Companies Act Section 378E

Companies Act, Section 378E: Benefits to Members of a Producer Company 

Section 378E of the Companies Act, 2013 lays down the framework for the distribution of benefits to the Members of a Producer Company, in keeping with the company’s mutual assistance and cooperative principles. It specifies how returns are provided to Members, both in terms of price for produce and in terms of financial and equity-based benefits. The section ensures that the distribution of surplus and rewards is equitable and directly tied to the Member’s contribution and participation in the company's business.

1. Payment for Produce Supplied by Members

Under this provision, the manner in which Members are compensated for their produce or products supplied to the Producer Company is governed as follows:

Initial Payment: Every Member is entitled to receive an initial value for the produce or products they have pooled and supplied to the Producer Company. This initial payment is determined by the Board of Directors, and it may not represent the full or final value of the produce at the time of delivery.
Withheld Price: A portion of the value (referred to as the withheld price) may be retained by the Producer Company and disbursed later, based on the profitability or operational results of the company.
Mode of Disbursement: This withheld portion can be disbursed to the Members: In cash, in kind (for example, as goods, inputs, or services), by way of allotment of equity shares.

Basis of Disbursement: The disbursement is made in proportion to the quantity or value of the produce supplied by each Member during the relevant financial year.
Conditions and Manner: The extent, timing, and manner of such disbursement are to be decided by the Board, and must comply with any conditions provided in the Articles of Association.
This ensures a fair and flexible system that allows the Producer Company to manage its finances prudently while rewarding Members for their actual contribution to the company’s business.

2. Limited Return on Share Capital

Every Member is entitled to receive only a limited return on their shareholding. This limited return refers to a fixed or capped rate of dividend or return, as opposed to an open-ended or market-linked return.
The principle of limited return preserves the cooperative character of the company by preventing undue profit-making on capital investment and instead encourages active participation in the business.
Bonus Shares: In addition to the limited return, Members may be allotted bonus shares in accordance with the provisions of Section 378ZJ. Bonus shares represent a capitalisation of the company’s surplus and are issued without any payment being required from Members, thus enhancing their ownership stake proportionally.
3. Distribution of Surplus as Patronage Bonus

Paid the limited return to Members on their share capital, and made appropriate provisions for reserves as mandated under Section 378ZI, the remaining surplus, if any, may be distributed among Members as a patronage bonus.

Key points on patronage bonus: It is a reward for participation, not for investment.
It is calculated in proportion to the extent of a Member’s participation in the business of the Producer Company. Participation may include supplying produce, using services, or any other form of engagement defined by the company. The mode of distribution may be:
Entirely in cash, entirely through allotment of equity shares, or A combination of both cash and equity shares. The Members in the general meeting have the authority to decide the exact method and extent of such disbursement.
This mechanism ensures that Members who actively contribute to the company’s success share in its profits, thereby reinforcing the principles of mutual benefit and collective growth.