Withheld Price and Patronage Bonus: Section 378E

Withheld price and patronage bonus are the two deferred payments a producer company owes its Members, and the Companies Act, 2013 defines both by name. Withheld price is part of the price for produce already supplied, held back for later. Patronage bonus is a share of surplus, paid out in proportion to how much each Member used the company. Section 378E carries the mechanism; section 378A carries the definitions.

What are withheld price and patronage bonus under the Companies Act?

Withheld price and patronage bonus are defined terms, so start with the definitions in section 378A rather than with the mechanism.

Withheld price, clause (n), means part of the price due and payable for goods supplied by any Member to the Producer Company; and as withheld by the Producer Company for payment on a subsequent date. Two features matter. The amount is due and payable already, which makes it a deferred liability rather than a discretionary bonus. And the trigger is goods supplied by any Member, so it arises out of a produce transaction.

Patronage, clause (h), means the use of services offered by the Producer Company to its Members by participation in its business activities.

Patronage bonus, clause (i), means payments made by a Producer Company out of its surplus income to the Members in proportion to their respective patronage.

The distinction between the two is the source of the money. Withheld price comes out of the price of produce the Member already delivered. Patronage bonus comes out of surplus income, and only after the claims that rank ahead of it are met.

Patronage is also the measure the Chapter uses elsewhere. Clause (a) defines an active Member as one who fulfils the quantum and period of patronage of the Producer Company as may be required by the articles, and that status governs voting rights and other entitlements set out on the producer company definitions page.

How does section 378E work as a payment chain?

Section 378E is headed Benefits to Members, and its three sub-sections run in sequence.

Sub-section (1) is the produce payment. Subject to the provisions made in articles, every Member shall initially receive only such value for the produce or products pooled and supplied as the Board of Producer Company may determine, and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares, in proportion to the produce supplied to the Producer Company during the financial year to such extent and in such manner and subject to such conditions as may be decided by the Board.

Read that slowly, because it is the whole architecture of withheld price:

• The Member initially receives only the value the Board determines. The initial payment is a Board decision, not a market price.
• The balance is the withheld price, and it may be disbursed later.
• Payment can be in cash or in kind or by allotment of equity shares. A produce payment can therefore turn into share capital.
• The allocation basis is in proportion to the produce supplied to the Producer Company during the financial year, which is a volume measure, not a shareholding measure.
• The extent, the manner and the conditions are decided by the Board.

Sub-section (2) is the return on capital, and it caps what a Member earns on shares as distinct from produce. Sub-section (3) is the surplus. What remains after making provision for payment of limited return and reserves referred to in section 378ZI may be disbursed as patronage bonus, amongst the Members, in proportion to their participation in the business of the Producer Company, either in cash or by way of allotment of equity shares, or both, as may be decided by the Members at the general meeting.

Sub-section (3) prints the reserves cross-reference unhyphenated, as "378ZI", while the section it points to is printed hyphenated, as "378Z-I" in its own heading. Both forms are in the source. The producer company share capital page records the split and carries the limited return and bonus share mechanics in detail.

What ranks ahead of patronage bonus?

This is the part that decides whether there is a patronage bonus at all in a given year. Section 378E(3) pays it only out of the surplus if any, remaining after making provision for two things:

1. payment of limited return, the return on share capital under sub-section (2); and
2. reserves referred to in section 378ZI.

Section 378Z-I(1) makes the reserve obligation unconditional: Every Producer Company shall maintain a general reserve in every financial year, in addition to any reserve maintained by it as may be specified in articles. Its sub-section (2) then handles a shortfall in a way that has no parallel in the general provisions on reserves. In a case where the Producer Company does not have sufficient funds in any financial year for transfer to maintain the reserves as may be specified in articles, the contribution to the reserve shall be shared amongst the Members in proportion to their patronage in the business of that Company in that year.

So patronage is the measure on both sides of the ledger. It allocates the bonus in a surplus year under section 378E(3), and it allocates the reserve contribution in a shortfall year under section 378Z-I(2).

Who decides the numbers?

Two provisions split the decision, and they are worth reading together.

Section 378R(2)(b) lists among the Board's powers the determination of the quantum of withheld price and recommend patronage to be approved at general meeting. The Board fixes the withheld price figure and recommends the patronage.

Section 378S then requires certain powers to be exercised only by means of resolutions passed at the annual general meeting of its Members, and two of its six matters are on this chain: clause (b) approval of patronage bonus, and clause (d) declaration of limited return and decision on the distribution of patronage. The powers of a producer company board page sets out the full list and the unusual way section 378S is drafted.

The practical division: withheld price is a Board determination under section 378E(1) and section 378R(2)(b), while patronage bonus needs a Member resolution at the annual general meeting under section 378E(3) and section 378S(b).

What happens if a producer company does not pay?

Non-payment reaches the directors personally. Section 378Q(1) lists the events on which the office of a director shall become vacant, and clause (d)(ii) is one of them: where the producer company in which he is a director has failed to, repay its deposit or withheld price or patronage bonus or interest thereon on due date, or pay dividend and such failure continues for one year or more. The comma after "failed to," is as printed in the source.

Withheld price and patronage bonus sit alongside deposits and dividend in that clause, which is consistent with the definition in section 378A(n): the withheld price is due and payable, so failing to pay it is a default rather than a decision. The office becomes vacant once the failure continues for one year or more.

Section 378ZP adds a company-level consequence in the same territory. Where a producer company fails to commence business within one year of its registration or ceases to transact business with the Members, or where the Registrar is satisfied it is no longer carrying on any of its section 378B objects, he shall order its name struck off, subject to a show-cause notice. The strike off of a producer company page carries that route and the appeal to the Tribunal.

Reading a producer company's Member payments therefore means separating four things: the initial value the Board determined under section 378E(1), the withheld price still owed on produce already supplied, the limited return on share capital under section 378E(2), and the patronage bonus out of surplus under section 378E(3), which exists only after the limited return and the section 378Z-I reserves are provided for. The accounts and audit provisions are where those figures have to appear.

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.