual General Meeting of the Company.

iii) Case 2 say a Company is incorporated on 05th January 2016 and as per provisions of Companies Act 2013 the Company has to end its financial year on 31st March 2017.

In above case as per Clause 2 of 581ZA Company has to hold its first annual general meeting within 90 days, lets say company held its First Annual General Meeting on 28th March 2016, but in this case the Company has to hold its Annual General Meeting for adoption of Accounts of the first financial year ending in 31st March 2017 by 28th June 2017 as the acts states that there shall not be a gap of more than 15 months between the two Annual General Meetings.

Again in above case going through the Act the Company has to finalized accounts by May and lay it before Shareholders by June as it cannot take benefit of taking Annual General Meeting within 9 months as per the section 96 of Companies Act as practically this will be second Annual General Meeting of the Company.

Citing above practical difficulties and confusion which leads to diverse practices followed by professional Ministry should re-consider the provisions and necessary changes shall be made in the Act.

There is some practical difficulty arising while working with Producer Companies with regard to Allotment of Shares. The Ministry may consider for the clarification in this regard.

Producer Companies are getting government assistance under various schemes, such as SFAC Equity grant scheme, SFAC Venture capital scheme, MACP scheme (Maharashtra), Nabard Finance Scheme, but in all above schemes minimum members required for eligibility are 50, 500, 350 and 250 respectively.

Now the problem arises as in section 581 there is no provisions w.r.t the allotment of shares, we have to follow procedure ,mentioned in section 42 of Companies Act 2013 for private placement, which itself is very lengthy and impracticable in above case. As minimum application size shall be of Rs.20000/- and further we cannot allot shares above 49 members in a single meeting and further we cannot allot more than 200 members in a financial year.

Means if a company has to avail a venture capital of SFAC it has to hold 10 Board Meetings in 2.5 year and allot shares to 49 persons in each meeting then only then they will be eligible, so it’s not practicable to hold 10 Board meeting which will be very costly to the Company, further farmers are already very much low in finance so how can a farmer take minimum shares of Rs.20000.

Probable solution for the above problem:- As there is a exemption notification for NIDHI Companies wherein they have exempted NIDHI companies from Section 42(2) Explanation (1), 42(3), 42(5), 42(7) (Private Placement) such exemptions also shall be granted to PRODUCER COMPANIES so that they will not face above problems.

SHARE CAPITAL AND MEMBERS RIGHTS FAQs

1. What are the types of shares which producer Company can issue?

As per section 581ZB of the Companies Act, 1956, the share capital of a Producer Company shall consist of equity shares only.

The shares held by a Member in a Producer Company, shall as far as may be, in proportion to the patronage of that company.

Here “patronage” means the use of services offered by the Producer Company to its Members by participation in its business activities.

“Patronage bonus” means payments made by a Producer Company out of its surplus income to the Members in proportion to their respective patronage.

2. Can a Producer Company give some special rights to the members of the Company?

The producers, who are active members may, if so provided in the articles, have special rights and the Producer Company may issue appropriate instruments to them in respect of such special rights.

The instruments of the Producer Company issued shall, after obtaining approval of the Board in that behalf, be transferable to any other active Member of that Producer Company.

Explanation. - For the purposes of this section, the expression “special right” means any right relating to supply of additional produce by the active Member or any other right relating to his produce which may be conferred upon him by the Board.

3. Whether shares of Producer Companies are transferable?

A Member of a Producer Company may, after obtaining the previous approval of the Board, transfer the whole or part of his shares along with any special rights, to an active Member at par.

Here “active members” means a member who fulfils the quantum and period of patronage of the Producer Company as may be required by the articles.

In the above provision there is one practical difficulty as if there are only 10 members as required by the Act and if one of them wants to transfer his shares and as the above provision suggest that the shares can be transferred only to active member, whether an outsider incoming member can be termed as an active member is the question and if he transfers his shares to existing members then minimum requirement of members will fall below which is again a default.

Probable resolution – the provision of obtaining previous approval of the Board for transfer of shares shall be kept as it is only the word transfer to active members shall be interchanged with Producer.

4. Whether the members of the Producer Company can appoint nominee?

Every Member shall, within three months of his becoming a Member in the Producer Company, nominate, in the manner specified in articles, a person to whom his shares in the Producer Company shall vest in the event of his death.

The nominee shall, on the death of the Member, become entitled to all the rights in the shares of the Producer Company and the Board of that Company shall transfer the shares of the deceased Member to his nominee.

In a case where such nominee is not a producer, the Board shall direct the surrender of shares together with special rights, if any, to the Producer Company at par value or such other value as may be determined by the Board.

5. How are the voting rights of members determined in Producer Companies?

The voting rights are determined as follows:

• In a case where the membership 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.

• In a case where the membership consists of Producer institutions only, the voting rights of such Producer institutions shall be determined on the basis of their participation in the business of the Producer Company in the previous year, as may be specified by articles.

• Provided that during the first year of registration of a Producer Company, the voting rights shall be determined on the basis of the shareholding by such Producer institutions.

• In a case where the membership consists of individuals and Producer institutions, the voting rights shall be computed on the basis of a single vote for every Member.

 ACCOUNTS, AUDIT, LOANS AND INVESTMENTS FAQs

1. What are the requirements with respect to Internal Audit for Producer Companies?

As per section 581ZF of the Companies Act, 1956, every Producer Company shall have internal audit of its accounts carried out, at such interval and in such manner as may be specified in articles, by a chartered accountant as defined in clause (b) of sub-section (1) of section 2 of the Institute of Chartered Accountants Act, 1949.

As per Section 138 of Companies Act, 2013, has widened the term of Internal Audit, any professional like a Chartered Accountant, Cost Accountant, Company Secretary or Advocate can be appointed as Internal Auditor whereas as per section 581ZF of the Companies Act, 1956, internal audit of Producer Company can be carried out only by a Chartered Accountant.

Clarification- If in future above criteria mentioned as per Section 138 of Companies Act, 2013, is made applicable to the Producer Companies most of the Companies would be exempted from carrying out Internal Audit.

2. What are the duties of an Auditor?

The auditor shall report on the following additional matters relating to the Producer Company, namely:

(i) the amount of debts due along with particulars of bad debts if any

(ii) the verification of cash balance and securities

(iii) all transactions which appear to be contrary to the provisions of this Part

(iv) the loans given by the Producer Company to the directors

(v) the donations or subscriptions given by the Producer Company

(vi) any other matter as may be considered necessary by the auditor

3. Whether Producer Companies can make donations or subscriptions?

As per sections 581ZH of the Companies Act, 1956, a Producer Company may, by special resolution, make donation or subscription to any institution or individual for the purposes of:

a) promoting the social and economic welfare of Producer Members or producers or general public

b) promoting the mutual assistance principles

The aggregate amount of all such donation and subscription in any financial year shall not exceed three per cent of the net profit of the Producer Company in the financial year immediately preceding the financial year in which the donation or subscription was made.

No Producer Company shall make directly or indirectly to any political party or for any political purpose to any person any contribution or subscription or make available any facilities including personnel or material.

5. Whether Producer Companies are required to transfer any funds to general reserves?

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 a case where the Producer Company does not have sufficient funds in any financial year for transfer to maintain the reserves as may be specified in articles, the contribution to the reserve shall be shared amongst the Members in proportion to their patronage in the business of that company in that year.

6. Can Producer Companies advance Loans or provide for financial assistance or credit facilities to its members?

As per Section 581ZK of the Companies Act, 1956, the Board may, subject to the provisions made in articles, provide financial assistance to the Members of the Producer Company by way of:

a) credit facility, to any Member, in connection with the business of the Producer Company, for a period not exceeding six months.

b) loans and advances, against security specified in articles to any Member, repayable within a period exceeding three months but not exceeding seven years from the date of disbursement of such loan or advances :

Further, any loan or advance to any director or his relative shall be granted only after the approval by the Members in general meeting.

Comparison with Companies Act, 2013:

Above provisions are in respect of loan to directors, their relatives and members, when the above provisions were enacted, Section 295 of Companies Act, 1956, was not applicable to private companies, but in current scenario Section 185 of Companies Act, 2013, is applicable to private companies (Read with exemption notification for Private Companies dated 05th June 2015).

7. Elaborate the aspect of investment by the Producer Company in other Companies, Formation of Subsidiaries etc.

Investment by the Producer Company in other Companies, Formation of Subsidiaries etc.:

(i) As per Section 581ZL of the Companies Act, 1956, the general reserves of any Producer Company shall be invested to secure the highest returns available from approved securities, fixed deposits, units, bonds issued by the Government or co-operative or scheduled bank or in such other mode as may be prescribed.

(ii) Any Producer Company may, for promotion of its objectives acquire the shares of another Producer Company.

(iii) Any Producer Company may subscribe to the share capital of, or enter into any agreement or other arrangement, whether by way of formation of its subsidiary company, joint venture or in any other manner with anybody corporate, for the purpose of promoting the objects of the Producer Company by special resolution in this behalf.

(iv) Any Producer Company, either by itself or together with its subsidiaries, may invest, by way of subscription, purchase or otherwise, shares in any other company as in point (ii), other than a Producer Company, or subscription of capital as in point (iii), for an amount not exceeding thirty per cent of the aggregate of its paid-up capital and free reserves.

(v) A Producer Company may, by special resolution passed in its general meeting and with prior approval of the Central Government, invest in excess of the limits specified in this section.

(vi) All investments by a Producer Company may be made if such investments are consistent with the objects of the Producer Company.

(vii) The Board of a Producer Company may, with the previous approval of Members by a special resolution, dispose of any of its investments referred to in points (iii) and (iv).

(viii) Every Producer Company shall maintain a register containing particulars of all the investments, showing:

• the names of the companies in which shares have been acquired,

• number and value of shares ;

• the date of acquisition ; and

• the manner and price at which any of the shares have been subsequently disposed of

(ix) The register shall be kept at the registered office of the Producer Company and the same shall be open to inspection by any Member who may take extracts there from.

CASE STUDY :

Vanilla India Producer Company Limited (Vanilco) is a new venture, promoted by Indian vanilla farmers to protect the long term interests of vanilla growers all over the country. Vanilco is a Producer Company with the twin objective of promoting vanilla production and processing vanilla as per international standards. Vanilco is owned by farmers and it works in tandem with them to produce and market the best vanilla beans and extracts. Its goal is to ensure a just and fair value for the farmers’ produce at par with the international markets and standards. The company procures, processes, benchmarks and markets the farmer’ produce and generates profits that are distributed to share holders as handsome dividends. Today Vanilco is recognized as one of the most reliable suppliers of natural Vanilla in the market, thanks to the technical know-how, quality of products, commercial expertise and knowledge of global markets.

It can aptly be concluded that the intention behind insertion of the concept of Producer Company in Companies Act, 1956 is to ensure a more beneficial and easy adaptable regulatory framework of such companies and it is to be well noted that whether it is a Producer Co-operative registered under Co-operative Societies Act, or a Producer Company under the Companies Act, they both serve for the common purpose as to serve its members and work for their betterment.

Some of the Producing Companies in India

1. Khujner Producer Company Ltd.

2. Hardol Vegetable Producer Company Ltd.

3. Rewa Producer Company Ltd.

4. Neshkala Producer Company Ltd.

5. Devnadi Valley Producer Company Ltd.

6. Devbhumi Natural Products Producer Company Ltd.

7. Kabini Organic Farmers Producer Company Ltd.

8. Grameen Aloe Producer Company Ltd.

9. Mahila Umang Producer Company Ltd.

10. Vanilla Producer Company Ltd.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.