Background of the law relating to producer companies:

The co-operative movement in India is considered as the backbone of the Indian economy. The movement was able to make rapid strides in the rural economy, uplifting the standard of living of the rural masses, which enabled them to sell their produce under an organised structure and form of organisation. The co-operative businesses in India are a time tested and successful form of organisation which enabled wider participation of the member constituting it and today there are many co-operative businesses, which are, not only state oriented but have become multi – state and national co-operatives. With the on set of reforms in the Indian economy, a need was felt that such of those producer co-operatives should be able to corporatise themselves into company form of organisation.

In the back drop of corporatisation of businesses, the Central Government constituted on 1st November, 1999, a high powered committee under the Chairmanship of Dr. Y.K. Alagh to examine and make recommendations with regard to the following agenda:

(i) Framing a legislation which would enable incorporation of co-operatives as companies and conversion of co-operatives into companies;

(ii) Ensuring that proposed legislation accommodates the unique principles of co-operative business within a regulatory framework similar to that of companies. The Committee submitted its report on 15th March, 2000. On the basis of recommendations of the Committee, the Government introduced in the Lok Sabha on 31st August, 2001, the Companies (Second Amendment) Bill, 2001. Thereafter, the Bill was renamed as Companies (Amendment) Bill, 2002 passed by the Lok Sabha on 10th December, 2002, and by the Rajya Sabha on 17th December, 2002. The Bill was given assent by the President of India on 31st December, 2002. The Bill finally became an Act, known as the Companies (Amendment) Act, 2002 [No. 1 of 2003]. The Act came into force w.e.f. 6th February, 2003 vide Notification No. 135(E) dated 5th February, 2003.

The main objective of the amendment is to facilitate the formation of co-operative businesses as companies and to make it possible to convert existing co-operative business into companies. The option of conversion is purely voluntarily. With the Act coming into force, a new part Part-IXA has been included. With this, the Act (Companies Act, 1956) contains new Sections 581A to 581ZT relating to formation of producer companies, their administration and management, conversion of existing co-operative businesses into produce companies and matters connected therewith.