Companies Act Section 378ZB

Companies Act, Section 378ZB: Share Capital Structure of a Producer Company

The share capital structure of a company determines not only the nature of ownership but also the rights, obligations, and returns available to its members. In the case of Producer Companies, which are unique corporate entities combining the features of cooperative societies with those of private limited companies, the shareholding framework is specifically designed to promote member participation, economic democracy, and equitable distribution of benefits.

Section 378ZB of the Companies Act, 2013, lays down clear provisions concerning the composition of share capital and the basis of shareholding in a Producer Company. These provisions are detailed below:

1. Composition of Share Capital- Equity Shares Only

Sub-section (1) of Section 378ZB provides that the share capital of a Producer Company shall consist exclusively of equity shares.

This means that a Producer Company cannot issue preference shares, debentures, or any other class of shares or securities.
The focus on equity shares alone ensures that all members participate equally in ownership, control, and profits, subject to the extent of their participation (patronage) and not just capital investment.
The objective behind this restriction is to maintain the cooperative character of the Producer Company, where capital is contributed by the producers themselves and is not influenced by external investors seeking preferential rights or fixed returns.

2. Shareholding to Reflect Patronage

Sub-section (2) states that the shares held by a Member in a Producer Company shall, as far as may be practicable, be in proportion to the patronage of that company.

What is "Patronage"?

The term patronage refers to the degree of participation or involvement of a member in the business activities of the Producer Company.
This may include, for example, the quantity of produce supplied, services availed, resources contributed, or other economic transactions carried out by the member with or through the company.
Implication of Patronage-Based Shareholding:

Unlike traditional companies, where shareholding is usually based on the amount of capital invested, in a Producer Company, shareholding is intended to reflect the active economic contribution of the member.
A member who contributes more to the business operations (i.e., provides more produce or services) may be entitled to hold more shares than a less active member.
This patronage-linked model promotes a fair and just allocation of ownership, profits (including patronage bonus and limited return), and voting rights, aligning incentives with participation and productivity.

Underlying Cooperative Principle

Section 378ZB encapsulates the core values of cooperative enterprise, including:

Democratic ownership: Through exclusive equity shareholding by members.
Economic participation: With shareholding linked to business contribution.
Member-centric control: Ensuring that ownership and control remain with the producer-members, rather than external investors.
This structure protects the Producer Company from being driven purely by capital motives and instead ensures that benefits flow back to those who contribute to the company’s business.