Module 14. Dairy development in India Phases and schemes

Lesson 26

26.1 Introduction

This chapter describes the concept of Producer companies as a new development for functioning of dairy co-operatives in this liberalized era. Producer companies Act is now being used by many dairy co-operatives in this competitive era. This act overcomes many problems faced by cooperative organizations while functioning under cooperative act.

26.2 Overview of Dairy Co-operatives

India is the largest milk producing country in the world. But considering the milch animal population of India, production per animal is lower compared to other nations. Moreover in free trade regime era, there are possibility of cheap imports to India, thus to be competitive, it is necessary to have technology oriented, smoother and updated delivery system in terms of production and marketing. co-operative will have to constantly endeavour towards modernization and diversification to ensure quality of international standards. They will have to constantly update technologies to make milk production viable & also improve quality to compete both in the internal & external market.

Animal Husbandry and dairying is an important component of Indian agricultural system. But now in the liberalized competitive era, dairying is professional enterprise which requires expertise. It is necessary to make all aspects of Co-operative dairy sector management oriented so as to make it at par with other countries which have shown tremendous progress in the sector.

It is estimated that organized dairy sector handles about 25 percent of milk production of the country. The share of co-operatives is about seventy percent from this organized sector & co-operatives should try to increase their share. The growth of co-operative sector is uneven across different states of India. Co-operative federations of each state have to strive for further increasing their coverage.

26.3 The New Concept of Producer Companies

Till recently, the Companies Act, 1956, recognised only three types of companies, namely, companies limited by shares (sub-divided into public limited and private limited companies), companies limited by guarantees and unlimited companies.

The new concept of producer companies is based on the recommendations of an expert committee led by noted economist, Y. K. Alagh. The committee was asked (a) to frame a legislation that would enable incorporation of cooperatives as companies and conversion of existing cooperatives into companies and (b) to ensure that the proposed legislation accommodated the unique elements of cooperative business with a regulatory framework similar to that of companies.

The new type is termed as `Producer Company', to indicate that only certain categories of persons can participate in the ownership of such companies. The members have necessarily to be `primary producers,' that is, persons engaged in an activity connected with, or related to, primary produce.

Primary produce: In terms of the Act. it is a produce of farmers arising from agriculture including animal husbandry, horticulture, floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising and farming plantation products: produce of persons engaged in handloom, handicraft and other cottage industries: by - products of such products; and products arising out of ancillary industries.

The 46 new sections respectively deal with incorporation of producer companies: their management; general meetings; share capital and members rights; finance, accounts and audit; loan to members and investments; penalties; amalgamation, merger or division; resolution of disputes; and reconversion of producer company to inter-State cooperative society. A few salient features are now briefly described.

Formation: Any ten or more individuals, each of them being a producer, that is, any person engaged in any activity connected with primary produce, any two or more producer institutions, that is, producer companies or any other institution having only producers or producer companies as its members or a combination of ten or more individuals and producer institutions, can get a producer company incorporated under the Act.

The companies shall be termed as limited and the liability of the members will be limited to the amount, if any, unpaid on the shares. On registration, the producer company shall become as if it is a private limited company with the significant difference that a minimum of two persons cannot get them registered, the provision relating to a minimum paid-up capital of Rs. 1 lakh will not apply and the maximum number of members can also exceed 50.

Members' equity cannot be publicly traded but be only transferred. As such, "producer companies would not be vulnerable to takeover by other companies or by MNCs.''

Objects: The objects of producer companies shall include one or more of the eleven items specified in the Act, the more important being:

(i) Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of members or import of goods or services for their benefit;

(ii) Processing including preserving, drying, distilling, brewing, venting, canning and packaging of produce of its members; and

(iii) Manufacture, sale or supply of machinery, equipment or consumables mainly to its members.

The other objects include rendering technical or consultancy services, insurance, generation, transmission and distribution of power and revitalization of land and water resources; promoting techniques of mutuality and mutual assistance; welfare measures and providing education on mutual assistance principles. It is to be noted that private limited or public limited companies are not hamstrung by such restrictions as to their objectives, provided they are legal.

26.4 Management

(a) Every producer company is to have at least five and not more than 15 directors. Minimum prescribed for private limited is two and for public limited three, while the maximum will depend on the number mentioned in the respective Articles. Usually the maximum is pegged at twelve.

(b) A full time chief executive, by whatever name called, is to be appointed by the board. He shall be an ex-officio director and will not be liable to retire by rotation. He shall be entrusted with substantial powers of management as the board may determine. This provision differs from that applicable to limited companies — a private limited need not have any chief executive while public limited companies, only with paid-up capital exceeding Rs. 5 crores, have to have a managing director.

(c) Producer companies having an average annual turnover exceeding Rs. 5 crores in each of three consecutive years need have a whole-time secretary. It is not mentioned what would happen to the incumbent, if the turnover falls below this minimum. This is in contrast to the mandate that private and public limited companies having a paid-up capital of Rs. 2 crores or more should have a whole-time secretary.

26.4.1 Members' benefits: Members will initially receive only such value for the produce or products pooled and supplied as the directors may determine. The withheld amount may be disbursed later either in cash or in kind or by allotment of equity shares. Members will be eligible to receive bonus shares.

An interesting provision is for the distribution of patronage bonus (akin to dividend) after the annual accounts is approved — patronage bonus means payment out of surplus income to members in proportion to their respective patronage (not shareholding). Patronage, in turn, is defined as the use of services offered by producer companies to their members by participation in their business activities.

26.4.2 Reserves: Every producer company has to maintain a general reserve in every financial year and in case there is a not sufficient fund in any year for such transfer, the shortfall has to be made up by members' contribution in proportion to their patronage in the business.

26.4.3 Audit: "without prejudice to the concerned sections in the Act,'' the auditors of producer companies have to specially report on some additional items such as debts due and bad debts, verification of cash balances and securities, details of assets and liabilities, loans extended to directors and details of donations and subscriptions. These are all integral parts of any audit, both statutory and internal and one fails to understand the logic behind this stipulation.

26.4.4 Internal audit: It is mandated that every producer company should carry out internal audit of its accounts by chartered accountants. The Act has not so far made it compulsory for limited companies to carry out internal audit, although listed companies, by virtue of the clause in the listing agreement relating to corporate governance, are to have a full-scale internal audit system.

26.4.5 Resolution of disputes: Any dispute relating to the formation, management or business of producers companies is to be settled by conciliation or by arbitration under the Arbitration and Conciliation Act, 1996 as if the parties to the dispute have consented in writing to such procedure. The arbitrator's decision shall be final. This seems to be inequitable since usually an arbitration award can be appealed against in high courts.

26.4.6 Inter-State cooperative societies: With objects not confined to one State may make an application to the Registrar for recognition as producer companies. The statute also provides for reconversion of such producer companies to their former status as inter-State cooperative societies subject to the approval of High Court.

26.5 The Companies (Amendment) Act, 2002 (Act No. 1 of 2003)

By this Amendment Act, Part IXA comprising sections 581A to 581ZT (46 sections) has been inserted in the Companies Act, 1956, to provide a statutory and regulatory framework for producer-owned enterprises to compete with other enterprises on a competitive footing. It gives an opportunity to cooperative institutions to voluntarily transform themselves into the new form of producer companies. Members equity may not be publicly traded, but may only be transferred to active members at par value with the approval of Board of directors and producer companies would not be vulnerable to takeover by multinationals/other companies. Conversion option by cooperative society to Producer Company can be exercised only if two-thirds of members of the concerned society vote in favour of a special resolution to that effect. The objects of a producer company have been defined to include, among other things, production, processing, manufacture and sale of primary produce as well as allied matters. It provides for: one vote per member, irrespective of its shareholding and adequate provisions regarding assets and liabilities to creditors to prevent cooperative-turned companies from vanishing with funds raised in the markets. The producer companies can raise funds from financial institutions and banks through issue of debentures and other securities. Every producer company having an average annual turnover exceeding five crore rupees in each of three consecutive financial years shall have a whole-time secretary. The enactment has allowed reconversion of producer company into a cooperative society where an application is made to the High Court, if not less than two-third of its members vote for such reconversion or a request is made by its creditors representing three-fourth value of its total creditors for such reconversion, and the High Court decides so after considering all material facts in the matter and a certified copy of the order of Court is filed with the Registrar of Companies. The said Amendment Act came into force on 6-2-2003, as notified by the Central Government.

The following table gives comparison of cooperative Act and producer companies Act, which modern new generation cooperatives should adopt to overcome the limitations of faced by cooperative dairies.

Table 26.1 Comparison of cooperative Act and producer companies Act



Producer Company


Cooperative Societies Act

Indian Companies Act.


Single object


Area of Operation

Restricted, discretionary

Entire Union of India


Individuals and cooperatives

Any individual, group, association, producer of the goods or services


Non tradable

Not tradable but transferable limited to members on par value

Profit sharing

Limited dividends on shares

Commensurate with volume of business

Voting rights

One member, one vote, but Government and Registrar of cooperative societies hold veto power

One member, one vote. Members not having transactions with the company cannot vote

Government control

Highly patronized to the extent of interference

Minimal, limited to statutory requirements

Extent of Autonomy

Limited in .real world scenario.

Fully autonomous, self ruled within the provisions of Act


Created if there are profits

Mandatory to create every year

Borrowing power


More freedom and alternatives

Relationship with other

Transaction based

Producers and corporate entity can together corporate / business float a producer company houses / NGOs

Last modified: Monday, 1 October 2012, 6:54 AM