Producer Company Share Capital: Section 378ZB

Producer company share capital is governed by section 378ZB of the Companies Act, 2013, and the rule is short: equity shares only, held as far as may be in proportion to patronage. The shares are then locked down by section 378ZD, which makes them non-transferable except on named routes, and by section 378E(2), which caps the return on them.

What does section 378ZB say about producer company share capital?

Two sub-sections, each one sentence.

Section 378ZB(1): the share capital of a producer company shall consist of equity shares only. There is no preference-share limb, so the instruments a company may use to raise Member capital are narrower than the range the general provisions of the Act allow, and narrower than what a further issue of share capital contemplates for companies at large.

Section 378ZB(2): the shares held by a Member in a Producer Company, shall as far as may be, be in proportion to the patronage of that company. The qualifier "as far as may be" is doing real work. The section states a target proportionality rather than a hard arithmetic test, and patronage under section 378A(h) is the use of services a Member makes by participation in the business, which moves year to year.

Note that shareholding proportionality does not translate into voting power. Under section 378D(1)(a) an individual Member has a single vote irrespective of his shareholding or patronage, so the two proportionality ideas in the Chapter run on separate tracks. That split is the subject of producer company voting rights.

What are special user rights under section 378ZC?

Section 378ZC(1) allows producers who are active Members to have special rights, if the articles so provide, and permits the producer company to issue appropriate instruments to them in respect of those rights.

The Explanation defines the term rather than leaving it open: for the purposes of the section, "special right" means any right relating to supply of additional produce by the active Member or any other right relating to his produce which may be conferred upon him by the Board. So a special right is a produce-side right, not a capital-side preference, which is consistent with section 378ZB(1) permitting equity shares only.

Sub-section (2) sets where those instruments may go: after obtaining approval of the Board, they are transferable to any other active Member of that Producer Company. The transferee class is active Members, not Members at large.

How does section 378ZD restrict transfer of shares?

Section 378ZD(1) states the default: save as otherwise provided in sub-sections (2) to (4), the shares of a Member of a Producer Company shall not be transferable. The exceptions are then specific.

The par-value constraint on the voluntary route is the substantive one. A Member exiting under sub-section (2) transfers at par, not at a negotiated price, so the shares are not an appreciating instrument in the way an ordinary company's shares can be. That is the capital-side counterpart of the limited return in section 378E(2).

When must a Member surrender shares?

Section 378ZD(5) adds a compulsory-surrender power where the Board is satisfied that either (a) any Member has ceased to be a primary producer, or (b) any Member has failed to retain his qualifications to be a Member as specified in articles. In either case the Board shall direct surrender of the shares together with special rights, if any, to the company at par value or such other value as the Board may determine.

The proviso attaches procedure to it: the Board shall not direct such surrender of shares unless the Member has been served with a written notice and given an opportunity of being heard. So the substantive test sits with the Board, and the section supplies a hearing before the direction issues.

Read this alongside section 378D(5), which makes a Member who acquires a conflicting business interest cease to be a Member and be removed in accordance with the articles. The two provisions cover different triggers, and the surrender machinery in section 378ZD(5) is what deals with the shares once membership has gone.

What return is payable on the capital, and where do bonus shares come from?

Section 378E(2) states that every Member shall, on the share capital contributed, receive only a limited return, with a proviso that a Member may be allotted bonus shares in accordance with section 378ZJ. Section 378A(d) defines limited return as the maximum dividend as may be specified by the articles, so the ceiling is set constitutionally rather than by the section.

Section 378E(3) then routes the surplus. What remains after providing for the limited return and the reserves may be disbursed as patronage bonus among the Members in proportion to their participation in the business, either in cash or by allotment of equity shares or both, as the Members decide at the general meeting.

Section 378ZJ is the bonus-share route: a producer company may, on the recommendation of the Board and a resolution in general meeting, issue bonus shares by capitalisation of amounts from general reserves, in proportion to the shares held by Members on the date of issue. The reserves themselves are required by section 378Z-I, which obliges every producer company to maintain a general reserve in every financial year, and which provides that where the company lacks sufficient funds in a year, the contribution to the reserve shall be shared among Members in proportion to their patronage.

A note on the printed section number for the reserves provision

The consolidation prints the reserves section two ways, so a citation can be checked against either. Its own body heading on printed page 215, the Chapter's table of contents and section 378ZJ's cross-reference all print it hyphenated, as "378Z-I". Sections 378E(3) and 378G(3)(g) print the same section unhyphenated, as "378ZI". Both forms are in the source, and both are cited here as printed.

Reading a producer company's capital structure

The documents that settle producer company share capital are the memorandum, which under section 378F(e) states the share capital the company is registered with and its division into shares of a fixed amount, and under section 378F(h) records the shares each subscriber takes with a floor of one share; the articles, which carry the limited return under section 378A(d), the special user rights under section 378ZC and the reserves provisions the duties of the auditor then report on; and the register of Members, which the general provisions on the register of members require. A change in capital is not the same event here as a reduction of share capital in an ordinary company, because section 378ZD's surrender routes return shares to the company at par or at a Board-determined value.

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.