Capital Market and Securities Laws · Share Based Employee Benefits and Sweat Equity

Benefits to Members under Section 378E of the Companies Act

Updated 11 October 2026 · Fact-checked

Section 378E sets out what a member of a producer company receives. First, an initial value for produce supplied, with the withheld price paid later. Second, only a limited return on share capital. Third, any surplus left after limited return and reserves can be paid as patronage bonus, approved at the general meeting.

Understand Benefits to Members under Section 378E

A Producer Company is a body corporate formed by primary producers such as farmers and artisans. These provisions were inserted in the Companies Act, 2013 by the Companies (Amendment) Act, 2020 (Act 29 of 2020), with effect from 11 February 2021. Its aim is to serve members, not to maximise dividends for investors.

Because of this, section 378E gives members three kinds of benefit. They are linked to the produce a member supplies, the share capital a member contributes, and the surplus the company earns.

The first benefit is price for produce. A member initially receives only the value the Board of the Producer Company determines for produce pooled and supplied. The part held back is the withheld price (section 378A(n)). It can be paid later in cash, in kind, or by allotment of equity shares, in proportion to produce supplied during the financial year. The Board decides the extent, manner and conditions, subject to the articles. The articles must also state when and how the withheld price is determined and distributed (section 378G(3)(e)).

The second benefit is a limited return on share capital. Section 378A(d) defines it as the maximum dividend the articles specify. Members may also get bonus shares under section 378ZJ.

The third benefit is patronage bonus. After providing for limited return and the reserves in section 378ZI, any surplus may be disbursed in proportion to participation in the business. Under section 378S(b), approval of patronage bonus is a matter the Board can exercise only by a resolution passed at the annual general meeting. Under section 378E(3), the members decide at the general meeting whether it is paid in cash, by equity shares, or both.

Key rules to remember

Initial value and withheld price (s. 378E(1)): Member first receives: value fixed by Board for produce supplied. Balance = withheld price, paid later.; Subject to the articles. Paid in cash, in kind or by equity shares, in proportion to produce supplied in the financial year, to the extent and on the conditions the Board decides.
Limited return (s. 378E(2)): Return on share capital contributed = limited return only; Limited return is the maximum dividend specified by the articles (s. 378A(d)). Bonus shares may be allotted as per section 378ZJ.
Patronage bonus (s. 378E(3)): Surplus after limited return and reserves under s. 378ZI → patronage bonus in proportion to participation in business; Paid in cash or equity shares or both, as the members decide at the general meeting. Approval of the bonus itself is by resolution at the AGM (s. 378S(b)).
Meaning of patronage bonus (s. 378A(i)): Payment from surplus income to Members in proportion to their respective patronage; Patronage means use of the company's services by participation in its business activities (s. 378A(h)).
Who decides what (s. 378S): Approval of patronage bonus, bonus shares and declaration of limited return: by resolution at the annual general meeting; The Board can exercise these powers only through such resolutions.

How to solve Benefits to Members under Section 378E questions

Use this method for any question on benefits to members of a producer company.

1Identify the type of benefit asked about: price for produce, return on capital, or share of surplus.
2State the rule from section 378E in plain words, naming the sub-section.
3Define the key term used: withheld price, limited return or patronage bonus (section 378A).
4Say who decides: the Board determines the initial value and how the withheld price is disbursed, subject to the articles (sections 378E(1) and 378G(3)(e)). Patronage bonus is approved by resolution at the AGM (section 378S(b)), and the members decide cash or equity shares (section 378E(3)).
5Apply the facts: check the basis of distribution, which is produce supplied or participation in business, not shareholding.
6Mention that the articles must cover the matter (section 378G(3)) and that the order is limited return and reserves first, then bonus.
7Close with a clear conclusion.

Quickest way: Three-benefit scan

When to use it: Short-answer or time-pressed questions on section 378E.

Write the three benefits in order: produce price, limited return, patronage bonus.
Add one phrase for each: withheld price paid later; only a limited return; surplus shared by participation.
Name the decision-maker: Board for initial value and withheld price, subject to the articles; AGM resolution for patronage bonus, with members choosing cash or shares.

Common mistakes in Benefits to Members under Section 378E

Saying members get dividends in proportion to shareholding without limit.
Students apply ordinary company rules to a producer company.
Fix: Remember section 378E(2): only a limited return on share capital, capped by the articles.
Distributing patronage bonus by shareholding.
Confusing bonus with dividend.
Fix: Patronage bonus goes in proportion to participation in the business, as section 378E(3) says.
Forgetting the order of payment.
Students jump straight to the surplus.
Fix: The surplus is what remains after limited return and the reserves under section 378ZI.
Saying the Board decides patronage bonus alone.
The Board determines the withheld price, so students assume it decides everything.
Fix: The Board's role on withheld price is subject to the articles. Patronage bonus is approved by resolution at the AGM (section 378S(b)), and the members decide cash or equity shares (section 378E(3)).
Treating withheld price as a deduction that is never paid.
The word withheld suggests loss.
Fix: It is part of the price withheld for payment on a later date (section 378A(n)). It may be paid in cash, kind or equity shares.

Worked examples

Example 1

Kisan Agro Producer Company Limited collects milk from its members. The Board pays members an initial amount per litre and holds back the balance. Explain, with reference to section 378E, how the withheld price may be paid.

Show the solution

Provision: under section 378E(1), subject to the articles, a member first receives only the value of produce pooled and supplied that the Board determines.
Withheld price means the part of the price due that the company withholds for payment later (section 378A(n)).
The withheld price may be disbursed later in cash, in kind or by allotment of equity shares.
It is paid in proportion to the produce supplied during the financial year, to the extent and on the conditions the Board decides.
The articles must also state the circumstances and manner in which the withheld price is determined and distributed (section 378G(3)(e)).

Answer: The company may pay the balance later in cash, in kind or by allotting equity shares. It must be in proportion to the produce each member supplied in the year, on the Board's terms and subject to the articles.

Example 2

Himalaya Handloom Producer Company has a surplus after paying the limited return and making provision for reserves under section 378ZI. State how the surplus may be distributed and who decides the form of payment.

Show the solution

Provision: section 378E(3) allows the remaining surplus to be disbursed as patronage bonus.
Basis: it is shared among members in proportion to their participation in the business, not in proportion to shares held.
Form: cash, allotment of equity shares, or both, as the members decide at the general meeting (section 378E(3)).
Approval: section 378S(b) lists approval of patronage bonus among matters the Board can exercise only by resolution passed at the annual general meeting.
Condition: the surplus is only what is left after limited return and the reserves in section 378ZI.

Answer: The surplus may be paid as patronage bonus in proportion to each member's participation in the business. It is approved by resolution at the AGM, and the members decide whether it is paid in cash, equity shares or both.

Exam tips

Write the three benefits as a short list, then explain each with its sub-section number.
Define withheld price, limited return and patronage bonus using section 378A. Examiners reward correct terms.
Link section 378E with section 378S and section 378G(3) to show who approves what and what the articles must say.
On who decides: the Board determines the initial value and withheld price disbursement, subject to the articles. Patronage bonus needs an AGM resolution, and the members decide cash or equity shares.
Close each answer with a one-line conclusion tied to the facts given.

Practice questions from Share Based Employee Benefits and Sweat Equity

Benefits to Members under Section 378E: frequently asked questions

What does section 378E of the Companies Act, 2013 deal with?

It deals with benefits to members of a producer company. These are the initial value and withheld price for produce, a limited return on share capital, and patronage bonus from surplus.

What is patronage bonus in a producer company?

It is a payment out of surplus income made to members in proportion to their patronage, meaning their use of the company's services (section 378A(i) and (h)). It can be paid in cash, in equity shares, or both.

Do producer company members get unlimited dividend?

No. Members receive only a limited return on share capital, which is the maximum dividend the articles specify. Bonus shares may be allotted under section 378ZJ.

Who approves the patronage bonus in a producer company?

Approval of patronage bonus is a matter the Board can exercise only by a resolution passed at the annual general meeting (section 378S(b)). Under section 378E(3), the members decide at the general meeting whether it is paid in cash, equity shares or both.