Section 378E of Companies Act 2013 - Benefits to Members

Section 378E of the Companies Act, 2013 deals with the benefits available to members of a Producer Company. The provision governs payment for produce or products supplied by members, limited return on share capital, bonus shares and distribution of surplus as patronage bonus.

Section: 378E

Chapter: Chapter XXIA - Producer Companies

Subject: Benefits to Members

Applicable to: Members of Producer Companies

What is Section 378E of the Companies Act, 2013?

Section 378E forms part of Chapter XXIA of the Companies Act, 2013, which contains the statutory framework governing Producer Companies. The provision determines how members may receive economic benefits from their participation in a Producer Company.

Broadly, Section 378E recognises three forms of member benefit: payment for produce or products pooled and supplied to the Producer Company, a limited return on share capital, and distribution of eligible surplus as patronage bonus.

Text of Section 378E - Benefits to Members

(1) Subject to the provisions made in articles, every Member shall initially receive only such value for the produce or products pooled and supplied as the Board of Producer Company may determine, and the withheld price may be disbursed later in cash or in kind or by allotment of equity shares, in proportion to the produce supplied to the Producer Company during the financial year to such extent and in such manner and subject to such conditions as may be decided by the Board.

(2) Every Member shall, on the share capital contributed, receive only a limited return:

Provided that every such Member may be allotted bonus shares in accordance with the provisions contained in section 378ZJ.

(3) The surplus if any, remaining after making provision for payment of limited return and reserves referred to in section 378ZI, may be disbursed as patronage bonus, amongst the Members, in proportion to their participation in the business of the Producer Company, either in cash or by way of allotment of equity shares, or both, as may be decided by the Members at the general meeting.

Explanation of Section 378E

1. Payment for produce or products supplied by members

Under Section 378E(1), a member who pools or supplies produce or products to the Producer Company initially receives the value determined by the Board, subject to the articles of the company. Part of the price may therefore be withheld for later disbursement.

The withheld price may subsequently be distributed in cash, in kind or through allotment of equity shares. The distribution is linked to the proportion of produce supplied by the member during the relevant financial year and is subject to the extent, manner and conditions decided by the Board.

2. Limited return on share capital

Section 378E(2) provides that a member receives only a limited return on the share capital contributed to the Producer Company. The concept is consistent with the distinctive member-oriented structure of a Producer Company rather than treating investment return as its sole basis for distribution.

3. Bonus shares

The proviso to Section 378E(2) permits members to be allotted bonus shares in accordance with Section 378ZJ of the Companies Act, 2013. The entitlement is therefore subject to the statutory requirements governing bonus shares of a Producer Company.

4. Patronage bonus

Section 378E(3) deals with the surplus remaining after provision has been made for payment of limited return and the reserves referred to in Section 378ZI. Such surplus may be distributed among members as a patronage bonus.

The patronage bonus is linked to each member's participation in the business of the Producer Company. It may be paid in cash, through allotment of equity shares, or through a combination of both, as decided by the members at the general meeting.

Key Features of Section 378E

The articles of the Producer Company remain relevant to the benefits payable to members.
The Board determines the initial value payable for produce or products pooled and supplied by members.
A portion of the price may be withheld and distributed subsequently.
Withheld price may be paid in cash, in kind or by allotment of equity shares.
A member receives only a limited return on contributed share capital.
Bonus shares may be allotted in accordance with Section 378ZJ.
Eligible surplus may be distributed as patronage bonus after providing for limited return and applicable reserves.
Patronage bonus is based on participation in the business of the Producer Company.

Meaning of Important Terms

Producer Company

A Producer Company is a company governed by the special provisions contained in Chapter XXIA of the Companies Act, 2013. Its statutory framework is designed around producers and the activities and objects permitted under the Producer Company provisions.

Limited return

For the purposes of the Producer Company provisions, limited return refers to the maximum return that may be distributed to members on their contributed share capital, subject to the applicable provisions of Chapter XXIA and the articles of the Producer Company.

Patronage bonus

A patronage bonus is a distribution of eligible surplus to members based on their participation in the business of the Producer Company. Section 378E(3) permits such distribution in cash, by allotment of equity shares, or by both methods.

Relationship with Sections 378ZI and 378ZJ

Section 378E should be read together with other provisions of Chapter XXIA. Section 378ZI concerns reserves of a Producer Company, while Section 378ZJ deals with the issue of bonus shares. These provisions directly interact with the distribution mechanisms contemplated by Section 378E.

Legislative Background

Chapter XXIA relating to Producer Companies, including Section 378E, was inserted into the Companies Act, 2013 by Section 52 of the Companies (Amendment) Act, 2020 (Act 29 of 2020), with effect from 11 February 2021.

Official law: The current text of the Companies Act, 2013 and its amendments should be checked on the official India Code portal and the Ministry of Corporate Affairs where required.

Practical Effect of Section 378E

Section 378E establishes a statutory framework under which the economic benefits of a Producer Company can be connected both to capital contributed by members and, importantly, to their actual participation in the company's business.

Consequently, the provision distinguishes between limited return on share capital and patronage-based benefits. The Board has specified functions in relation to the value and withheld price for produce, while the distribution of qualifying surplus as patronage bonus is subject to a decision of members at the general meeting.

The exact entitlement in a particular Producer Company must also be considered with reference to its articles and the other applicable provisions of Chapter XXIA.