Producer Company-Ten Things under Company Law

The article seeks to discuss in detail the features of a producer company along with method of its incorporation. It will also discuss the benefits that are received by members of a producer company and the composition of board of directors in company along with the procedure of audit.
Estimated Reading Time: 9 minutes

Introduction

A producer company is basically a combination of both a private limited company and a cooperative society. There are no separate provisions under Companies Act, 2013 that govern the producer companies. The provisions falling under part IX A of Companies Act, 1956 still governs the functioning of producer companies and the part consists of sections from 581Z to 581ZT. Section 456 of Companies Act, 2013 makes it clear that producer companies will still be governed by the same law as before under the Companies Act of 1956. This article seeks to discuss in detail the features of a producer company along with the method of its incorporation. It will also discuss the benefits that are received by members of a producer company and the composition of the board of directors in the company along with the procedure of audit.

What are Producer Companies?

The farmers and agriculturists make an association and come together to form producer companies, this producer company is legally recognised and consists of the group of farmers and agriculturists, the main objective behind the formation of producer companies by farmers and agriculturists is to enhance their standard of living and ensure that their income and profits are increased and improve their status. According to Companies Act, 1956, in order to form producer companies, at least 10 members have to come together to start the company or at least 2 institutions have to associate in order to constitute a producer company. It may also combine both i.e. institutions and individuals as well. The main objective of carrying on business by producer companies must be one amongst, procurement, production, harvesting, grading, pooling, handling, marketing, selling or exporting produce of the ones who are members. It can also be pertaining to import of products that facilitate work of members. It is basically a combination of both the cooperative organisation and a company. [1]

Activities performed by Producer Companies

The main activities which the producer companies are allowed to carry out by the Companies Act, 2013 are as follows and the company, may according to the preference of its members choose any one or more of these activities to perform as a part of their business.

  1. It includes processing the produce of company’s members.
  2. The company may also be aimed at the sale of, or providing machinery and tolls which enable better functioning, to its member who may be agriculturists or farmers.
  3. Nowadays, it can be seen that there are various institutions aimed at giving education on agricultural matters and their aim is towards improvement of produce through use of education and scientific techniques. So, a producer company may also be set up with aim to impart education to its members.
  4. To provide technical and consultancy services or any other services with an aim to benefit the producer members and furthering their interests.
  5. To get the primary produce, as produced by its members, duly insured to avoid any loss in case of uncertain event.
  6. To ensure that all the producer members are working together and carry out activities with an aim to benefit mutually by using techniques of mutuality in working. It basically aims towards promotions of mutual assistance amongst the members of a producer company.
  7. Its aim may also be to provide financial help to the producers who are members of a producer company.[2]

Registration of Producer Company

Producer companies can be formed when more than 10 people or 2 or more institutions come together to form a producer company, however, there is no such upper limit over the number of members in a producer company. It requires a minimum capital of Rs. 5,00,000 in order to form a producer company. The board of director in a company will include at least 5 and at most 15 directors. These directors can be appointed for a term extending to a maximum period of 5 years and a minimum period of 1 year. The period of appointment has to specified in the articles of association of producer company. At the same time every director can also be reappointed. The directors are appointed by the members of producer company in their annual general meetings. The producer company can be converted into a multi-state co-operative society but not a public company.

The first step that has to be complied in the formation or incorporation of a producer company, is the obtaining of a Digital Signature Certificate by the ones who will become company’s directors. There are various documents that are required to be filed by such person, which include a PAN card, an Aadhar card, photo, email id and contact details. After obtaining the DSC, Director Identification proof has to be obtained. For obtaining the same the person has to fill the DIR-3 form and pay the requisite fees and attach the documents such as the identity proof, address proof and photo.

The next step in incorporation is the finalisation of name of producer company by the members, an INC form has to be duly filled with the names and preferences, It is required that every producer company’s name should have ‘producer limited company’ as its last name.[3]

The Registrar of companies, then after looking in suitability of the name, and after considering the name to be non-identical and desirable, accepts one name for the producer company. After acceptance of name by the Registrar of companies, the members have to start preparation of documents such as the Memorandum of Association of company, which states the objectives that the company seeks to achieve.The other document to be prepared is the Articles of Association, which contains ways of internal functioning of company. The members have to subscribe to the memorandum of association. Basically, the method of incorporating a producer company is the same as are required to be satisfied in setting up or incorporating a private company. On satisfaction regarding submission of the documents the registrar of companies will register the producer company by issuing a certificate of incorporation. Now the producer company is permitted to start the business. It usually consists of producers, farmers or agriculturists who belong to low income group and aim to increase their earning by selling products to the consumers directly and eliminating middle-men.[4]

Loans and Investments

It is known that those who become members of a producer company are not that well-off and belong to lower-income groups as they are merely primary producers. Thus, Companies Act, 1956 had taken these factors into consideration and thus the act has legal provisions which allow the producer companies to lend loans to their members, it basically allows for financial assistance by giving help in following forms.

  1. Credit facility- The company can give credit to its member in respect of the business carried out by the company and the period of such credit will extend to a maximum period of 6 months.
  2. Loans and advances- The provisions of company law allow the producer company to lend loans to its members, it is required that these loans be granted against security and have to be re-paid within a maximum period of 7 years from the date of lending loan.
  3. NABARD loans- It seeks to help the producer company by giving them loans and financial assistance so that they are able to function well and thereby satisfy their needs. [5]

Share Capital

As per company law the share capital of a producer company will consist only of equity shares and the capital raised through issue of equity shares that cannot be traded in the market, though they can be transferred from one person to another. The process of voting in producer company is quite simple. In case of a producer company that is formed by only individual members, then every member will have one vote. In case if producer company is formed by institutions then voting will depend on their participation, and if it is formed by a combination of both, i.e. individual members and institutions then every member will have one vote. [6]

Annual General Meetings

A producer company, after it has been incorporated, has to call an annual general meeting of its members within a period of 90 days from the date of incorporation of such company. The producer company has to hold a meeting every year and the requirement is that the time period between 2 meetings must not be more than 15 months. This period of 15 months however can be extended by the registrar, if the producer company approaches the registrar to seek permission. This extension cannot be made beyond 3 months. The meeting has to be held after issuing a notice 14 days prior to the conduct of meeting. [7]

Benefits for the Members

The members receive various benefits. Initially they will receive the price of their products as it has been decided by the directors of the producer company. However, they get returns in form of cash or allotment of equity shares or any other form of benefit that is given to them out of the profits that company makes. The members are also eligible to receive benefits in form of bonus. Another benefit received by the members is patronage bonus. This means that after the audit has been duly completed the members, receive sums out of the surplus income, this is known as patronage bonus as the amount of bonus received by every member is in proportion to their patronage and not the shareholding.

Audit

The producer companies are required to carry out their internal audits that have to be duly carried out by chartered accountants. These audits have to be in accordance with the provisions of Articles of association of the producer company. The auditor after due examination of the accounts is required to make submission of an audit report to the members, that has been prepared by him. The ones who audit producer company accounts are required to specially report on certain items such as the debts that are due, bad debts along with the verification of cash balances, securities along with the details regarding assets and liabilities of company, loans that have been extended to directors and details regarding donations and subscriptions.[8]

Alteration of Articles of Association and Memorandum of Association

Memorandum of Association and Articles of Association of a producer company can be altered by its members but there are two conditions that need to be satisfied, the first condition is that the members need to pass a special resolution to that effect. The second condition involves ensuring that the alteration made to Memorandum of Association or Articles of Association is not inconsistent or contrary to section 581B. When an amendment if being made to Articles of Association then at least two-third of elected directors or one-third of members have to make the proposition and then pass a special resolution. This alteration that has been approved through a special resolution has to be notified to Registrar of companies within a period of 30 days from the day of alteration. [9]

Conclusion

The main intention behind enacting the provisions that govern producer companies specifically was to allow the producer companies, which are usually formed by small famers and agriculturists, to prosper and conduct their business in a smooth and relatively easy manner as compared to public companies which have to comply with strict legal provisions as laid down under Companies Act, 2013. The producer companies are given such relief because they are set up with an aim to benefit the farmers who belong to lower-income society and it seeks to contribute towards their general welfare.


[1]Sukhpal Singh, Producer Companies as New Generation Cooperatives, Economic and Political Weekly 22, 23 (2008).

[2]Cleartax, Producer Company in India under Companies Act, 2013, Cleartax (5 June 2020), https://cleartax.in/s/producer-company-india#Benefits.

[3] B.K. Goyal, Company Law 270 (13th ed. Singhal Law Publications, 2018).

[4] Dr. G.K. Kapoor; Dr. Sanjay Dhamija, Company Law-A Comprehensive Text Book on Companies Act 2013228 (22nd ed. Taxmann, 2019).

[5] Cleartax, Producer Company in India under Companies Act, 2013, Cleartax (5 June 2020), https://cleartax.in/s/producer-company-india#Benefits.

[6] P.P.S. Gogna, Textbook of Company Law 48 (11th ed. S. Chand & Co, 2015).

[7] Avtar Singh, Company Law, 222 (17th ed. Eastern Book Company, 2018).

[8]Divesh Goyal, Producer Company under Companies Act, 2013, Taxguru Complete tax solutions (10 April 2020), https://taxguru.in/company-law/producer-company-under-companies-act-2013.html.

[9]Avtar Singh, supra, 223.

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