Producer Company Loans and Investments: Part VII

Producer company loans and investments are governed by Part VII of Chapter XXIA of the Companies Act, 2013, headed LOANS TO MEMBERS AND INVESTMENTS. It has exactly two sections. Section 378ZK is the lending side, with two tenor bands and a Member-approval gate on director loans. Section 378ZL is the investment side, with a reserve-investment rule, a thirty per cent. ceiling and a register open to any Member.

What producer company loans and investments does section 378ZK allow?

Producer company loans and investments start with the Board's lending power, and section 378ZK is narrow by design. The Board may, subject to the provisions made in articles, provide financial assistance to the Members of the Producer Company by way of the two forms its clauses name:

• (a) credit facility, to any Member, in connection with the business of the Producer Company, for a period not exceeding six months;
• (b) loans and advances, against security specified in articles to any Member, repayable within a period exceeding three months but not exceeding seven years from the date of disbursement of such loan or advances.

Four constraints are worth reading off that text. The recipient must be a Member, so section 378ZK is not a general lending power. Clause (a) requires the credit to be in connection with the business of the Producer Company. Clause (b) requires security specified in articles, which puts the acceptable security into the company's own constitutional document. And the clause (b) band is bounded at both ends: exceeding three months but not exceeding seven years, measured from the date of disbursement.

The two bands do not overlap in the way people assume. A credit facility under clause (a) runs up to six months. A loan under clause (b) has to run for more than three months. The overlap between three and six months is inside both clauses; anything under three months can only be a clause (a) credit facility.

What is the gate on lending to a director?

The proviso to section 378ZK: any loan or advance to any director or his relative shall be granted only after the approval by the Members in general meeting.

That is one of two Member-level controls on director lending in the Chapter. Section 378S, which requires certain powers to be exercised only by resolution passed at the annual general meeting, includes at clause (e) specify the conditions and limits of loans that may be given by the Board to any director. So the Members set the conditions and limits in advance under section 378S(e), and approve the individual loan or advance under the section 378ZK proviso.

The Board's own power list confirms where the line falls. Section 378R(2)(j) lets the Board sanction any loan or advance, in connection with the business activities of the Producer Company to any Member, not being a director or his relative. The powers of a producer company board page carries the full list of eleven matters in that sub-section.

Section 378ZR is what connects this to the rest of the Act. All the limitations, restrictions and provisions of this Act, other than those specified in this Chapter, applicable to a private company, shall, as far as may be, apply to a Producer Company, as if it is a private limited company under this Act in so far as they are not in conflict with the provisions of this Chapter. Read with section 378ZQ, which gives the Chapter effect notwithstanding anything inconsistent therewith contained in this Act, the general provisions on loans to directors under section 185 and on loans and investments under section 186 come in only so far as they are not in conflict with, and are not varied by, Part VII.

Where must a producer company invest its reserves?

Section 378ZL(1) is a direction, not a permission. The general reserves of any Producer Company shall be invested to secure the highest returns available from approved securities, fixed deposits, units, bonds issued by the Government or co-operative or scheduled bank or in such other mode as may be prescribed.

The reserve itself is compulsory. Section 378Z-I(1) requires every producer company to maintain a general reserve in every financial year, in addition to any reserve maintained by it as may be specified in articles, and section 378E(3) makes provision for those reserves a prior claim on surplus, ahead of any patronage bonus. The withheld price and patronage bonus page sets out that ranking, and the producer company share capital page carries the bonus-share route that capitalises the same reserves under section 378ZJ.

What investments in other companies are permitted?

Section 378ZL splits them by counterparty, and each route has its own approval.

Sub-section (4) is the ceiling provision, and its scope words repay a careful read. It applies to investment in shares in any other company, other than a Producer Company, specified under sub-section (2), or subscription of capital under sub-section (3), for an amount not exceeding thirty per cent. of the aggregate of its paid-up capital and free reserves. The consolidation prints the archaism thirty per cent. with a full stop after "cent", which is the same form the Chapter uses in section 378ZM(2) and section 378ZH.

The proviso is the escape route, and it needs both approvals: a producer company may, by special resolution passed in its general meeting and with prior approval of the Central Government, invest in excess of the limits specified in this section.

Two further sub-sections govern the whole set. Sub-section (5) states that all investments by a Producer Company may be made if such investments are consistent with the objects of the Producer Company, printed as "may be made if" rather than as a prohibition. The objects it refers to are the ones in section 378B, set out on the objects of a producer company page. Sub-section (6) lets the Board, with the previous approval of Members by a special resolution, dispose of any of its investments referred to in sub-sections (3) and (4). Disposal of a sub-section (2) shareholding in another producer company is not named in sub-section (6).

What has to be on the investment register?

Sub-section (7) requires every producer company to maintain a register containing particulars of all the investments, showing four things:

• the names of the companies in which shares have been acquired;
• number and value of shares;
• the date of acquisition; and
• the manner and price at which any of the shares have been subsequently disposed of.

Sub-section (8) then fixes where it lives and who can see it: the register shall be kept at the registered office of the Producer Company and the same shall be open to inspection by any Member who may take extracts therefrom.

That is a Member right without a threshold, a fee or an application. It covers any Member, and it includes taking extracts. The register also carries disposal particulars, so the acquisition history and the exit history sit in the same document. The company's accounts and audit obligations are separate, and section 378ZG(e) adds the loans given by the Producer Company to the directors to the matters the auditor must report on.

Reading producer company loans and investments therefore means checking five things: whether each Member advance is a clause (a) credit facility or a clause (b) secured loan and whether its tenor sits in the right band, whether any director or relative loan carries a general-meeting approval, whether the general reserves are in one of the section 378ZL(1) modes, whether investment in other companies is inside the thirty per cent. ceiling or covered by the proviso's two approvals, and whether the section 378ZL(7) register is complete and at the registered office. The persons those tests turn on, "Member", "Producer Institution" and "officer", are defined in section 378A.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.