Farmer Producer Companies - The Complete Guide

India has long been an agriculture – centric economy, with the agriculture sector providing employment to about 58% of India’s population and contributing 17-18% to the country’s GDP. Yet, the agriculture sector is one of the most unorganized sectors in Indian economy. The government of India, taking cognizance of the issue, set up a high - powered committee under the chairmanship of Dr. Y.K. Alagh examine the issue.

Based on the report submitted by the committee, in 2002, the Ministry of Company Affairs introduced a bill for amendment of Companies Act, 1956 and inserted Chapter IX-A, which opened the doors for the primary producers to organize themselves and gain maximum profit from the economy.

Producer Organization (PO)

A PO is a legal entity formed by primary producers, viz. farmers, milk producers, fishermen, etc. It is a hybrid between a private limited company and a cooperative society, taking on the strengths of both these forms of organizations. A PO is a company formed under chapter IX-A of the Companies Act, 2013.

Primary Producer –

The National Bank for Agriculture and Rural Development (NABARD) defines a primary producer as “Any person engaged in any activity connected with or related to any primary produce will be treated as producer. Primary produce means the produce of farmers from agriculture and allied activities or produce of persons engaged in handloom, handicrafts and other cottage industries, including any by-product and product resulting from ancillary activities thereof. Primary produce also includes any activity intended to increase the production or quality of aforementioned products or activities. Persons engaged in agriculture, horticulture, animal husbandry, fishery, sericulture, apiary, handloom, handicrafts, etc., can become members of appropriate PO. Persons engaged in collection of minor forest produce are also eligible for membership of PO although they gather these from forests and strictly are not producers”.

Need for a Farmer Producer Company (FPC) –

Small and marginal farmers (who form a major part of the Indian agriculture sector), in their individual capacity do not possess the volume (both in inputs and produce) to avail the benefits of economies of scale. The large chain of intermediaries in agriculture marketing leads to the producers not getting their fair share of income.

The aim of an FPC is to overcome these disparities by ensuring a better income for producers through an organization of their own. An FPC provides the producers with the volume (both in inputs and produce) to get the benefit of economies of scale. The large size of the FPC also gives it the leverage to negotiate better deals vis-a-vis bulk buyers of produce and bulk suppliers of inputs.

Essentials of an FPC –

a. It is formed by a group of producers for either farm activities.

b. It is a registered body and a legal entity.

c. Producers are shareholders in the organization.

d. It deals with business activities related to the primary produce/product.

e. It works for the benefit of the member producers.

f. A part of the profit is shared amongst the producers.

g. Rest of the surplus is added to its owned funds for business expansion.

Objects of an FPC –

a. Production, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the members or import of goods and services for their benefit;

b. Processing (includes preserving, drying, distilling, brewing, vinting, canning and packaging) of produce of its members;

c. Manufacture, sale or supply of machinery, equipment or consumables mainly to its members;

d. Providing education on the mutual assistance principles to its members and others;

e. Rendering technical services, consultancy services, training, research and development and all other activities for the promotion of interests of its members;

f. Generation, transmission and distribution of power, revitalization of land and water resources, their use, conservation and communications relatable to primary produce;

g. Insurance of producers or their primary produce;

h. Promoting techniques of mutuality and mutual assistance;

i. Welfare measures or facilities for the benefits of members as may be decided by the Board

j. Any other activity, ancillary or incidental to any of the activities referred to above

k. Financing of procurement, processing, marketing or other activities as specified above, which include extending of credit facilities or any other financial services to its members.

Important activities undertaken by the FPC –

The farmers have skill and expertise in farming, however they need assistance in marketing what they produce. The FPC helps bridging this gap by taking over the responsibility of one or more of the activities in the value chain of the produce, including but not limited to –

1. Procurement of inputs

2. Disseminating market information

3. Dissemination of technology and innovations

4. Facilitating finance of inputs

5. Aggregation and storage of produce

6. Primary processing like drying, cleaning and grading

7. Brand building, Packaging, Labeling and Standardization

8. Quality Control

9. Marketing to Institutional buyers

10. Participation in commodity exchanges

11. Export

Benefits of an FPC to its members –

Monetary benefits –

1. FPC can negotiate cheaper prices for inputs and transportation by bulk-purchasing from suppliers, thus reducing the cost of production,

2. It can also fetch better market prices for its produce by negotiating bulk deals with buyers, thus earning a better price per unit produced,

3. FPC also provide its members with market information that enables them to sell their produce when market prices are more favorable

4. Members of an FPC can avail credit facility from the FPC, in connection with the business of the company, for a period not exceeding 6 months

5. Members can also avail loans and advances, against security, for a period exceeding 3 months but not exceeding 7 years.

Non – Monetary Benefits –

1. FPC can work as a platform to facilitate better access to government services like PDS, MNREGA, scholarships & pensions, etc

2. It can also liaison with government departments for convergence of programmes like access to drinking water, sanitation, health and hygiene.

The preparatory arrangements before registration and incorporation of a producer company.

The concept of FPC is still not popular among the primary producers. Any individual eager to successfully incorporate a producer company should make the requisite preparatory arrangements - 

1. The promoter of an FPC should identify a cluster where the proposed FPC can be formed.

2. A Baseline and Feasibility study should be conducted to ensure that a viable FPC can be formed in the cluster. 

3. The promoter shall then meet the villagers (primary producers) and introduce the concept of Producer Company to them.

4. He shall explore the need for an FPC with the primary producers, explain the benefits and the need for a producer company.

5. The interested primary producers shall be taken on an exposure visit to a functioning Producer Company to enable meaningful interaction among them and make them better understand the concept.

6. A focused group meeting will be organized to motivate eligible members to become shareholders.

7. A meeting with the prospective shareholders will discuss objectives and possible business ideas for the company. A business plan will be drafted taking into account views of the prospective shareholders.

Once the primary producers are willing to form a Producer Company and are ready to contribute to the share capital, the process of incorporation of FPC can be initiated.

Pre-incorporation checklist -

1. Any of the following producers can incorporate an FPC –

       a. 10 or more individual producers; or

       b. 2 or more producer institutions; or

       c. A combination of the above 2

2. The minimum authorized capital is Rs. 5 lakhs and minimum paid-up capital is Rs. 1 Lakh

3. The company should have a minimum of 5 directors and a maximum of 15 directors

Registration Procedure and documentation required –

1. The first towards registration of an FPC is obtaining of a Digital Signature Certificate (DSC) for all the directors. The documents required to obtain a DSC are –
       a. PAN of Director
       b. Aadhar Card of Director
       c. Photo
       d. Email Address
       e. Contact Number

2. After obtaining DSC, the next step is obtaining a Director Identification Number (DIN) for all the directors. DIN can be obtained by filing Form DIR – 3 along with a self - attested identity proof, address proof and a photo.

3. An application for the name of the FPC shall be made in RUN (Reserve Unique Name) to the ROC. 3 names are to be submitted for approval, in order of preference. All the proposed names shall have the words “PRODUCER COMPANY” at the end.

4. Once the name is approved by the ROC, the following documents are to be prepared –
       a. The Memorandum of Association (MOA) – Incorporating all the objects that the company intends to follow
       b. The Articles of Association – Containing all the by laws of the company i.e. how the company shall be internally governed.
       c. An affidavit must be signed by all the subscribers of the proposed company declaring their legal competency to act as subscribers.
       d. A utility bill and NOC shall be obtained from the owner whose address is being rented as registered office of the company.
       e. The directors must give their consent to act as directors of the company in Form DIR – 2 and their details in Form DIR – 8.

5. An incorporation application is then filed, in SPICE Form along with the above-mentioned documents with the ROC.

6. On proper verification of all the documents, the ROC will issue a Certificate of Incorporation to the company and the company can commence its business operations.

Estimated cost of Incorporation –

Particulars	Item of Expenditure	Amount (Rs)
Application for Name of PC	Fees	500
Digital signature	Fees	2,600
Stamp duty	MoA and AoA	1,500
Registration/Filing fees	MoA, AoA, Form-1, Form-18, Form-32	17,200
Fees of Chartered Accountant or Company Secretary	Consultancy charges	10,000
Stamps cancellation		300
Affidavit expenses	Fees of Notary	500
Share transfer fees and processing		5,000
Miscellaneous expenses		2,400
Total		40,000

Advantages of a producer company –

a. Benefits of a private limited company and Co-operative society –

A Producer Company is a hybrid between a Private Limited Company and a Cooperative Society, thus enjoying the benefits of professional management of a Private Limited Company as well as mutual benefits derived from a Cooperative Society.

b. Ownership in the hands of only Primary Producers –

Ownership and membership of a Producer Company is held only by “primary producers” or “Producer Institution/s”. There cannot be any government or private equity stake in the Producer Companies. Hence, any Government or other corporate threat is non-existent in professional functioning of the company and nobody can take over the company or deprive the primary producers of their organization.

c. Limited Liability and Separate legal entity –

The Famer Producer Company is a separate legal entity which can sue and be sued. The liability of the members is limited to the unpaid amount of the shares held by them. Hence, the private assets of the members are safe from company losses.

d. More Credibility –

An incorporated company offers more credibility to the farmers, with respect to their dealings with suppliers, financial institutions etc. as compared to unregistered organizations or farmers.

Support for FPC –
SFAC (Small Farmers Agriculture Consortium), NABARD (National Bank for Agriculture and Rural Development), Government Departments, Corporates and Domestic & International Aid Agencies provide financial and/or technical support to the Producer Organization Promoting Institution (POPI) for promotion and guidance of the PO. Each agency has its own criteria for selecting the project/promoting institution to support.

Support to FPC from SFAC department –

The Small Faremrs Agribusiness Consortium (SFAC) is an Autonomous Society promoted by Ministry of Agriculture. The SFAC implements the schemes of the central government, which are focused on increasing incomes of small and marginal farmers.

Mainly two types of support specifically are available to the POs from the Small Farmers Agribusiness Consortium (SFAC).
1. Credit Guarantee Fund Scheme –

SFAC has setup a Credit Guarantee Fund with an objective of providing a Credit Guarantee cover to Eligible Lending Institutions (ELIs) to enable them to provide collateral free credit to FPCs by minimizing their credit risk in resect of loans, with the objective of  –

a)      Providing protection to ELIs by extending credit guarantee and covering their lending risks upto Rs. 1 Crore

b)      Enabling FPC to get collateral free loans of upto Rs. 1 Crore

2        Equity Grant Scheme –

Equity Grant scheme extends support to the equity base of FPCs by providing matching equity grants subject to a maximum of Rs. 15 Lacs per FPC in two tranches within a period of 3 years and to address nascent and emerging FPCs which have paid up capital not exceeding Rs 30 lacs, with the objective of –
a.      Enhancing viability and sustainability of FPCs
b.      Enhancing the shareholding of members to increase their wnership and  participation in their FPC
c.       Enhancing credit worthiness of FPCs. 

Support from NABARD –

National Bank of Agriculture and Rural Development (NABARD) is a development bank, established in 1982, as the apex institution for financing agriculture and rural sector

NABARD provides financial support to the POs through the following means -  

a) Lending towards contribution towards share capital -
NABARD lends to FPCs for contribution towards share capital on a matching basis (1:1 ratio) to
enable the FPC to access higher credit from banks. This is a loan without collateral which will be
repaid by the FPC after specified time. The maximum amount of such assistance is Rs. 25 lakh per
PO with a cap of Rs. 25,000 per member.

b) Credit support against collateral security for business operations -

Credit support without collateral security for business operations to FPCs which are eligible under Credit Guarantee scheme of SFAC. The credit product can be customized as per requirement of the business. Credit support will be available for regular business activities and creation of assets and/or working capital requirements including administrative and other recurring costs connected with the project as composite loan. 

Capital expenditures will not be considered for support.

Other support from NABARD –
NABARD also provides technical, managerial and financial support for hand-holding, capacity building and market intervention efforts of the PO. Such support is available in the form of grant, loans, or a combination of the two and is available only to those POs which avail credit from NABARD. 

Capacity building support will not be given in isolation in general. It would essentially be a part of the overall project having loan component. Grant, if any, will be maximum 20% of the loan amount. Capacity building should broadly cover any activity relating to functioning of a producer organization. Some such activities are given below:

a. Skill development in order to enable members to improve production/productivity

b. Business planning

c. Technological extension through classroom training

d. Exposure visits, agricultural university tie ups, expert meetings, etc.

e. Any other capacity building initiative which directly benefits the P.O.

f. NABARD through its Farm Sector Promotion Fund (FSPF) is providing financial assistance to various institutions including Farmers clubs for:

     i. facilitating adoption of appropriate technologies by the agriculturists through the provision of training cum exposure visits, organizing for demonstrations on the use of the various technologies

     ii. organizing financial credit counselling

     iii. providing support for financial literacy

     iv. Dissemination of appropriate technologies to the various people in need thereof

     v. Promotion of Producer Organisation

NABARD help to the POs in marketing their produce -

NABARD also provides support to the POs to access markets for their produce. Some of these activities are as below:

a. Credit and/or grant support for setting up of marketing infrastructure facilities for sale

of produce.

b. Support for marketing through rural haat and rural mart which had already been

established through NABARD support.

c. NABARD may facilitate tie-ups with buyers for Producers Organization's produce.

d. Through existing schemes of National Horticulture Mission and Ministry of Agriculture,

NABARD may support creation of infrastructure wherever possible.

Tax benefits to FPC –

Currently, Government of India has allowed 100% deduction to these companies registered as Farmer Producer Companies and having annual turnover up to Rs 100 crore in respect of their profit derived from such activities for a period of five years from financial year 2018-19. But immediately after incorporation, they must procure PAN number from the Income Tax Department and GSTIN from the GST Department to carry out business. 

The Income derived by a Producer Company through agricultural activities as defined in Income Tax Act, 1961 as amended from time to time, is treated as agricultural income and is exempted from taxation.

b. The Government of India has vide the Finance Act, 2012, reduced the customs duty on the import of agricultural equipment and their parts which would benefit the Producer Companies engaged in agricultural activities to a great extent.

c. Producer Companies engaged in the business of growing and manufacturing tea or coffee or rubber are eligible for deduction in respect of deposit of any amount with a Nationalised Bank or any other bank in accordance with scheme as approved between the Company and the respective Board.