Understanding governance principles, voting rights, and internal controls under the Companies Act, 2013.

By Prashant Kumar

Introduction

A Farmer Producer Organisation turns into a functioning institution only when its governance and management systems mature beyond incorporation. The structure is simple on paper — members elect a board, the board appoints a CEO, and the CEO runs operations — but the real challenge is designing controls that keep the FPO accountable, compliant, and member-driven. Under the Companies Act, 2013, a Producer Company has unique governance features that combine the discipline of a corporate entity with the cooperative spirit of farmer ownership. For FPOs seeking SFAC grants, NABARD handholding, NCDC finance, or state subsidies, governance quality often determines approval speed more than the business plan itself.

If you are still understanding the fundamentals of forming an FPO, the earlier guide on how to register an FPO will give useful context. This article takes the next step — how to run an FPO professionally and compliantly.

What is the governance structure of a Producer Company?

A Producer Company is governed by its farmer-members, who elect a Board of Directors responsible for strategic decisions. The Board appoints a CEO to run day-to-day operations. Voting follows a one-member-one-vote principle, irrespective of shareholding. The Companies Act, 2013 mandates regular meetings, transparency, and internal controls.

1. Role of the Members: The Real Owners of the FPO

Members sit at the heart of the Producer Company model. Their rights flow from the “one member, one vote” rule — a democratic principle that prevents concentration of control and keeps the institution truly farmer-owned. Members approve foundational decisions: adoption of accounts, appointment or removal of directors, amendments to Articles, distribution of patronage bonus, and major borrowings.

Members are also expected to participate in procurement, aggregation, or production-related activities. A Producer Company where members are inactive eventually collapses, even if the board is strong. Regular member mobilisation, which we discuss in the FPO registration guide, builds legitimacy and strengthens grant applications.

Core responsibilities of members

Attend annual general meetings and vote on key resolutions
Supply produce or participate in services
Elect directors transparently
Monitor the Board’s performance through democratic oversight
Approve audited accounts and major strategic decisions

Members are the institution’s accountability mechanism. Their participation — recorded through registers, attendance sheets, and share subscriptions — is often a decisive factor during SFAC or NABARD verification.

2. Role of the Board of Directors: Strategic Leadership & Compliance Custodian

The Board acts as the strategic nerve centre of an FPO. Under the Companies Act, 2013, a Producer Company must have a minimum of five directors, with the option to appoint an expert or additional director. This structure ensures both farmer representation and professional insight.

Key functions of the Board

Defining long-term strategy, procurement plans, pricing, and value-addition
Approving budgets, bank accounts, loans, and partnerships
Ensuring compliance — MCA filings, statutory registers, audit cycles
Overseeing the CEO and reviewing operational outcomes
Safeguarding the company’s financial health and risk management
Approving grants, subsidies, and project proposals

The board is personally responsible for statutory compliance. In our article on post-incorporation compliance for FPOs, we explain how annual filings, maintenance of registers, and board meeting documentation build the governance trail required for audits and subsidies.

Board governance best practices

Hold monthly or bi-monthly board meetings with proper agendas
Maintain transparent minutes and action trackers
Create committees for finance, procurement, and internal audit
Rotate leadership positions periodically to prevent dominance
Insist on early financial discipline — bank reconciliation, stock records, purchase approvals

A disciplined Board is the single most important factor behind an FPO’s sustainability.

Quote image on FPO governance stating that strong boards and disciplined CEOs create successful farmer-owned organisations. — A governance insight by Prashant Kumar on how strong Board leadership and disciplined execution make FPOs sustainable.

3. Role of the CEO: The Professional Executor of Strategy

While the Board decides, the CEO delivers. The CEO bridges farmer expectations and business reality. For most FPOs, this is the first full-time professional the institution hires — and the quality of the CEO often determines whether grant funds convert into activity or remain idle.

Core responsibilities of the CEO

Executing the business plan approved by the Board
Managing procurement, aggregation, quality control, and sales
Maintaining accounts, invoices, stock records, and cash flow
Leading staff and field teams
Ensuring timely utilisation of grants and proper documentation
Preparing financial statements and working with auditors
Liaising with buyers, banks, departments, and government agencies

A strong CEO ensures the FPO is project-ready for NCDC finance or state subsidies. Their ability to maintain clean accounts becomes critical when the FPO deals with taxation or exemption-related matters, as explained in our analyses on FPO taxation and agricultural-income exemption.

4. Voting Rights: Why FPOs Follow the One-Member-One-Vote Rule

Unlike private companies where voting power depends on shareholding, Producer Companies operate on democratic voting — one member, one vote. This ensures farmers retain collective control even if some contribute higher share capital or produce volume. The rule also aligns with the cooperative ethos embedded in the Producer Company chapter of the Companies Act.

Strategic advantages of this rule

Prevents dominance by large farmers
Encourages participation from smallholders
Builds trust within the community
Stabilises governance during conflicts

However, the one-member-one-vote model requires strong internal communication. FPOs must train members on rights and responsibilities to prevent Board capture by active but unrepresentative groups.

5. Internal Controls: The Backbone of FPO Governance

Every FPO that aims to scale must put internal controls in place early. These controls prevent leakages, ensure accountability, and build investor and government confidence.

Internal controls that every FPO must establish

Financial controls: invoice tracking, stock management, cash limits, audit trails
Purchase controls: quotations, committee approvals, competitive pricing
Sales controls: rate fixation, weighing protocols, buyer contracts
Document controls: digitised registers, cloud backups, utilisation records
Grant utilisation controls: separate bank tracking, timely UCs, dedicated ledgers

Internal controls also influence taxation outcomes. Mistakes in classifying agricultural and non-agricultural income can create tax exposure. Our article on FPO taxation and accounting explains how to structure accounts to avoid such issues.

6. Conflict Management and Transparency Practices

Disputes are inevitable in any farmer institution. The challenge is managing them without destabilising the company.

Best practices:

Maintain transparent procurement records
Publish periodic price and payment dashboards
Use third-party grading or digital scales during aggregation
Keep grievance registers at both board and CEO levels
Communicate decisions openly — especially around pricing and patronage bonus

FPOs that embed transparency early face fewer governance issues and gain faster acceptance among farmers and funding agencies.

7. Governance Red Flags: What Funding Agencies Notice Immediately

During SFAC, NABARD, or NCDC evaluations, certain governance failures are instantly visible:

Incomplete or fabricated member registers
Directors who cannot explain decisions taken in meetings
No documented business plan
Infrequent or poorly recorded board meetings
Cash handling without approvals
No stock records or inventory trails
No separation between personal and company expenses
Directors using FPO funds for individual procurement

These red flags often lead to immediate rejection of grant or subsidy applications.

FAQs: Governance & Management of FPOs (In-Depth Answers)

1. How many directors should an FPO ideally have?

Legally, the minimum is five, but most functioning FPOs operate best with seven to nine directors. This provides adequate representation from different villages or commodity groups while avoiding bloated decision-making.

2. Can a non-farmer be a director in a Producer Company?

Yes — the Board may appoint an expert director with technical or financial expertise. However, voting control must remain with farmer-elected directors.

3. Should the CEO be a farmer-member?

Preferably not. The CEO should be a professional with business, finance, or procurement expertise. A member-CEO often leads to conflicts of interest unless the Board is very strong.

4. How often should a Board meet?

Practical best practice is every 30–45 days. Monthly meetings ensure control over cash flow, procurement, sales, and operational risks.

5. How should an FPO record member participation?

Maintain physical and digital registers, mobile attendance, share receipts, and records of produce supplied. These documents matter during audits and grant verification.

6. Who approves large purchases or machinery?

For any capital purchase, the Board should approve via a documented resolution, with at least two quotations attached, especially if applying for subsidy.

7. What governance systems help in NCDC project approval?

Clear financial statements, land/title documents, stock records, procurement history, and consistent board oversight. NCDC looks closely at management discipline.

8. Can a Board member also work as a staff member?

Not advisable. It creates conflicts of interest. If unavoidable, duties should be segregated and transparently recorded.

About the Author

Prashant Kumar is a Company Secretary, Published Author, and Partner at Eclectic Legal, where he advises Farmer Producer Organisations (FPOs), agri-startups, cooperatives, and rural enterprises on governance, compliance, taxation, funding strategy, and institutional design. He works closely with FPOs on SFAC, NABARD, NCDC, and state-subsidy readiness, helping promoter groups build robust and transparent farmer-owned institutions.
For professional discussions, he can be reached at prashant@eclecticlegal.com or +91-9821008011.

Governance and Management Structure of an FPO: Roles of Board, CEO, and Members in India

Introduction

What is the governance structure of a Producer Company?