Farmer Producer Company: 5 Best & Proven Benefits

This Article is written by Sneha Pandey during her internship with Ledroit India.

Abstract

Agriculture remains the backbone of the Indian economy. However, the issues of exploitation, lack of infrastructure, and middlemen continue to affect the primary producers and small-scale farmers. The concept of Producer Company was introduced in the Indian corporate law framework to address some of these issues. A ‘Producer Company’ is a blend of Cooperative Society and a Private Limited Company. This article attempts to understand the concept of Producer Company in detail with a specific focus on farmers and agri-businesses. It also traces the evolution of laws governing Producer Companies in India – from Part IXA of the Companies Act, 1956 to Chapter XXIA of the Companies Act, 2013. Further, this article also dwells upon the process of formation, compliance, government schemes, and court judgments relevant to Farmer Producer Companies or FPCs. The article finally concludes by reflecting upon the benefits of Farmer Producer Companies to the farmers.

Keywords: Farmer Producer Company, Companies Act 2013, Agri-Business, Primary Producers, Cooperative Society, Corporate Governance.

Introduction to Producer Companies in India

Dr. M.S. Swaminathan – “If agriculture goes wrong, nothing else will have a chance to go right in the country.”

India has a huge farming population, however, most of them are small-scale farmers with limited or no access to modern technologies. Further, the bargaining power of the farmers is low resulting in very less percentage of revenues fetched by the farmers. The concept of Producer Company came into existence to address some of these issues.

A Farmer Producer Company or FPC is a company incorporated under the Companies Act by a group of farmers. An FPC is formed for the purpose of production, harvesting, procurement, grading, pooling, handling, marketing, selling, and export of the produce of its members. An FPC helps the farmers to get credit facilities, get rid of middlemen, and fetch a higher price for their produce. It combines the features of a Cooperative Society and Private Limited Company. In short, An FPC provides farmers with “the best of both worlds”.

Historical Background and Legislative Evolution

Why was there a need for Producer Company?

For more than a century, Indian farmers have been relying upon traditional Cooperative Societies to deal with the issues of price discovery, bargaining power, and credit access. Though the initial objective of cooperative societies was to help the farmers, over the years they failed due to several factors including political interference, lack of professional managers, and control by state governments. Thus, cooperative societies were unable to meet the challenges of a commercialized economy, leaving small and marginal farmers at the mercy of middlemen and large corporations.

Genesis of the “New Generation Cooperative”

Recognizing the need for a “New Cooperative” in India, the Government of India set up a task force chaired by Prof. Y.K. Alagh in the year 2000. Prof. Alagh submitted a report to the government in this regard, recommending the need for a “New Generation Cooperative”. His vision was to create a hybrid institution which would have the soul of a cooperative, but the body of a Joint Stock Company. He further recommended that the new cooperative should be registered as a company and should be governed by three principles:

1. Democratic Ownership: regardless of the shareholding pattern, each member would receive one vote.
2. Protection from external capital: Only farmers/producers can become members or provide credit to the new cooperative. Corporates, financiers, or other farmers cannot acquire controlling interest in it. This objective was to prevent takeover of these cooperatives by external agribusiness firms.
3. Professional Management: Such cooperatives would have professional managers who would be appointed as CEOs. This would allow these cooperatives to function more effectively and efficiently.

Legislative Birth, Resistance and Evolution:

The task force’s recommendations and the need for such cooperative societies were opposed by several business groups such as FICCI. In the meantime, Prof. Alagh and his team continued to lobby within the government to get the necessary legislation passed for the formation of “New Generation Cooperative Society” to promote and support farmers and protect them from exploitation. Finally, in the year 2002, the Companies (Second Amendment) Act 2002 was passed by the Parliament. Part IXA of the Companies Act, 1956, which related to Producer Companies, was brought into force. The new law, for the first time, permitted the incorporation of Producer Companies in India.

Pilot Projects, Acceptance and Government Support:

In the initial phase, a few pilot projects were undertaken in order to popularize the concept of Producer Company. These included the District Poverty Initiative Project of Madhya Pradesh, etc. The State Government realized the benefits of such companies and took active steps to promote them. SFAC, along with NABARD, started providing credit support and advisory services to such companies. In order to address the needs of credit, the Union Budget of 2013-14 announced the creation of a Rs 100-crore Credit Guarantee Fund for Farmer Producer Organizations with an equity grant component.

Transition to Companies Act 2013 and Recent Changes:

The Companies Act 2013 did not contain specific provisions for Producer Companies. However, S. 465A of the Companies Act 2013 states that the provisions of Part IXA of the Companies Act, 1956 (related to Producer Companies) would continue to be in force. In order to make the law more effective, the Government of India introduced the Companies (Amendment) Act, 2020 in February 2021. This amendment added Chapter XXIA in the Companies Act 2013 which gave a new lease of life to the much-needed “Producer Companies” in India. In short, Prof. Alagh’s dream and vision for “New Generation Cooperative” has finally borne fruits for the farmers in India.

Permissible Activities under the Companies Act, 2013

According to Section 378B of the Companies Act, 2013, a Producer Company can be formed for the purpose of carrying on activities for the benefit of the primary producers so as to enable them to get price discovery, credit access, and market linkages. A Producer Company can engage in any of the following activities:

“1. The production, harvesting, procurement, grading, pooling, handling, marketing, selling, and export of the produce;

2. Processing of the produce including preservation, drying, distilling, brewing, vinting, canning, and packing;

3. The manufacture or supply of machinery and equipment or other consumables to its members;

4. Providing education on the principles of mutual aid and technical consultancy;

5. Rendering credit or other financial services to its members for facilitating agricultural activities;

6. Rendering insurance services to the members and their produce.”

A Producer Company can only carry on the activities specified in the MoA of the company. It cannot engage in any other activity even if it is incidental or ancillary to the main activity.

Unique Features of Farmer Producer Companies

A Farmer Producer Company or FPC has some unique features which distinguish it from a Private Limited Company and a Cooperative Society. Some of the important features of FPCs under the Companies Act 2013 are:

Only primary producers or “Producer Institutions” can become members of an FPC. “Producer Institutions” are institutions formed by the primary producers for mutual benefit. The outside funds/investments are prohibited in an FPC.

The members of an FPC enjoy democratic rights on the basis of the number of votes allocated. The voting power may vary according to the shareholding pattern of the members. However, as per S. 378D of the Companies Act, 2013, an FPC should follow the principles of “one member – one vote”.

An FPC enjoys similar rights as a Private Limited Company. The members of an FPC have limited liability. The liability of a member is limited to the unpaid share capital.

Similar to Cooperative Societies, an FPC also distributes profits on a “product basis” and not on a “share capital basis”. Therefore, an FPC typically has a higher share of profit distributed to its members.

An FPC must have minimum 5 directors and maximum 15 directors. Further, an FPC must have a minimum of Rs. 5 Lakhs as paid-up share capital and must appoint a Chief Executive Officer.

Incorporation, Registration and Compliance

As per the Companies Act, 2013, an FPC can be formed by:

1. Any ten or more persons, being all producers,
2. Any two or more producer institutions,
3. Or a combination of the above.

Following steps must be taken in order to incorporate an FPC:

1. Digital Signature and DIN: The directors of the company must apply for Digital Signature and DIN.
2. Name Approval: The name of the company must end with the words “Producer Company Limited”.
3. MoA and AoA: The Memorandum of Association and Articles of Association of the company must be prepared as per the requirements of the Companies Act, 2013.
4. Submission of incorporation documents: The SPICe+ Incorporation form along with address proof, PAN, Aadhaar card, and other documents must be submitted to the Registrar of Companies (RoC).
5. Compliances: An FPC must mandatorily file an Annual General Meeting (AGM); file annual returns and audited financial statements; get statutory audit done by a chartered accountant; file tax returns, etc.

The Benefits to Farmers and Agri-business sector

The legislative framework of FPCs has been conceptualized to address the problems faced by the Indian farmers. Some of the benefits offered by an FPC are:

1. Collective Bargaining: An FPC can facilitate collective bargaining for the farmers which in turn helps them in fetching a better price for their produce while also helping them to negotiate a lower price for the agricultural inputs. In other words, an FPC allows the farmers to buy at a lesser price and sell at a higher price.
2. Access to Institutional Credit: An FPC helps the farmers to access institutional credit which individual farmers may not always be able to get. Credit facilities, grants, and subsidies from agencies such as NABARD are available to FPCs.
3. Access to Infrastructure: An FPC can also facilitate the creation of infrastructure such as cold storage, processing units, and warehousing.

Government Schemes and Taxation Benefits

Both the Central and State Governments have come up with various benefits and incentives for Farmer Producer Companies. Some of the key benefits are:

1. Equity Grant and Credit Guarantee scheme by SFAC: SFAC provides equity grants to FPCs in order to help them raise their capital base. SFAC also provides credit guarantee to the lenders in order to encourage them to provide credit to FPCs.
2. Support from NABARD: NABARD facilitates funding to FPCs and also provides promotional and consultancy support to FPCs.
3. Taxation: Taxation is one of the key aspects of any business setup, especially while incorporating a new entity. It is pertinent to note that a Producer Company does not enjoy any specific tax exemptions under the Income Tax Act, 1961. Agricultural income is, however, exempt from tax under S. 10(1) of the Income Tax Act, 1961. Further, a recent amendment in the Income Tax Act, 2021 provides an exemption to the profits of the FPC, up to a turnover of Rs. 500 crores (S. 80PA).

Producer Company vs Cooperative Society – Which is the Best Option for Collective Farming?

Dr. Verghese Kurien – “India’s place in the sun would come from the partnership between wisdom of its rural people and skill of its professionals.”

Cooperative Societies and Producer Companies are the two distinct options for collective farming in India. Both of them have their own merits and demerits. The following table highlights the key differences between the two entities:

Particulars	Cooperative Society	Producer Company
Regulatory Authority	Registrar of Cooperative Societies (State)	Registrar of Companies (Ministry of Corporate Affairs)
Area of Operation	Typically, one state or region	Anywhere in India
Professional Management	Often Low	Higher professional management (compulsory appointment of CEO)
Borrowing Power	Restricted	Generally Better

Judicial Interpretations and Illustrations

Since a Producer Company is a company incorporated under the Companies Act, all the case laws that apply to the ‘Separate Legal Entity’ of a Company also apply to a Producer Company.

Illustration 1: Separate Legal Entity

Similar to the case laws applicable to a Private Limited Company, let us take an example of an FPC which has taken a loan to purchase tractors. If the FPC fails to repay the bank, the bank can approach the court to auction the tractors. However, the personal assets or agricultural land of the farmer members cannot be sold by the bank to recover the outstanding amount.

Illustration 2: Oppression and Mismanagement

In case the Articles of Association of an FPC are amended by the majority shareholders to override the patronage bonus rules in favor of the promoter shareholders, the minority shareholders can move the National Company Law Tribunal against the oppressive actions of the majority shareholders.

Other Relevant Case Laws

Though Shri Mahila Griha Udyog Lijjat Papad is not a company registered under the Companies Act, the success story of this organization demonstrates the benefits of collective effort. If such women-led organizations were to register as FPCs, it would lead to better governance while also protecting the members’ interests.

Challenges and Way Forward

Capital Mobilization and Trust Deficit

One of the biggest challenges that FPCs face today is convincing small and marginal farmers to invest their money as equity share capital in the company. Due to a high-risk, low-income profile, farmers are more likely to save their hard-earned money in the form of liquid cash instead of investing it in some business which will yield them returns only after due realization of produce. Moreover, farmers don’t have much of a faith in money lenders and cooperative societies due to various scams and defaults in the past, and hence, would want to see some benefits before they jump on the bandwagon of any investment scheme.

Compliance and Managerial Issues

Since FPCs are registered as companies under the Company Act, 2013, they are required to file all sorts of statutory compliances like tax filings, audit reports, board meetings, etc. This requires a company to have a full-time professional CEO, CFO, and other executive members to look after the managerial duties. For small-scale FPCs, such costs can be prohibitively high, and hence, the burden of statutory compliances with the Ministry of Corporate Affairs (MCA) becomes quite a strain on the company’s finances. The Board of Directors of an FPC mostly comprises farmers who have limited or no knowledge of corporate compliances, and hence, the burden of interaction with MCA falls on these farmers which costs the company exorbitant amounts of money.

The Way Forward

There needs to be a policy change regarding relaxations in compliances for FPCs with smaller turnover as of now. The government should set up criteria according to which FPCs with lower turnover will have to file their returns and tax statements. Various government agencies and financing institutions like NABARD and SFAC can take it upon themselves to organize various subsidy programs which can fund the managerial salaries of these FPCs for the first three to five years after their incorporation. Credit guarantee schemes can be launched to help these FPCs get working capital loans to finance their initial losses, expansion of processing infrastructure, etc. This will motivate farmer members to invest more into the FPC.

Conclusion

The ‘Producer Company’, as suggested by the Companies Act, 2013, is a historic initiative which seeks to bridge the gap between the age-old cooperative societies and modern-day corporate companies. By bringing together people belonging to the same profession and providing them with the same rights as that of a company, the government has not only empowered them but promised a better rate of profit. Farmer Producer Companies have now been given a platform where they can sell their products collectively and negotiate better prices for quality inputs.

These companies have the ability to cut out the middlemen and add value to the farmer-producer’s product. Farmer Producers are the lifeline of the country’s agrarian economy, and with a growing commercialization of products and increasing use of agri-tech, the FPCs will be the link between the remote sellers and buyers. These companies will ensure that the value captured by various middlemen in the supply chain is redirected to the poor and marginalized farmer-producers.