Section 378ZD Companies Act 2013 - Transferability of Shares and Attendant Rights
Section 378ZD of the Companies Act, 2013 governs the transferability of shares and attendant rights of members of a Producer Company. It forms part of Chapter XXIA, Part V, dealing with share capital and members' rights. The provision was inserted by section 52 of the Companies (Amendment) Act, 2020 and came into force on 11 February 2021.
Meaning and scope of Section 378ZD
The special share-transfer regime reflects the membership-based character of a Producer Company. Unlike ordinary freely transferable securities, shares covered by Section 378ZD are subject to statutory restrictions intended to keep ownership and related rights within the eligible producer-member framework.
Section 378ZD - Statutory provision
Section 378ZD(1): General restriction on transfer
Save as otherwise provided in sub-sections (2) to (4), the shares of a Member of a Producer Company shall not be transferable.
Transfer to an active member - Section 378ZD(2)
A member may transfer the whole or part of the member's shares, together with any special rights attached to them, to an active member at par value. The previous approval of the Board is mandatory before such transfer.
Nomination by a member - Section 378ZD(3)
Every member must, within three months of becoming a member of the Producer Company, make a nomination in the manner specified in the articles. The nomination identifies the person in whom the member's shares will vest upon the member's death.
Rights of nominee after death - Section 378ZD(4)
On the death of a member, the nominee becomes entitled to the rights in the shares, and the Board is required to transfer the deceased member's shares to the nominee.
If the nominee is not a producer, the Board must direct surrender of the shares and any special rights to the Producer Company at par value or at such other value as the Board may determine.
Surrender where membership qualification ceases - Section 378ZD(5)
The Board must direct surrender of shares together with special rights, if any, where it is satisfied that a member has ceased to be a primary producer or has failed to retain the qualifications for membership specified in the articles. The surrender is at par value or such other value as may be determined by the Board.
Before directing surrender under sub-section (5), the member must be served with written notice and given an opportunity of being heard. This statutory safeguard requires notice and hearing before the Board takes the surrender decision.
Key compliance points for a Producer Company
- Check the articles of association for membership qualifications and the prescribed nomination procedure.
- Obtain previous Board approval before registering a transfer under Section 378ZD(2).
- Ensure that a transfer under sub-section (2) is to an active member and is at par value.
- Maintain nominations made by members within the statutory three-month period.
- On a member's death, determine whether the nominee is a producer before completing transfer or directing surrender.
- For surrender under sub-section (5), issue written notice and provide an opportunity of hearing before the Board reaches its decision.
Related provision: special rights under Section 378ZC
Section 378ZD refers to "special rights." Section 378ZC provides for special rights of active members where the articles so provide and regulates instruments issued in respect of those rights. Section 378ZC explains a special right as a right relating to supply of additional produce by an active member or another right relating to the member's produce conferred by the Board.
Legislative history
Section 378ZD was inserted into the Companies Act, 2013 by section 52 of the Companies (Amendment) Act, 2020 as part of the statutory framework for Producer Companies. The provision took effect from 11 February 2021.
Note: Section 378ZD was inserted by Act 29 of 2020, section 52, with effect from 11 February 2021.