Small producers now look for equity partners

Brushing aside the the concept of 100 per cent producers company, an increasing number of small producers are now joining hands with private players for equity tie-up.

Nearly half a dozen organisations including SEWA, SAVE India Ltd, Aga Khan Rural Support Programme (AKRSP), Spices Board of India, Masuta and Fab India are in the process of promoting entities wherein small producers, many of them hailing from BPL families, can mobilise funds from outside by diluting equity.

SEWA has recently promoted three private limited companies including Rudi Multi Trading Company, SEWA Trade Faciliation and Nirmaan Construction Workers’ Company for small producers. The shareholders of the three companies include farmers, labourers and artisans who are also members of SEWA.

“SEWA being a charitable organisation cannot hold equity in profit making companies however, the board members which include many industrialists are willing to pick equity stake in these entities,” said Reema Nanavati, chairperson of Rudi Multi Trading Company.

After availing private equity next year, a public listing on NSE and BSE is also on the cards, she added. The amount of stake dilution and timing of listing is yet to be decided.

The Companies Act, 1956 which was amended in 2003, made provision for ‘producers company’. To protect the producers company from being vulnerable to takeover by other entities, the equity cannot be publicly traded but be only transferred, as per the Act.

“Under the current provision, producers’ company work like a co-operative. They cannot dilute stake and hence are not allowed to mobilise capital from outside. About a dozen producers companies have been formed so far. Many of them who have taken soft loans had bad experiences,” said Sukhpal Singh, faculty member at Indian Institute of Management, Ahmedabad (IIM-A) who is also one of the directors of SAVE India Ltd.

Small producers being poor are not able to put in the required start up equity which will limit the growth of the company.

SAVE India, supported by Sir Ratan Tata Trust, has successfully launched a profit making company SABRAS India wherein salt pan workers hold 74 per cent stake with the rest being held by SAVE, an initiative by Ahmedabad based NGO Vikas.

SAVE is in the process of floating three more subsidiaries wherein small producers have equity stake namely Veg India and its subsidiary Setu Tradelink, Essence Private Ltd and Sujal Pvt Ltd. Sujal Private Ltd, which is at the conceptual stage will have 49 per cent equity stake of rural women and it will undertake construction work which includes developing assets like underground water, overhead tanks and even RO systems, said Rajesh Shah, director of SAVE India.

“We are also in talks with a couple of private equity players and other organisations for equity partnership in the project,” he added.

An increasing number of venture funds including players like Netherlands Development Finance Company (FMO N.V.), Intellecap, Aavishkar and Goodwell are queing up to finance in producers companies, according to industry watchers.

AKRSP is meanwhile awaiting certain modifications in the Companies Act before it can avail private capital for its producers company wherein women are the stakeholders, said Apoorva Oza, Chief Executive of AKRSP-India.

Masuta Producer Company, formed by about 2000 Tasar yarn producers in Bihar, Jharkhand and Chhattisgarh is a joint joint venture with a Government of Jharkhand enterprise — Jharcraft for cocoon trading.

FabIndia under its fully-owned subsidiary Artisans Micro Finance, a venture fund, has formed 17 entities which are owned 49 per cent by the fund, 26 per cent by private investors and 10 per cent by the employees of the community-owned company. This concept has found a place in Harvard Case Study.

In Assam, two community-owned companies have been set—Coinonya Farms Producers Company Limited for turmeric and Karbi Farms Producer Company Limited for ginger and chilli. Spices Board of India owns 49 per cent of each company for which it had invested equity stake is Rs 1 crore in each, last year. Small and marginal tribal farmers practicing jhum cultivation own 51 per cent stake in each of them.