Companies Act Section 378K

Companies Act, Section 378K: Legal Effect of Incorporation of a Producer Company

Understanding the Consequences of Transformation of an Inter-State Co-operative Society into a Producer Company

The Companies Act, 2013, under Chapter XXIA, provides a legal framework that enables certain inter-State co-operative societies to convert themselves into Producer Companies. Section 378K specifically deals with the direct impact of such transformation on the membership structure of the co-operative society and ensures continuity of shareholding in the newly formed Producer Company.

This provision ensures that the interests of the existing members or shareholders of the co-operative society are safeguarded and carried forward seamlessly into the Producer Company without requiring any redundant procedural steps or formalities.

1. Definition of the “Date of Transformation”

The section introduces the concept of the "date of transformation," which is crucial in determining the point from which the new legal status of the entity and its members takes effect. The “date of transformation” refers to the date on which the inter-State co-operative society is officially registered and incorporated as a Producer Company under the provisions of Chapter XXIA of the Companies Act, 2013, particularly under Section 378J.

This date acts as the legal transition point, after which the entity ceases to be governed by co-operative laws and instead becomes subject to the regulatory framework and operational principles applicable to Producer Companies.

2. Automatic Transition of Shareholders

Upon such transformation, every person who was a registered shareholder or member of the inter-State co-operative society immediately before the date of transformation shall, by operation of law, be deemed to have become a shareholder of the newly formed Producer Company. This legal deeming provision ensures that:

Shareholders do not need to reapply or take any additional steps to assert their ownership in the Producer Company, the process is automatic, smooth, and without interruption to the shareholder's status. 

There is no loss of membership rights during the transition from a co-operative society to a Producer Company.
This automatic continuity is a critical mechanism to preserve the existing rights and expectations of producer members and to avoid any disruption in the governance or capital structure of the newly formed Producer Company.

3. Preservation of Share Value

The shareholders will be deemed to hold shares in the Producer Company to the same extent as the face value of the shares held by them in the inter-State co-operative society as on the date of transformation. This means:

The monetary value of a shareholder’s investment is protected during the transition.
Although the structure and rules of the Producer Company may differ from the co-operative society, the economic interest and equity contribution of each member remain intact.
The shareholding is carried forward on a face value basis, regardless of any market value, premium, or depreciation that may have occurred in the co-operative context.
4. No Adverse Consequences or Legal Interruptions

Importantly, this transition to a Producer Company under Section 378K does not impose any penalty, liability, or obligation on the existing members solely due to the transformation. The provision ensures that:

No third party or authority can raise a claim against the company or any of its members based merely on the fact of its conversion.
The transformation process is legally protected and recognized, reinforcing the continuity of operations and member relationships.
All prior investments and contributions made by the members of the co-operative are legally preserved in the new Producer Company format.