Mr. Girish Sohani, President of BAIF2 Development Research Foundation and Chairman of Vasundhara Agri-Horti Producer Company Limited (VAPCOL) was pondering over future course of action as management participants of IRMA3, a premier Rural Management institute of India raised concern about the functioning and viability of the producer company. Organizational structure of VAPCOL varied across operating states – Gujarat and Maharashtra, though members were under the one umbrella organization, VAPCOL. This structural difference at the organizational level led to the transfer of patronage4 payments from member-producer groups of Maharashtra to member-cooperatives of Gujarat.
Mr. Sohani posed before his executives, “is it necessary to bring uniformity in organizational structure across the states and how your recommendations would help sustain VAPCOL?” Before charting the future plan, Mr. Sohani was interested to ascertain patronage amounts that got transferred from one state to the other and it was noted that 20% of profits earned accounted for patronage returns to members. If this was substantial then he could have weighed a few strategic options. On the other hand, if he wanted to maintain a status quo then he needed to devise an alternate patronage disbursement way out that might bring parity (in accounting) for both the states. Establishing cooperatives in Maharashtra on similar lines with Gujarat could then have a direct bearing on VAPCOL.
“Could you help me determine patronage bonus transferred from Maharashtra to Gujarat?” he blatantly posed. If Sohani would decide to set up cooperatives in Maharashtra then he could be willing to test the merit of his decision on financial health of VAPCOL. Upon negative consequences, he could otherwise plan to increase the commission from 6% to 10% of sales or gross revenues.
Producer Companies in India
Collective action through cooperatives was important not only to impact the exchange process but also to help small-scale growers enhance their market orientation and adapt to greater levels of competition5. India had experienced the cooperative wave since early 1900s and this was indeed drawn on impressive credit history of rural financial sector. Traditional cooperatives those were registered under the concerned State Cooperatives Societies acts failed to withstand the test of time in most cases due to a range of internal and external issues.
Producer organizations were promoted to address the concern of small and marginal growers as recourse to cooperatives. Since more freedom could help cooperatives to operate in a competitive business environment, the Companies Act 1956 was amended to include the Producer Company as a separate chapter in the Section 581A based on the Alagh Committee report. A producer company operated in liberalized regulatory environment as applicable to other business entities and had some unique characteristics of cooperative. Therefore, the entity was said to be a hybrid of cooperative and private limited company.
Producer companies appeared to be effective since they adhered to the principles of member ownership and control, member participation in governance, efficient operating system, and transparent processes for sustainability6. These companies had gained salience performing a host of activities, namely, provision of inputs, attainment of economies of scale, value addition to primary produce and marketing in addition to developing competitive primary markets and generate surplus in successive stages of the value addition.
Producer companies were to be registered under the provisions of Part-IX-A, Chapter one of the Companies Act 1956. The company could engage in production, harvesting, procurement, grading, pooling, handling, marketing, selling, and export of primary produce of the members of import of goods or services for their benefit. Their membership could be 10 or more producer organizations/institutions or a combination of both. Though they were deemed to be private limited or limited liability companies by shares within the meaning of Section 581C(5) of the Companies Act 1956, there was no restriction on membership – voluntary and open; the provision of minimum paid up capital of INR 0.1 million would not apply to and number of members could be more than 50 7 . They were also permitted to buy other producer companies’ shares and to incorporate subsidiary or joint venture or new organization.
Benefits to Members
Companies retained one member – one vote principle regardless of shares or patronage except during the first years when it could be based on authorized share capital. They offered a limited return on capital similar to traditional cooperatives8 but could issue patronage bonus and dividend. As they were named “producer company limited”, they could issue only tradable equity shares within the members based on their patronage in the business.
These companies could have five to 15 directors, chairman, and ex-officio chief executive but multi- state cooperative societies could have more than 15 directors for a year or so. They could co-opt expert or additional director without allowing them to exercise voting rights. Companies focused on member education and co-operation among producer organizations. However, failing to start business within a year of incorporation could attract cancellation of the registration. The audit had to be conducted by a chartered accountant. Producer companies should maintain a general reserve in every financial year and in case of insufficient funds, members had to contribute in proportion to their patronage in the business. Dispute relating to companies were to be settled by conciliation or arbitration under the Arbitration and Conciliation Act 1996 as if the related parties to the dispute could consent in writing.
Evidences from USA, New Zealand, and Denmark revealed that cooperatives and producer institutions could register and operate under a parallel legal environment as governed companies. In backend, these were producer owned enterprises and in frontend, they functioned as a corporate entity.
While there was no comprehensive report on the functioning of producer companies in India, about 150 such registered organizations were operating in several states, such as Indian Organic Farmers Producer Company, Vanilla India Producer Company and Banana India Producer Company in Kerala, Coinonya Farm Producer Company (for turmeric) and Karbi Farms Producer Company (for ginger and chilies) in Assam, Masuta Producer Company (for silk) in Jharkhand, Rangsutra (for artisan) in Rajasthan, and 17 producer companies (for seed, grain, pulses, spices and poultry) in Madhya Pradesh, Mahi (for milk) in Gujarat and Prayas (for milk) in Rajasthan, among others. These organizations participated in aggregations, backward and forward linkages with farmers and corporates for various agricultural/horticultural products in addition to participation in milk and poultry business.
Notwithstanding a strategic approach to shape up collective action by these companies, they had yet to draw the attention of Union or the State for required support or incentive. Obtaining licenses from Agricultural Produce Marketing Committee remained a major hurdle for producer companies as traditional cooperatives often blocked the opportunity to enter regulated markets. Access to formal credit institutions, on one hand, continued to impede the prospect for scaling up, i.e. value addition and marketing and entry barrier to the capital market for fund raising, on the other, was a limiting factor to the sustenance. Further, legislative issues complicated hassle-free functioning of the producer organizations in India following J J Irani Committee’s recommendation on the inclusion of producer companies in the Companies Act.
Producer companies were expected to more competitive than cooperatives. Business format appeared to be in favor of legitimacy and credibility. This encouraged the organization devoid of altruistic image of cooperatives and accommodated both registered and non-registered groups/user groups as equity shareholders in the company. Amendment in the Act permitted only primary producers to hold in the ownership in that outsiders were not encouraged to control the company and allowed for raising funds from other producer interest groups. In emerging markets, where retailing had a long way to go for sourcing and managing supply chain, scale in operations and skilled manpower could be essential to sustain producer organizations.