Section 378ZB of Companies Act 2013 - Share Capital of Producer Company

Section 378ZB of the Companies Act, 2013 regulates the nature of the share capital of a Producer Company and links a Member's shareholding, as far as practicable, with the Member's patronage of the company. The provision forms part of the special statutory framework governing Producer Companies under Chapter XXIA of the Companies Act, 2013.

Meaning of Section 378ZB

Section 378ZB lays down two basic statutory principles governing the capital structure of a Producer Company. First, the share capital of a Producer Company is restricted to equity shares. Secondly, the Act connects the extent of a Member's shareholding, as far as practicable, with that Member's patronage of the Producer Company.

Section 378ZB(1) - Equity Shares Only

Sub-section (1) expressly provides that the share capital of a Producer Company shall consist of equity shares only. The provision therefore establishes the basic capital structure applicable specifically to Producer Companies.

This requirement should be read with the other provisions contained in Chapter XXIA of the Companies Act, 2013 governing Producer Companies, including the provisions relating to membership, voting rights, transfer of shares, special user rights and bonus shares.

Section 378ZB(2) - Shares in Proportion to Patronage

Sub-section (2) provides that the shares held by a Member in a Producer Company shall, as far as may be, be in proportion to the patronage of that company.

The expression is important because Producer Companies are designed around participation by producers. The statutory provision therefore connects shareholding with the Member's patronage rather than treating shareholding as an entirely independent feature of the relationship between the Member and the Producer Company.

What Does "Patronage" Mean?

For the Producer Company provisions, "patronage" is a defined statutory concept. Broadly, it concerns the use of the services offered by a Producer Company to its Members through participation in its business activities. Accordingly, Section 378ZB(2) should be understood in the context of the definitions and other provisions of Chapter XXIA.

Key Requirements of Section 378ZB

Related Producer Company Provisions

Section 378ZB is the first provision in Part V of Chapter XXIA dealing with Share Capital and Members Rights. It should be read together with the immediately following provisions governing special user rights and transferability of shares.

• Section 378ZA - Annual general meetings
• Section 378ZC - Special user rights
• Section 378ZD - Transferability of shares and attendant rights
• Section 378ZJ - Issue of bonus shares

Legislative Background

The Producer Company provisions now appearing in Chapter XXIA of the Companies Act, 2013 were inserted by the Companies (Amendment) Act, 2020 and brought into force with effect from 11 February 2021. Section 378ZB forms part of this statutory framework.

Practical Significance

Section 378ZB is relevant when considering the capital and membership structure of a Producer Company. Its two requirements should be taken into account when structuring equity participation and when examining the relationship between a Member's shareholding and patronage.

The provision should not be read in isolation. Questions concerning membership rights, voting, transfer of shares, special rights, bonus shares or other financial matters should be considered under the corresponding provisions of Chapter XXIA and the applicable rules.

This page provides a general explanation of Section 378ZB of the Companies Act, 2013. The statutory text and applicable rules should be checked for the requirements relevant to a particular Producer Company or transaction.