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Producer Company: Incorporation Requirements, Tax benefits and much more

Producer Company

Our country’s economy is agriculturally based, where close to 60 % of people depend on agricultural activities for fulfilling their daily requirements. However, the farmers and the agriculturalists had faced a lot of struggles in India. With a view to resolve the hardship faced by them, the Government of India, under the leadership of Y.K Alagh, set up an expert committee to tackle the challenge faced by the Indian farmers and all. Consequently, the concept of Producer Company registration was introduced in the year 2002 to the Indian economy. It served the need of primary producers to gain on various fronts like production technology, market, credit, etc. Through this article, we shall cover the multiple aspects of a producer company like requirements for incorporation, tax benefits, registration procedure, etc.

Meaning of a Producer Company

Producer Companies are a legal body recognized as a corporate entity with an aim to improve the living standard of the farmers and agriculturalists and to ensure enhanced incomes and profitability. The producer companies registered under the Companies Act is incorporated with the following objectives:

  • Procurement,
  • Harvesting,
  • Grading,
  • Pooling,
  • Production,
  • Handling,
  • Marketing,
  • Selling,
  • Export of the primary produce and import for the benefit of its members.

The producer companies intend to facilitate the formation of co-operative business into companies and allow the existing co-operative business to convert into companies.

Activities of a Producer Company

Producer companies are a body corporate which is required to carry or relate to any of the following activities mentioned below:

  1. Processing which includes preserving, brewing, drying, venting, distilling, canning, distilling, and packaging of the produce of its members.
  2. Manufacture, sale or supplying equipment, consumables, or machinery to its producer members.
  3. Providing education on mutual assistance principle to the members of producer in the producer companies and others.
  4. Rendering technical services, consultancy services, research and development, training, and other relevant activities in order to promote the interests of the producer members.
  5. Generation, transmission along with distribution of power, communication relatable to primary produce, conservation and revitalization of land and water resources.
  6. Insurance of producer and the primary produce.
  7. Promoting techniques of mutuality and mutual assistance.
  8. Promoting the welfare of members as decided by the board.
  9. Financing procurement, marketing, processing, or any other activity like extending credit facilities or such other financial assistance to its producer members.
  10. Other activities that are either ancillary or incidental to the main objective of producer companies with a view to promoting mutual assistance among the producer members and principles of mutuality.

It is important to note that Primary produce under the Companies Act, 1956, is defined as a produce arising from agriculture by a farmer that include floriculture, animal husbandry, horticulture, viticulture, re-vegetation, forestry, farming plantation products, produce of handloom, handicraft and other cottage industries.

Incorporation requirements of a Producer Company

The following checklists must be completed in order to form a Producer Company

  • A combination of any ten or more producers (individuals) can come together and form, but there is no upper limit on the maximum number of members.
  • Or it can be formed by any two or more producer institutions.
  • Producer Companies may be incorporated by having a minimum capital of Rs. 500000.
  • Every such company should have a minimum of 5 directors and a maximum of 15 directors.

What are the types of Producer Companies?

Primarily, there are five types of Producer companies, namely:

1- Production Business

Production is related to the use of raw material to produce something. The production businesses are involved in the production and procurement of the items.

2- Marketing Business

The marketing business involves selling the farming products to other companies and consumers. The businesses that are involved in the promotion or marketing of primary production may also be a Producer Company.

3- Technical Service Business

This business refers to the technical analysis of a product. A company that is providing technical assistance to the producers and which conducts research and development may register itself as a Producer Company.

4- Financial Business

The company under such business helps the producers to achieve the financial goals.

5- Infrastructure Business

The company under the infrastructure business provides the producers with infrastructure in the form of electricity, irrigation techniques, water resources, etc.

Various Compliances for the Producer Companies

Following compliances of Producer Companies must have to adhere :

  1. The election process of the directors should be conducted within a 90 days period from the date the said company was registered. The directors are required to hold office for a period of not less than one year and not more than five years period. They are appointed by the members in the Annual General Meeting (AGM).
  2. The AGM must be conducted once in a year, and it shall be notified through a notice mentioning the agenda of the meeting, minutes of the meeting, audited balance sheets, etc.
  3. First, AGM should be held within a period of 90 days from the date of incorporation.
  4. The company shall conduct an Annual General Meeting each year, and the time period between an AGM and the subsequent AGM must not be more than 15 months.
  5. The proceeds and the particulars of every AGM should be filed with the registrar, along with the director’s report, audited balance sheet and profit and loss account, within 60 days of such AGM.
  6. The share capital of the producer companies shall consist of equity shares only.
  7. The equity of members cannot be traded publicly but can only be transferred.
  8. Every producer companies shall have a full-time Chief Executive who will be appointed by the Board among persons other than the members.
  9. The internal audit is mandatory; therefore, it must be conducted by a Chartered Accountant in such intervals and manner as prescribed in the article of the company. Thereafter the auditor shall make an annual report on the audit of the accounts examined by him.
  10. A general reserve must be maintained in every financial year, and if there are not enough funds in any year for transfer, then the shortfall has to be made up by the contribution of members with respect to their patronage in the business.
  11. The book of accounts relating to the company’s cash flow, sale and purchase of goods, expenditure, assets and liabilities, profit and loss statements, cost of labor, etc. must be maintained.
  12. In order to alter the Article of Association or the Memorandum of Association of the company, a special resolution may be passed, but such an alteration must not be inconsistent with section 581B. Altering articles requires to be proposed by a minimum of 2/3rd of elected directors or a minimum of 1/3rd of members. A copy of an altered article or Memorandum of Association with a copy of the special resolution must be filed with the registrar in 30 days of such adoption.
  13. The producer company is required to commence its business within one year from the date of registration, if it fails to do so or if it ceases its transactions after providing a notice to the company then the registrar shall strike the name of such company.

Registration of a Producer Company

The registration procedure is identical to the registration procedure of a Private Limited Company. The registration process of Producer Companies is listed below.

  • Obtain DSC and DIN

The first stage involves obtaining the Digital Signature Certificate (DSC) from all directors and the Directors Identification Number (DIN). The documents needed for DSC are Pan Card, Adhar Card, and other contact details of the directors. DIN can be obtained by filing DIR-3 Form with identity proof, address proof, and a photo.

  • Finalizing Name

The name of the proposed company is filed through Form INC-1 to the ROC (Registrar of Companies) with the requisite fees applicable. The proposed name of the company must have “Producer Company” at the end.

  • Drafting necessary documents

The next stage requires the drafting of documents. It includes the Memorandum of association that incorporates the objective of the company, the article of association that comprises of all by-laws of the company.

  • Filing other relevant documents

Other required documents must also be filed like a declaration in the format of Form INC-8 by a professional, an affidavit signed by the subscribers of the proposed company stating their competency to be a subscriber. Apart from these, a utility bill and a Non-objection Certificate must be taken from the owner whose address will be used as the registered office. All the relevant documents shall be attached to form INC-7, 22, and DIR- 12 and will be uploaded to the ROC website.

  • Issuance of Incorporation Certificate

Once the ROC verifies every detail, it shall issue a Certificate of Incorporation, thereby permitting the company to commence its business operations. It is critical to note that under no conditions, a Producer Company can change itself into a Public Limited Company.

Benefits of Producer Companies

 The producer Companies can avail the following benefits:

  1. Each member of the company shall receive the value for the produce pooled and supplied as decided by the directors. Later on, this amount shall be distributed in the form of cash, kind, or equity shares as per the conditions of the board.
  2. The members of the company shall be entitled to receive bonus shares in proportion to the shares held by them.
  3. If there is any surplus after providing provision for payment of limited return and reserves, then it may be given to the members of the producer companies as patronage bonus. Patronage means participation by members in the business activities through the services offered by the company.
  4. The members of producer companies may also get financial assistance through a credit facility for a particular period but not exceeding six months.
  5. The producer members can also receive loans under the special provisions of the Companies Act 1956. The loans and advances are provided to the producer member against security. It should be repaid in not more than seven years period from the date of disbursement of such loans or advances. NABARD also provides support and financial help to satisfy the needs of Producer Companies.

Tax benefits for Producer Companies

As per the provisions of section 10(1) of the Income Tax Act, 1961, exempts the agricultural income, but it is vital to know that the exemption provided for the agricultural income under section 10(1) sometimes varies on the basis of the agricultural activity carried out.

Under the Income Tax Act, 1961, there is no provision for a specific tax benefit that provides special tax benefits or provides exemptions to a producer company by its definition; however, certain tax benefits and exemptions can be availed subject to the agricultural activity carried out by producer companies.

For instance, income received after selling the grown green tea leaves falls in the agricultural income under the ambit of the Income Tax Act, and it is 100% tax-free, but if the tea leaves are processed further for the manufacturing of tea then only 60% of the income derived from it shall be considered as agricultural income and rest of such income shall be taxed.

Hence, the tax benefits and exemption to the producer companies totally depends on the activity carried on by it.

What are some of the examples of Producer Companies?

India has witnessed a number of producer companies, primarily in the states of Maharashtra and Madhya Pradesh. The lists of some of these companies are enumerated below.

  • Indian Organic Farmer Producer Company Limited (Kerala)
  • Vanilla India Producer Company Limited
  • Coinonya Farm Producer Company Limited (Assam)
  • Karnavati Producer Company Limited (Madhya Pradesh)

Case study of Amul (Co-operative society) to transform into a Producer Company

In May 2006, the AMUL, in a major initiative, intended to modify its organizational model and proposed to transform from a co-operative society to a Producer Company. The intended transformation was aimed to exit the restrictions of the Co-operatives. The then chairman of AMUL made his views clear, stating that the state government’s permission is required for all events at present and that the producer companies have a lot more flexibility in investment, and it provides a lot more scope for expansion of business. However, this proposal was not implemented; thus, AMUL is still a co-operative society.

Takeaway

Producer companies are a hybrid between a Private Limited Company and a Co-operative society that combines the efficiency of the company, and it accommodates the elements of co-operative business. The creation of the Producer Companies under the Companies Act is to serve its members and work for their betterment.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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