Companies Act Section 378ZD

Companies Act, Section 378ZD: Transferability of Shares and Attendant Rights in a Producer Company

In the context of a Producer Company formed under Chapter XXIA of the Companies Act, 2013, the transfer of shares and the rights associated with such shares are governed by certain rules designed to protect the character and integrity of the company, which is fundamentally owned and managed by primary producers. Section 378ZD of the Act outlines the conditions and restrictions relating to the transfer of shares, nomination, and the surrender of shares in specific cases. The key provisions are elaborated as follows:

1. General Restriction on Transfer of Shares

As a general rule, the shares held by a Member in a Producer Company cannot be transferred. This restriction ensures that ownership and decision-making powers remain with individuals or entities directly involved in primary production, thus preserving the cooperative and producer-centric nature of the company.

However, this blanket restriction is subject to exceptions provided in the subsequent sub-sections (2) to (4), which lay down specific circumstances under which transfer may be permitted.

2. Permitted Transfer to Another Active Member

A Member of a Producer Company is allowed to transfer either the whole or part of his shareholding, but only under the following conditions:

Prior approval of the Board of Directors of the Producer Company must be obtained before any such transfer takes place.
The transfer must be made only to an “active Member” of the Producer Company. An active Member is typically one who continues to engage in primary production and meets the criteria specified in the articles of association.
The shares, along with any special rights attached thereto, may be transferred at par value, ensuring transparency and fairness in valuation.
This provision allows for flexibility and continuity of ownership among eligible producer members, while preventing speculative or unrelated ownership.

3. Nomination Requirement upon Admission as Member

To provide for succession and avoid uncertainty in ownership upon a Member’s death, the law mandates that:

Every person who becomes a Member of a Producer Company must, within three months of acquiring membership, nominate a person to whom his shares shall vest upon his death.
The procedure and manner of making such a nomination shall be as specified in the articles of association of the Producer Company.
This nomination process ensures a smooth and legally sound transfer of shareholding in the event of the Member’s demise, minimizing disputes and protecting the interests of both the nominee and the company.

4. Rights of the Nominee and Conditions Thereon

Upon the death of a Member:

The nominee shall become entitled to all the rights associated with the shares of the deceased Member.
The Board of Directors shall, accordingly, transfer the shares to the nominee, thereby making them the rightful holder. However, there is an important caveat:

If the nominee is not a “producer” as defined under the Act or the articles of association, then:
The Board shall not permit the nominee to retain the shares. Instead, the Board shall direct the surrender of the shares, along with any special rights attached to them, to the Producer Company.
The value to be paid for such surrendered shares shall be either at par value or such other value as may be determined by the Board.
This provision ensures that only individuals involved in production remain the owners of the company, in line with the objectives of a Producer Company.

5. Compulsory Surrender of Shares in Specific Cases

The Board of a Producer Company is empowered to compel the surrender of shares in the following circumstances:

(a) Where it is determined that a Member has ceased to be a primary producer, i.e., they are no longer engaged in any activity related to farming, livestock, forestry, fisheries, or other primary production activities; or
(b) Where a Member has failed to continue meeting the eligibility criteria for membership as prescribed in the articles of association. 

The Board shall direct the surrender of the Member’s shares, along with any special rights attached to those shares, back to the Producer Company.
The surrender shall be made at par value or such other value as determined by the Board. However, in the interest of fairness and natural justice:

The Member must first be given a written notice detailing the grounds for proposed surrender.
The Member must also be given an opportunity to be heard before any such surrender is directed.
This ensures that Members are not arbitrarily deprived of their ownership and that all actions taken by the Board are transparent and justifiable.