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The economy of India is an agricultural centric economy. Around 60% of population depends on agricultural activities for their livelihood. But, the primary producers and farmers have had a long struggle in India. In order to address these problems, the Government of India set up an expert committee, led by Y.K. Alagh (an economist) to look into the matter. In the year 2002, they introduced the Producer companies concept to the Indian economy. Since then, they have helped primary producers gain access to input, credit, production technology, market etc.

 

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What is a Producer Company

A producer company can be defined as a legally recognized body of farmers/ agriculturists with the aim to improve the standard of their living, and ensure a good status of their available support, incomes and profitability. Under Companies Act 1956, a Producer Company can be formed by 10 individuals (or more) or 2 institutions (or more) or by a combination of both (10 individuals and 2 institutions) having their business objective as one of the following:

  • Procurement
  • Production
  • Harvesting
  • Grading
  • Pooling
  • Handling
  • Marketing
  • Selling, or
  • Export

of the primary produce of the Members or import of goods or services for their benefit.

The main objective of the producer company is to facilitate the formation of co-operative business as companies and to make it possible to convert existing co-operative business into companies.

The objects given under section 581B are as follows:

“The objects of the Producer Company shall relate to all or any of the following matters, namely: (as given in the law)

  1. Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary production of the Members or import of goods or services for their benefit, provided that the Producer Company may carry on any of the activities specified in this clause either by itself or through other institution.
  2. Processing including preserving, drying, distilling, brewing, vinting, canning, and packaging of the produce of its Members
  3. Manufacture, sale or supply of machinery, equipment or consumables mainly to its Members.
  4. Providing education on the mutual assistance principles, to its Members and others.
  5. Rendering technical services, consultancy services, training, research and development and all other activities for the promotion of the interests of its Members.
  6. Generation, transmission, and distribution of power, revitalization of land and water resources, their use, conservation and communication relatable to primary produce.
  7. Insurance of producers or their primary produce.
  8. Promoting techniques of mutuality and mutual assistance.
  9. Welfare measures or facilities for the benefit of Members as may be decided by the Board.
  10. Any other activity, ancillary or incidental to any of the activities referred to in clauses (a) to (i) or other activities which may promote the principles of mutuality and mutual assistance amongst the Members in any other manner.
  11. Financing of procurement, processing, marketing or other activities specified in clauses (a) to (j) which include extending of credit facilities or any other financial services to its Members.”

Authorized activities of Producer companies

The Producer Company is required to deal with the produce of its members and is authorized to carry on any of the following activities:

  • Processing (processing also includes, preserving, brewing, vinting,  drying, distilling, canning and packaging) of the produce of its members;
  • Manufacture, sale or supply of equipment, machinery or consumables to its producer members;
  • To provide education on the mutual assistance principles to the producer members of the producer company and others;
  • To render consultancy services, technical services, training, R&D and all other required activities for promoting the interests of producer members;
  • Generation, transmission and distribution of power, conservation and communication relatable to primary produce, revitalisation of land and water resources,
  • Insurance of the primary produce and its producer;
  • To promote the techniques of mutuality and mutual assistance;
  • The welfare of members as may be decided by the Board;
  • Financing of procurement, marketing, processing or other activities such as extending of credit facilities or any other financial assistance to its producer members.
  • Any other activity (ancillary or incidental to the main objectives of the producer company) in order to promote the mutual assistance amongst the producer members and the lines of principles of mutuality.

Note: Primary produce has been defined under the Companies Act 1956 as a produce arising from agriculture by a farmer which includes animal husbandry, floriculture, horticulture, viticulture, pisciculture, re-vegetation, bee raising, forestry, forest products and farming plantation products, produce of hand-loom, handicraft and other cottage industries.

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.

Registration Procedure

The process of registering a Producer Company is similar to that of a Private Limited Company. Digital Signature (DSC) and Director Identification Number (DIN) must be obtained first for the proposed first Directors of the company. Once, Digital Signature (DSC) and Director Identification Number (DIN) are obtained, an application for name reservation is to be filed with the relevant Registrar of Companies (ROC). There is a requirement under the Act that the name of a producer company must end with the words “Producer Limited Company”. Once, the suggested name is approved by the Registrar of Companies (ROC), an application for incorporation is to be filed in the prescribed format for the incorporation of the Producer Company. Once the Registrar is satisfied with the application and the required documents filed for incorporation of Producer Company, he will approve the same and issue Certificate of Incorporation.

Procedure and Documentation required to incorporate a Producer Company

  1. 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
  2. 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
  3. 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
  4. 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
  5. 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.

Benefits for Producer Companies

The following are the benefits enjoyed by a Producer Company:-

  • The members of the producer company initially will receive the value for the produce pooled and supplied as determined by the directors. This amount will be given out later in the form of cash/ kind/ equity shares.
  • The members of the producer company will be entitled to get bonus shares in the same proportion to the shares held by them.
  • The surplus (after providing provision for payment of limited return and reserves) may be given as patronage bonus* to the members of the producer company.

*Patronage bonus signifies a distribution of the surplus income to the members of the producer company in proportion to their respective patronage. Patronage, on contrary, is the participation by members in their business activities by using the services offered by producer company.

Loans and Investments

As mentioned above the Producer Company consist of individuals who are primary producers, and thus, are in need of financial support from time to time. Hence, a special provision under the companies acts 1956 was passed for giving loans to producer members. A Producer Company can provide financial assistance to its members through:-

  • Credit facility : This is available to any member for a period not exceeding six months (such facility must be in connection with the business of the Company).
  • Loans and advances: These are provided to the producer member against security, repayable within a period not exceeding seven years from the date of disbursement of such loans or advances.
  • NABARD Loan: NABARD provides support and financial assistance to meet the needs of Producer Companies. In 2011, NABARD set up a Rs. 50 crore Producer Organisation Development Fund (PODF), out of its operating surplus.

Tax Benefit (Taxability of Producer Company)

The Income Tax Act, 1961 under section 10(1) exempts the agricultural income. However, the exemption provided under section 10(1) for the agricultural income sometimes vary on the basis of the agricultural activity carried out.

The Income Tax Act does not specify any specific tax benefit which essentially provides special tax benefits or exemptions to producer companies by its definition. But subject to the agricultural activity carried out by the producer company, certain tax benefits and exemption can be availed.

For example, income derived from selling the grown green tea leaves is an agricultural income under the Income Tax Act and it is 100 % tax-free. However, if the tea leaves are further processed for the manufacturing of tea, only 60% of such income will be considered as agricultural income and 40% of such income will be taxed.

Thus, it is apparent that the tax benefit and exemption to a producer company is totally depending upon the activity it carries on.

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