STRUCTURING A CROSS-BORDER INSOLVENCY REGIME: STRENGTHENING EASE OF DOING BUSINESS IN INDIA
August 30, 2019
The Issue Regarding the Existence of a Maintenance Condition under Section 23 of the Maintenance and Welfare of Parents and Senior Citizens Act, 2007  
September 2, 2019

The Way FORWARD: A Case For Improving Agricultural Livelihoods Through Farmer Producer Companies

Agrarian Distress
Agriculture, an intrinsic part of the Indian culture, has been the source of income for a major section of the population. It however has deteriorated and there are multiple reasons as to why it happened. These include but are not limited to the reduction in average landholding of a farmer, exploitative middle-men raking in most of the profit, shift in resource allocation by the state to industrialization and lack of sufficient credit for farmers. Some other contributing factors are high input cultivation costs (because of reduced subsidies post IMF bailout loans in the early 90’s), the lack of implementation of agri-technology at the ground level, uncertain weather conditions, low yield income (probably because of lack of post-processing facilities by individual farmers) etc.
The Situation Assessment Survey of Farmers, 2013 (SAS), NSSO 70th round[1] indicates that the monthly per capita income of a farmer household, within 1 hectare of land, is much lower than the monthly per capita consumption expenditure.
According to Agricultural Census 2010-11[2], the proportion of marginal land holding below 1 hectare to total land holding, is a substantive 67%. This means that for 67% of farmers, their monthly per capita income is not enough to even cover their basic expenditure. This is a grave concern, especially when the income includes net receipts from cultivation, farming of animals, nonfarm business and income from wages/salaries.
Small/marginal holdings farmers face several constraints as a consequence of the size of their operation. These include the inability to create scale of economies, low bargaining power because of low quantities of marketable surplus, scarcity of capital, lack of market access, shortage of knowledge and information, market imperfections, poor infrastructure and communications[3]
 
Cooperatives and the idea of pooling of resources
This predicament resulted in the formation of co-operative societies. The idea is that a co-operative association is generally an organisation of the people who are financially weak. Individually their resources are so meagre that they cannot improve their prevailing conditions. But, if they pool their meager resources and work together for mutual benefit, their weakness can be converted into a dynamic strength. This would enable them to achieve economies of scale as well and consequently, better bargaining power with prospective buyers.
Emergence of cooperatives thus enabled the individual farmers to have a say in the collective decision-making process by providing them with a platform to raise their concerns. Being run and regulated by a collection of farmers, cooperatives work towards achieving collective best interests of its members. This results in an increase in their average income as the profits would then not be misappropriated by traders/middlemen. All of this empowers them, makes them self-reliant and this results in the development of the economy in the area.[4]
Despite the benign intention behind cooperatives, especially in a country of numerous small scale agriculturists, the execution of this idea has not done justice to the original intent. This discrepancy can perhaps be attributed to the unabated governmental interference in the functioning of cooperatives at every stage over time. The insufficient funds, lack of transparency and objectivity in the loan granting process, the lack of proper enforcement by the state government of the compliance framework, created by them, to ensure proper functioning, failure to maintain proper records and audit reports are just a few reasons which highlights the (lack of) efficiency in the cooperatives.[5]
The channeling of an increasing amount of public money through cooperatives at a low lending rate to fulfill the capital requirement has been met with minimal, symbolical enforcement. No proper recovery methods and the cycle of loan-waiver schemes as political appeasement also made them a burden on the economy. Cooperatives have also been alleged of being a platform for money laundering for private banks.[6]
Farmer Producer Companies
As a way out of this quandary, we propose “Farmers Producer Companies” (Hereinafter, referred to as FPC) is the way forward. It is based on the core concept of co-operatives, i.e. cooperation to achieve better economies of scale and bargaining power, but it seeks to do so through a better mechanism at the heart of which lies the corporate structure. Even the Government of India, as a matter of policy, considers Producers Company to be the most appropriate institutional form through which farmers must build their capacity to collectively leverage their production and marketing strength.[7]
Keeping this in mind, part IXA[8] was added to the Companies Act, 1956, comprising Sections 581A to 581ZL which give a legal form to the concept of Producer Companies.”Producer Company” means a body corporate having objects or activities specified in section 581B and registered as Producer Company under this Act. Wherein, Producer means any person engaged in any activity connected with or relatable to any primary produce. Section 581C lays down the pre-requisite of at least 10 individuals who are producers or two producer organizations for the formation of Producer Company. Furthermore, Section 581D vests equal voting power in all the producers, thus giving them an equal stake in the company. Section 581J provides for the conversion of inter-state cooperatives into Producer Companies which is in line with the state’s aim of converting co-operatives and other farmer organization into Producer Companies to achieve greater efficiency.
The functions that a Farmer Producer Company can serve are multifold. Section 581B includes a list of objectives which a FPC must have including but not limited to production, harvesting, procurement, processing, packaging of produce or manufacture or supply of technology, fertilizers, generating awareness about agro-tech and newer methods of producing etc.
Functionalities
The fact that FPCs can provide assistance to farmers from the stage of preparations to the harvest and the subsequent sale of the produce fleshes out a better picture of functionality.
A Farmer Producer Company can initially start by providing good quality seeds, fertilizers, pesticides and other agricultural inputs at a discount from the market price through bulk-buying as well as informational assistance in terms of which crops to grow and the cropping pattern etc by linking up with experts from local agricultural institutes. FPC’s can further help in reducing production costs by making/providing organic manure, promoting organic farming and facilitating Kitchen Gardens[9]among the farmers to supplement their nutritional needs.
FPC can then provide assistance during the growing season in terms of crop tracking during the growing season, irrigation facilities like community wells, rural rainwater harvesting system, drip irrigation and crop-rotation information and techniques.
FPC can buy or rent farm mechanization machines and subsequently, rent it to its members for free or for a token price. But then there are limitations to farm mechanization such as the need to provide excess labourers with some productive employment, lack of electricity and other supporting infrastructure to operate machinery and the small land holdings making it infeasible/inefficient to use the machinery.[10] FPCs can invest in infrastructure development through linkages with the government functionaries.
Post-harvest is where FPC’s have an even more significant role to play. They can undertake various tasks such as those of primary processing like grading, cleaning, sorting for value-addition to the produce, which in turn may fetch better prices for the farmers. Furthermore, they can provide services like collective cold storage facilities to members at minimal rent (which individual farmers find expensive to get), collective transport to processing facilities, branding, packaging and marketing of the produce.
Selling Options
As to the question of selling produce, FPC’s have a wide range of options.
  1. FPCs can have product linkages with buyers through contract farming[11] which would protect the farmers from market volatility while also ensuring that the farmers are not exploited by the sponsors through creating a benchmark of pre-agreed sale prices. FPC’s can contract on behalf of farmers, with their consent, and then join the sponsor/buyer in providing post-processing or input assistance or any allied facilities according to the terms of the contract. Farmers when contracting through FPC, will have greater bargaining power in setting the terms of the contract and thus would be less prone to exploitative contracts.
  2. FPC’s can also act as procurement agencies for both the State and Central government reserves,SFAC[12], DFPD[13], NAFED[14], FCI (under the new Price Support Scheme)[15] and Private players (under the new Pilot of Private Procurement &Stockist Scheme)[16]
  3. There are states in India where APMC Act[17] (Model Agricultural Produce Marketing) is applicable. As per the Act, if an area comes under the definition of “notified market”, then the farmers from that area are necessarily required to sell their produce at that market. This is problematic as only a limited number of traders can conduct business in this market because of specific requirement for APMC licenses, which virtually creates a high-entry barrier. As a consequence, APMC traders form a virtual cartel and exploit farmers by not giving them fair prices.[18]
   We propose that if there is an FPC present in a notified market area, then that FPC should be given an APMC License so that there can be fairer prices to farmer members and this would give the FPC’s another avenue to sell its produce.
  1. Moreover, FPC’s can undertake along with post processing, packaging, marketing of the produce and consequently, form links with local markets and sell the produce directly under its own brand name. Thereby, creating a self-reliant system in a locality where fairer prices are given to producers and the retailers get the produce at a lower cost than market price in the absence of the middlemen.
  2. FPC’s can also be registered under the National Commodity and Derivative Exchange (NCDEX) which increases the procurement possibilities, however, NCDEX has a pretty stringent quality control and FPC’s may not always have the requisite capability to check or assure quality and this is where governmental ministries/agencies can come into play by providing the same. FPC’s can also trade in E-NAM Portal (National Agricultural Market), an online portal which unifies the APMC Mandis to create a unified national market for agricultural produce[19]
Funding And Government Schemes
The shares of the Farmer Producer Companies under section 581ZDare not tradable and this provides a constraint on raising capital albeit, for a greater cause for preserving the autonomy of the farmers and to ensure that the FPC works in the best interest of it’s members.
Governmental Schemes, then become the only viable funding option. Funding under various government assistance schemes is available, such as SFAC Equity grant scheme[20] where equity grants upto 15 Lakhs are given. Equity grant is a cash infusion equivalent to the amount of shareholder equity in the producer company.
SFAC Venture capital assistance scheme[21], Pradhan Mantri Kisan SAMPADA Yojana, which provides funding to FPC’s through various schemes such as Scheme for Cold Chain and Value Addition Infrastructure, Creation of Backward and Forward Linkages, Creation /Expansion of Food Processing and Preservation Capacities, Infrastructure for Agro-processing Cluster etc. 
NABARD, through its various funds,[22] provides various loans such as Producers Organization Development Fund (PODF) with an initial corpus of 50 crores, Warehouse Infrastructure Fund (WIF) for constructing cold storage facilities, Credit Facilities to Marketing Federations (CFF) etc.
NABARD’s subsidiary NABKISAN also provides loans[23], both term and working, for FPC’s covered/not covered under the SFAC Guarantee Scheme, FPCs who cannot provide collateral and Start-up FPC’s in their very nascent stage. Further, FPCs, from the 2018-19 Budget, will be exempted from any tax liability if their turnover is below 100 crores for five years.[24]
The Common Facilitation Centres[25], will provide infrastructure at a village level for joint  post-harvest processing, storage facilities, and marketing at the farm gate for value addition.
FPCs, to a certain extent, can remedy major faults in individualized agriculture and yet, they might not be able to fully realise their potential for the lack of supporting infrastructure or enough bargaining power compared to the large corporates or for any other matter. To provide a solution to this problem, the concept of State Level Producer Companies[26] (SLPC) has been introduced by SFAC[27]. An example of the same is MAHAFPC, which will consolidate the efforts of FPC’s to increase their leverage with market players, help in business development plans for FPC’s, provide training in management and other fields to make FPC’s more efficient, raise more funding which individual fpc’s could not on their own, coordinate with central and state level governments for capacity and infrastructure building etc.
Faults And Remedies
Lack of management professionals
FPC’s constantly face a considerable lack of professionals who can carry out the managerial tasks efficiently, have professional expertise for auditing and compliance and ensure that the business is viable while working for minimal wages. FPCs, atleast initially, cannot afford to hire professionals at a high salary and this vacuum in quality work can be detrimental to the viability of FPC.
Inadequate availability of funds
FPCs usually face a lack of funds for many reasons including lack of interest from farmers to acquire shares of the company, stringent eligibility criteria for funding under various schemes such as a minimum number of shareholders, requirements of a developed business plan, budget and a statement of account audited by a CA, collateral securities, sanctioning of partial loan amount etc.
Inadequate infrastructure to carry out its functions
The socio-economic conditions of the small and marginal farmers which an FPC targets, are very poor which naturally means that the villages they reside in, lack adequate infrastructure like roads for transportation, electricity for machinery, warehouses/silos for storage and individual FPCs cannot develop infrastructure on their own.
Lack of awareness about collective organization
There is lack of information about FPC’s and other collective organizations. Lack of requisite knowledge and will to form FPCs and lack of trust/suspicion from farmers towards such organizations significantly throttle the effectiveness of FPC.
Lack of viable market linkages
FPC’s do not have by default market linkages. They have to establish it themselves, which is tedious, time taking and requires professionals to form and maintain such linkages. Also, unless FPCs have diversified links to sell their produce, they stands the risk of being exploited by large retailers/corporates.
Policy Reforms
  • After the APLM[28] Act of 2017, each state has been declared as a unified agricultural market. This provides more outlets for farmers to sell their produce along with the establishment of direct farmer-consumer market yard. However, Under Section 12 of the Act, there still remains the problem of commissioning agents in the markets operating as cartels because of high fee entry barrier for becoming a trader given that only a trader with license can operate in the mandis. A provision for conferring license to FPC’s without a levy of Mandi fees so that they can sell the produce of their members would provide a better platform for farmers to sell and realise a better value for their produce and the commission received by the FPC will also help in making the FPC economically viable.
  • FPC’s can also be categorized as places of GRAM[29] or Gramin Agriculture Markets which are basically village level markets so that they can sell their produce directly at the farm-gate. GRAM’s require creation of market infrastructure and this infrastructure can be created from Agri-Market Infrastructure Fund.[30] FPC’s will own and operate the GRAM which will also to be listed in E-NAM[31] which would further provide more avenues for FPC’s to sell their produce.
  • The restrictions on SFAC, NABARD and other governmental funding should be diluted. It is understood that these restrictions are in place to ensure repayment but there needs to be some relaxations in terms of the minimum number of shareholders or quantum of Collateral Security required etc.
  • Direct and mandatory linkages of farmer welfare programmes from the concerned ministry to FPC’s will ensure better availability of benefits to the farmers.
  • Provisions for private equity funding should be made to ensure the availability of more funds for the FPC’s without eroding producer autonomy and not having to pay dividends, atleast in the initial years to ensure viability.
  • Agricultural Universities may provide diploma courses for FPC promotion and Agri-business, focusing on rural youth and women. Further, management universities/institutes along with agri-clinics and agribusiness centres can provide specialized courses for rural youths to become agri-business savvy.
  • District level / Village level assistance (DM/SDM) to FPC’s in compliance, auditing, preparing business plans and other professional requirements, atleast in the initial years would help in keeping them viable.
  • FPCs must look towards organic farming and the state should also incentivize the same for the promotion of organic farming, which is more sustainable and cheaper for the farmer.
  • FPC’s can eventually operate as PACS[32] (Primary Agriculture Co-operative Societies) in being a facilitator of loans for its members along with non-credit farming activities.
Conclusion
Agrarian distress in India has been a reality for a considerable amount of time now. The major factors responsible for capacity deprivation of farmers are the lack of bargaining power and the lack of availability of supportive infrastructure and eco-system.  Remission efforts in the form of co-operative societies were made in order to resolve these issues, but they failed because of multiple restraints such as governmental interference, lack of supporting infrastructure, lack of efficiency in management etc. Farmer Producer Companies are thus, the new evolutionary link which merges the core-concept of cooperatives and the efficiency of a corporate body in order to empower the poor farmers. The article has highlighted the various functions an FPC can undertake in providing for the farmers at different stages of the agriculture process. As there is a bar on private funding to FPC’s to preserve farmer autonomy, avenues for availing funding from governmental schemes such as those of SFAC, NABARD has also been chalked out. This is followed by the problems/lack of supportive ecosystem that an FPC faces and the proposed policy reforms which the authors believe, if implemented, can provide for better functioning of FPC’s and eventually, might help in uplifting the poor farmers.

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REFERENCES

[1]NSSO 70th Round, Key Indicators of Situation of Agricultural Households in Indiahttp://mospi.nic.in/sites/default/files/publication_reports/KI_70_33_19dec14.pdf

[2]Agriculture Census Data, 2011, http://agcensus.dacnet.nic.in/NL/natt1table1.aspx

[3]Collective actions initiatives toimprovemarketingperformance,https://doi.org/10.1016/j.foodpol.2008.10.002

[4] Part 4, https://mscs.dac.gov.in/Form/NatPolicy02.pdf

[5] PROBLEMS AND PROSPECTS OF THE COOPERATIVE MOVEMENT IN INDIA UNDER THE GLOBALIZATION REGIME, http://www.helsinki.fi/iehc2006/papers2/Das72.pdf ; ibid at part 3

[6]https://www.moneylife.in/article/rbi-money-laundering-probe-shows-cooperative-banks-as-the-key-facilitator-of-shady-deals/32256.html

[7] FPO Policy and Process Guidelines, Govt. of India, 2013

[8]Part IXA of Companies Act 1956: PRODUCER COMPANIES http://www.mca.gov.in/Ministry/pdf/Producer_Company.pdf

[9]Home or Kitchen Gardening, https://agriinfo.in/home-or-kitchen-gardening-844/

[10] FARM MECHANIZATION, www.hillagric.ac.in › agengg › lecture

[11]The ———–State /UT Agricultural Produce and Livestock Contract Farming (Promotion & Facilitation) Act, 2018.

[12] http://sfacindia.com/Procurement.aspx

[13] https://dfpd.gov.in/procurement-figures.htm

[14] http://www.nafed-india.com/Home/Procurements

[15] http://fci.gov.in/app/webroot/upload/Procurement/PSS%20Guidelines.pdf

[16] http://pib.nic.in/PressReleaseIframePage.aspx?PRID=1545775

[17]http://agricoop.nic.in/sites/default/files/apmc.pdf

[18] Page 13, http://ficci.in/spdocument/20928/Agriculture-Marketing-Report-inside.pdf

[19] https://enam.gov.in/enam/stakeholders-Involved/fpos

[20] http://sfacindia.com/Equity_grant.aspx

[21] http://sfacindia.com/VCA_Scheme.aspx

[22] https://www.nabard.org/content1.aspx?id=570&catid=8&mid=488

[23] http://www.nabkisan.org/products.php

[24]https://indianexpress.com/article/business/budget/union-budget-2018-arun-jaitley-agriculture-farmer-companies-reap-benefits-tax-holiday-for-5-years-5048448/

[25] 3.3 , https://www.nabard.org/auth/writereaddata/tender/1412180913Cir_283_E%20.pdf

[26] http://sfacindia.com/PDFs/MAHAFarmers-Producer-Company-Ltd(MAHAFPC).pdf

[27]http://sfacindia.com/State-Level-Producer-Companies.aspx

[28] The ——-State /UT Agricultural Produce and Livestock Marketing (Promotion & Facilitation) Act, 2017

[29]https://www.prsindia.org/report-summaries/agriculture-marketing-and-role-weekly-gramin-haats

[30] http://www.uniindia.com/cea-approves-creation-of-agri-market-infrastructure-fund/india/news/1491551.html

[31]Supra note 27

[32] https://globaljournals.org/GJMBR_Volume17/4-Role-of-Primary-Agricultural.pdf

ABOUT THE AUTHOR(S)

 

Ishan Saxena is currently a fourth year student at Dr Ram Manohar Lohiya National Law University. His areas of interests include Constitutional Law, International Law and public policy issues. 

Ritika Srivastava is currently a fourth year student at Dr Ram Manohar Lohiya National Law University. Her areas of interests include Constitutional Law, Competition Law and Arbitration Law.

 

In Content Picture Credit: Down to Earth

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