ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Producer Companies as New Generation Cooperatives

Traditional cooperatives have been unsuccessful in linking small farmers to the global market. Can the development of producer companies as new generation cooperatives turn out to be different?

COMMENTARYmay 17, 2008 EPW Economic & Political Weekly22Producer Companies as New Generation CooperativesSukhpal SinghTraditional cooperatives have been unsuccessful in linking small farmers to the global market. Can the development of producer companies as new generation cooperatives turn out to be different?Linking small producers to markets is an important and popular policy and practice issue. There is a need for aggregation in order to benefit from economies of scale. Organised systems are also needed for sharing services such as knowledge input, production supervision, storage, transportation, etc, and to absorb price risks to which primary produce is al-ways subjected. Producers’ organisations amplify the political voice of smallholder producers, reduce the costs of marketing of inputs and outputs, and provide a forum for members to share information, coordi-nate activities and make collective decisions. They also create opportunities for produc-ers to get more involved in value adding activities such as input supply, credit, processing, marketing and distribution. On the other hand, they lower transaction costs for processing/marketing agencies working with growers under contracts. Collective action through cooperatives or associations is important not only to be able to buy and sell at a better price but also to help small farmers adapt to new patterns and much greater levels of competition [Farina 2002]. These are the imperatives around which producer organisationsare created that also ensure the active interest and participation of producers. In addition, producers’ organisations also must ad-here to principles of member ownership and control, members’ participation in governance, efficient operating systems and transparent processes for sustainable and successful functioning. In India, traditional cooperatives were mostly registered under the respective State Cooperative Societies Acts. But due to political interference, corruption, elite capture, and similar issues, the cooperatives soon lost their vibrancy and became known for their poor efficiency and loss-making ways. Now, government support to these cooperatives is declining, though gradually and selectively. At the same time, they face higher competition due to privatisation and liberalisation pol-icies. The new environment, however, provides new opportunities for coopera-tives due to state withdrawal and deregu-lation. And, there is increased need and relevance of cooperatives due to the struc-tural adjustment programme, and globali-sation policies, which are marginalising the resource-poor producers. The major problems of traditional cooperatives have been capital constraint due to the with-drawal of financial support by the govern-ment, high competition from other players in the market, and access to credit (capi-tal) and technology, besides free riding by members. The new and potential role of cooperatives in the new economic regime includes provision of inputs, economies of scale, fine-tuning of produce to the mar-ket, facilitating more competition in pri-mary markets, and capturing surplus in adjoining stages of the value chain. Cooperatives are different from other forms of organisations not in terms of business functions they perform but in terms of the manner and philosophy with which these functions are performed. The role of a cooperative is to create an inter-face between the farmer and global mar-ket, provide access to permanent risk-bearing capital for farmers, manage risk for farmers through diversification, set standards in the market, provide more competitive market conditions and market access to farmers, and to promoteeconomic democracy at the grass root level.RationaleThe traditional cooperative form of organ-isation has suffered from various con-straints, which have had a negative effect on the day-to-day operations and per-formance of cooperatives. These con-straints, which originate in the very nature andprinciples of the cooperative form of organisation, include the commitment to buy the entire produce from all members, lack of financial and managerial resourc-es, lack of market-orientation, and small size of operations. As a solution to this problem of cooperatives, a new variant called new generation cooperatives (NGCs) has evolved over time in various parts of the world, especially inUS and Canada. The rationale for NGCs comes from market thrust and orientation, which are required Sukhpal Singh ( is at the Centre for Management in Agriculture, Indian Institute of Management, Ahmedabad.
COMMENTARYEconomic & Political Weekly EPW may 17, 200823due to competition, vertical integration and coordination (backward and forward) by other forms of enterprises, and capital mobilisation constraints due to free rider and horizon problems.NGC Concept and PracticeAnNGC is one, which has restricted or lim-ited membership, links product delivery rights to producer member equity, raises capital through tradable equity shares among membership, enforces contractual delivery of produce by members, distributes returns based on patronage, goes for value addition through processing or marketing, and makes use of information efficiently throughout the vertical system. However, it retains one member – one vote principle for major policy decisions [Harris et al 1996; Nilsson 1997]. The advantages of delivery rights shares for members are as-sured procurement prices and market share of profits due to value addition (resi-due claims), and appreciation of share prices due to better performance of the cooperative [Harris et al 1996]. This kind of restructuring, especially equity-linked delivery shares and contractual delivery of produce helps cooperatives tackle problemsoffree riding by member-ship horizon, which is at the root of financial constraint; and opportunism, both of members as well as of the cooperative. This arrangement by cooperatives has helped them become economically efficient, financially viable, and obtain member loyalty wherever it has been tried [Harris et al 1996; Nilsson 1997]. The problems with the NGC concept and its practice as pointed out by various critics are: (i) preferred shares provision compromises the principle of user owner-ship, though it protects the user control principle; (ii) in practice, member control may operate by the control of delivery rights rather than by the one member-one vote principle; (iii) it is more suited for large growers who can afford large up-front investment in processing/marketing; (iv) they are more like closely held com-panies; and (v) have the potential danger to turn into investor oriented company instead of an user-oriented cooperative. In practice, though the NGCs have been able to raise 30-50 per cent of their total capital through delivery rights issues, the problems include: (i) off market pur-chases to meet contract terms by the growers; (ii) leasing of delivery rights by members; and (iii) dependence on non-producer member equity and non- member business.Producer Companies in IndiaIn the light of the previous experience of the poor performance of traditional coop-eratives in India, it was felt that there was a need to give more freedom to coopera-tives to operate as business entities in a competitive market. This led to the amend-ment to the Companies Act, 1956 in 2003, which provided for producer companies through a separate chapter based on the Alagh Committee report. Producer com-panies came into existence with the amendment of Section 581 of the Compa-nies Act, 1956, in 2003. This amendment gave primary producers the flexibility to organise themselves on the basis of a oneman-one vote principle, which is the essence of a cooperative institution. A producer company operates under the regulatory framework that applies to companies, which is distinctly different from that of the cooperatives, which was seen as arbitrary and corrupt.A producer company can be registered under the provisions of partIX-A, chapter one of the Companies Act, 1956. The objective of the said company can be produ-ction, harvesting, procurement, grading, pooling, handling, marketing, selling, export of primary produce of the members or import of goods or services for their benefit. Its membership can be 10 or more individual producers, or two or more pro-ducer institutions or a combination of both. It is deemed to be a private limited company but there is no limit on member-ship, which is voluntary and open. It is a limited liability company by share and not a public limited company under the Com-panies Act. It is deemed to be a private company within the meaning of Section 581C(5) of the Companies Act, 1956. It retains the one member-one vote principle irrespective of shares or patronage, except during the first year when it can be based on shares. Like traditional cooperatives, it provides a limited return on capital but can give bonus or bonus shares based on patronage. It is named “producer company limited”. It can issue only equity shares, that too, based on patronage. These are not transferable but are tradable within the membership. Even land can be treated as share capital. It is free to buy other producer companies’ shares and to form subsidiary/joint venture/collaboration/new organisations. It can have five to 15 directors, chairman, and ex officio chief executive but multi-state cooperative societies can have more than 15 directors for one year. It can co-opt expert or additional directors without voting rights. It lays emphasis on member education, and co-operation among producer companies. If it fails to start business within a year, regis-tration can be cancelled. The audit has to be conducted by a chartered accountant.Thus, a producer company is a NGC. It is a cooperative form of business enterprise democratically owned and controlled by active user members. It enjoys the same liberalised regulatory environment as available to other business enterprises but it has unique characteristics of cooperatives. Some of the salient features that provide the producer company a competitive edge are that first, the producer company format provides more legitimacy and credibility in the immediate business environment. It breaks the producer organisation free of the welfare-oriented, inefficient,and corruption-ridden image of cooperatives.Second, it allows registered and non-registered groups, such as self-help groups or user groups to become equity holders in a producer company. This enables provision andisadistinct improvement over the existing legislation on cooperatives, which allows only indi-vidual producers to be members. Third, the Act permits only certain cat-egories of persons to participate in the ownership of producer companies, i e, the members necessarily have to be “primary producers” – persons engaged in an activity connected with or related to primary produce. This ensures that outsiders do not capture control of the company and allows for raising investments from other players in the supply chain who have stated producer interest. Fourth, new marketing models such as retail chains are leading to new ways of sourcing produce and organising the supply chain. Dealing with these requirements needs scale and skills.

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