Powers of a Producer Company Board: Section 378R

A producer company board of directors is sized by section 378-O of the Companies Act, 2013, appointed under section 378P, and holds the powers section 378R gives it. Three numbers run through Chapter XXIA's treatment of the Board: a band of five to fifteen directors, a term band of one to five years, and a list of six matters the Board may act on only through a resolution passed at the annual general meeting.

How is a producer company board of directors constituted?

Board size comes first, and it is not in section 378P. Section 378-O states that every Producer Company shall have at least five and not more than fifteen directors, with a proviso: in the case of an inter-State co-operative society incorporated as a producer company, such company may have more than fifteen directors for a period of one year from the date of its incorporation as a Producer Company. Section 378N(1) is the provision that fills that year, opening with a notwithstanding on section 378-O and continuing all the directors in the inter-State co-operative society before the incorporation of the Producer Company in office for a period of one year from the date of transformation.

A note on the section number, because it is easy to lose. The Act writes this section as 378-O with a hyphen, not "378O". Chapter XXIA does the same wherever a section letter would be I or O: 378-I (amendment of articles), 378-O (number of directors), 378Z-I (general and other reserves) and 378Z-O (disputes). A letter-range shorthand such as "sections 378N to 378P" silently skips 378-O, and a grep for "378O" returns nothing.

Section 378P then works in two stages. Save as otherwise provided in section 378N, the Members who sign the memorandum and the articles may designate therein the Board of Directors, not less than five, who govern the affairs of the company until directors are elected. That is an interim Board, not the section 378-O rule. The election of directors shall be conducted within a period of ninety days of the registration of the producer company.

The proviso to sub-section (2) extends that window in one case. Where an inter-State co-operative society has been registered as a producer company under section 378J(4) and at least five directors [including the directors continuing in office under sub-section (1) of section 378N] hold office as such on the date of registration of such company, the words "ninety days" have effect as if "three hundred and sixty-five days" had been substituted.

Term and appointment run as follows. Every person shall hold office of a director for a period not less than one year but not exceeding five years as the articles specify, per sub-section (3), and a director who retires in accordance with the articles is eligible for re-appointment, per sub-section (4). Save as provided in sub-section (2), directors are elected or appointed by the Members in the annual general meeting, per sub-section (5). Sub-section (5) is where Chapter XXIA meets the general provisions on appointment of directors, which section 378ZR applies to a producer company as far as they do not conflict with this Chapter.

Sub-section (6) adds co-option. The Board may co-opt one or more expert directors or an additional director not exceeding one-fifth of the total number of directors, or appoint any other person as additional director for such period as it deems fit. Two provisos attach: expert directors shall not have the right to vote in the election of the Chairman but are eligible to be elected as Chairman if the articles so provide, and the maximum period an expert or additional director holds office shall not exceed the period the articles specify.

When does the office of a producer company director become vacant?

Section 378Q(1) lists six grounds, and they are keyed to defaults of the company as much as to the person.

Sub-section (2) extends the provisions of sub-section (1), as far as may be, to the director of a Producer Institution which is a member of a Producer Company, so a defaulting institution's own director is reached.

Grounds (d), (e) and (f) are structural rather than personal: they turn on the company's compliance record, which puts the directors' tenure inside the same filing discipline as its annual return and its annual general meeting deadline. The general provisions on vacation of office and director disqualification apply, as far as they do not conflict with this Chapter, through section 378ZR.

What are the eleven powers in section 378R(2)?

Section 378R(1) is the general grant: subject to the provisions of the Act and the articles, the Board shall exercise all such powers and to do all such acts and things, as that Company is authorised so to do. Sub-section (2) then lists eleven matters, in clauses (a) to (k), without prejudice to that generality:

• (a) Determination of the dividend payable.
• (b) Determination of the quantum of withheld price, and recommending patronage to be approved at general meeting.
• (c) Admission of new Members.
• (d) Pursuing and formulating organisational policy and objectives, establishing long-term and annual objectives, and approving corporate strategies and financial plans.
• (e) Appointment of a Chief Executive and such other officers as the articles specify.
• (f) Superintendence, direction and control over the Chief Executive and other officers it appoints.
• (g) Causing proper books of account to be maintained, and preparing annual accounts for the annual general meeting with the auditor's report and the replies on qualifications.
• (h) Acquisition or disposal of property in the ordinary course of business.
• (i) Investment of the funds of the company in the ordinary course of its business.
• (j) Sanctioning any loan or advance for the business activities of the company to any Member, not being a director or his relative.
• (k) Taking such other measures or doing such other acts as may be required in the discharge of its functions or exercise of its powers.

Two limits sit on top of the list. Sub-section (3) requires that all the powers specified in sub-sections (1) and (2) shall be exercised by the Board, by means of resolution passed at its meeting on behalf of the company. The Explanation then states, for the removal of doubts, that a director or a group of directors, who do not constitute the Board, shall not exercise any of the powers exercisable by it.

Clause (j) is the point at which the Board's lending power stops. A loan to a Member is a Board sanction; a loan or advance to a director or a director's relative is granted only after approval by the Members in general meeting, under the proviso to section 378ZK. Loans to directors of companies at large are governed by section 185, which sits outside this Chapter.

Which matters need an annual general meeting resolution?

Section 378S is drafted in an unusual way, and it is worth quoting the structure rather than paraphrasing it. The section says the Board of Directors shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at the annual general meeting of its Members. So the power is stated as the Board's, but the only vehicle for exercising it is a resolution of the Members in the annual general meeting.

The six matters are: approval of the budget and adoption of the annual accounts; approval of patronage bonus; issue of bonus shares; declaration of limited return and the decision on distribution of patronage; specifying the conditions and limits of loans that may be given by the Board to any director; and approval of any transaction of a nature reserved in the articles for Member approval.

Three of those tie back to the money provisions of the Chapter: patronage bonus and limited return under section 378E, and bonus shares under section 378ZJ, which draw on the general reserves section 378Z-I requires. The share capital provisions carry those mechanics.

What liability do producer company directors carry?

Section 378T(1) is the operative rule. When directors vote for a resolution, or approve by any other means, anything done in contravention of the Act, any other law in force, or the articles, they are jointly and severally liable to make good any loss or damage the producer company suffers.

Sub-section (2) gives the company a recovery right in two measures: where the director has made any profit as a result of the contravention, an amount equal to the profit; and where the company incurred a loss or damage, an amount equal to that loss or damage. Sub-section (3) states that the liability is in addition to and not in derogation of any liability imposed on a director under the Act or any other law, so it stacks with the duties of a director under section 166.

Committees, meetings and the Chief Executive

Section 378U lets the Board constitute committees to assist it, with a proviso that the Board shall not delegate any of its powers or assign the powers of the Chief Executive, to any committee. A committee may co-opt persons with Board approval, provided the Chief Executive appointed under section 378W or a director is a member of it. Committee minutes are placed before the Board at its next meeting.

Section 378V sets the meeting discipline: a meeting of the Board shall be held not less than once in every three months and at least four such meetings shall be held in every year; written notice to every director in India and at his usual address in India to every other director; notice by the Chief Executive not less than seven days prior, failing which he is liable to a penalty of five thousand rupees, with shorter notice permitted if the Board records the reasons in writing; and a quorum that shall be one-third of the total strength of directors, subject to a minimum of three. That is a different formula from the quorum for a board meeting in the general provisions.

A producer company board therefore shares the running of the company with one officer it cannot draw from its own membership. Section 378W requires every producer company to have a full time Chief Executive, appointed by the Board from amongst persons other than Members, who is an ex officio director and shall not retire by rotation. The exemption from retirement by rotation is stated in the section itself. Sub-section (5) lists eleven functions, including operating bank accounts, maintaining proper books of account and placing the audited accounts before the Board and the annual general meeting, and sub-section (6) makes the Chief Executive accountable for the performance of the company under the general superintendence of the Board.

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.