Insights & Research
CS Muhammed Sahal
Partner & Head, Corporate Advisory
One of the great realization during the COVID 19 crisis to all of us is that the most stable industry across the world is food and processing of food or agri-business. On the other hand, relatively most of the news from agri-businesses industry is not positive for the last couple of years due to the various socio, economic and, climatic reasons. In India, we witnessed some of the very few success stories only of agri-food businesses during the last decade like Amul which are still running gloriously. However, Co-operatives, in general, have suffered from the problems globally and failed with some exceptions. In the light of the previous experience of the poor performance of traditional cooperatives in India, it was felt that there was a need to give more freedom to co-operatives to operate as business entities in competitive markets.
We have great potential for agri-business especially in Kerala due to the shortage of essential agri-business products, acceptance of produce in Kerala products in the global market, strong government policies, and high literature rate. However, if we analyze at the micro-level, it is understood that the success of an agri-business in this generation depends on the linking of small producers or farmers to the right market. Apart from that organized group systems are also needed for sharing services such as knowledge input, production supervision, storage, transportation, etc, and to absorb price risks to which primary produce is always subjected. Producers’ organizations amplify the political voice of smallholder producers, reduce the costs of marketing of inputs and outputs, and provide a forum for members to share information, coordinate activities, and make collective decisions. They also create opportunities for producers to get more involved in value-adding activities such as input supply, credit, processing, marketing, and distribution. On the other hand, they lower transaction costs for processing/marketing agencies working with growers under contracts. Collective action through cooperatives or associations is important not only to be able to buy and sell at a better price but also to help small farmers adapt to new patterns and much greater levels of competition.
A producer company operates under the regulatory framework that applies to companies, which is distinctly different from that of the cooperatives, which was seen as arbitrary and corrupt. Here we are trying to provide an overview of the producer companies which is in hybrid nature having both Company & Cooperative character.
Advantage of organised business formats for agriculture:
The role of a cooperative is to create an interface between the farmer and global market, provide access to permanent risk-bearing capital for farmers, manage risk for farmers through diversification, set standards in the market, provide more competitive market conditions and market access to farmers, and to promote economic democracy at the grass-root level. But, an important question is to find an appropriate design of a producer institution which can make it more likely to succeed given other factors. Hence member centrality and member control as crucial which also come from patronage system and governance structure, besides being facilitated by the operating system.
What is the Producer Company ?
A producer company operates under the regulatory framework that applies to companies, which is distinctly different from that of the cooperatives, which was seen as arbitrary and corrupt. A producer company is a company incorporated under Companies Act 2013 (formerly the Companies Act 1956) and shall carry on following activities as mentioned in section 581B of Companies Act 1956 and shall have the objective of including but not limited to production, harvesting, procurement, grading, pooling, handling, marketing, selling, the export of primary produce of the Members or import of goods or services for their benefit and Financing of procurement, processing, marketing or other activities specified in the Act.
How relevant and appropriate are the Producer Companies in the context of globalized markets compared to cooperative societies ?
The traditional cooperative form of organization has suffered from various constraints, which have harmed the day-to-day operations and performance of cooperatives. These constraints, which originate in the very nature and principles of the cooperative form of organization, include the commitment to buy the entire produce from all members, lack of financial and managerial resources, lack of market-orientation, and small size of operations. On the other hand Producer Companies format provides more legitimacy and credibility in the immediate business environment. It breaks the producer organization free of the welfare-oriented, inefficient, and corruption-ridden image of cooperatives. Further, it allows registered and non-registered groups, such as self-help groups or user groups to become equity holders in a Producer Company. This enabling provision is a distinct improvement over the existing legislation on cooperatives.
What are the important legislative and statutory differences between the Cooperative Society and Producer Company?
• Co-operatives have largely been the state promoted, with a focus on welfare rather than to do business on commercial lines and more State government intervention in the management of Co-operatives. Whereas Companies Act is central legislation comparatively more liberal and minimal government control in the management of the Company.
• A Producer Company is a hybrid of Company and Co-operative Society. It combines the goodness of a co-operative enterprise and vibrancy and efficiency of a company and accommodates the unique elements of cooperative business with a regulatory framework similar to that of a company.
• Members shall trade or transfer the equity shareholdings in Producer Company whereas it prohibits in the case of Cooperative Society.
• The State or Central Governments are having significant control over the Cooperatives and also having excessive administrative control whereas there is no such control over producer company except the general compliances as per the Companies Act
• Generally Cooperative Societies Act restricts the area of operation whereas there is no such restriction for producer companies as per the Indian Companies Act
• Members benefits are limited with dividend on capital in case of Cooperative Societies whereas members are entitled to both patronage bonus shares and dividend
Agriculture plays an important role in our national economy and livelihood of more than 55% population of our country is dependent on agriculture and allied activities. However, we could not find many successful organized business formats that also pass the benefits to farmers due to several reasons. Despite rapid growth, the overall progress of cooperative movement during 100 years of its existence is not very impressive mainly because of High Government Interference, Extensive mismanagement and manipulation, more than all the above the core intention of Cooperative Society was mainly focusing on welfare rather than a business motive to compete to a global market. Producer Company formats overcome all the structural limitations of Cooperative Societies and enable and provide a good platform to those who can take the leadership to a group of farmers with bona fide business intention and allows to pass the benefits to the farmers while the promoters also enjoy for their time and efforts contribution. The world is changing and the business formats also changing during this unprecedented era, people who think out of boxes and come up with different formats unlike the conventional systems in the agriculture industry can achieve new heights by joining hands with competent individuals having innovative thoughts in different sectors both technical and non-technical skills using the corporate structure like producer companies.
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