Establishing and

governance for FPOs

Hyderabad

What we will broadly cover

What is Producer Organisation?
Challenges in FPOs?
Best Practices in General
Best Practices in Governance

What is a producer
organisation?
Simplest form a Producer Organisation is an organisation formed by a group of farmers
(that may carry a particular status under law )

FPOs can be informal groups, formal associations, cooperative societies,

producer companies and unions.

A Producer Organisation brings together people and businesses into a

collaborative venture. For many, working with other producers will be a new and
often alien way of working.

It involves aligned thinking, commitment to work with others and a joint

approach to business.

If a farmer is not prepared to collaborate and operate in this way, a Producer

Organisation is not for them.

Farmers organizations: intermediaries

between farmers and other stakeholders

On behalf of its
members, it organizes
and regulates relations
between members and
other stakeholders in
rural sectors and areas

Institutional Models of Producer Organisations

Different models of producer organisations are discussed below:Informal collectives

Formal collectives

Producer companies

JLG/Self-help groups

Farmers

Cooperatives (under

established under the

groups/Association

old Cooperative Acts,

Companies Act

Farmers Club

Liberal Cooperative

Federations

Acts and Multi State

Formal collectives like

Cooperative Societies
Act)

Long history of producer

collectives - Cooperatives
in fishery, sugar and
dairy

Societies and Trusts

Producer companies

Challenges to FPOs

Social capital formation in PCs

Governance and Management capabilities of PCs

Scope and scale of PCs

Market landscape of PCs

Ownership issues in PCs

Convergence of resources from district administration

Institutional architecture of producer organizations in the district, and

Financial capital formation of PCs.

FPOs still evolving !

Challenge - Best practices across sector not documented .

Fundamental difference between a Producer Organization and the

other forms of business organizations is that in this case a group of
producers (of a commodity or a set of commodities) come together to
find an opportunity to maximize their Return on this commodity (ies)
and is not a group of people coming together to maximize the return on
the capital invested by them, may be utilizing an opportunity offered by
the commodity

Best practices in - General

Leveraging ecosystem for scale

and sustainability through four
levers

This has always been the driving philosophy of

CSA to achieve scale and sustainability
Capacity of communities
Power of the state
Efficiency of markets
Reach and attitude of facilitators

Best Practices
Size of the FPO 500 to 2000 members
Multi-commodity is better (Agriculture, Horticulture, Forestry)
Combination of bulk and retail; raw and processing; local and distant
markets; and niche and regular.
Paying strong emphasis on marketing efforts
Sub-contracting ways to generate adequate experiences
Farm-Farmer-Family diversity of products and services for
sustainability

Ecosystem solution CSA strongly believed in the convergence of

multiple stakeholders (bringing together the efficiency of the market,

power of the state, reach of the facilitator and strength of the
communities) to ensure a sustainable eco-system for the intervention
to work

Best Practices
Geo Spread Contiguous villages 10-20 villages for one FPO
Spending time in identifying the leaders for the FPO
Not so diversified crops in the cluster
Financing
at farmer level directly with bankers (linkages);
At the FPO level through FPO financing, WH Receipt, Trade Financing (credit
from supplier and advance from farmer) etc.

Pooling pricing - use variable payment schedules and marketing

agreements
People Professional Partnership.

Just phrases do not help. How they come together to bring good
outcomes needs to be properly enunciated for someone from another
context to understand.

Establishing an FPO Best

Practices

Some Best Practices

BUSINESS PLAN

Having a Business Plan in place - Business Plan will be a

tool for the FPO for setting the direction of the company
over the next few years and will support the company to
set up the action plans and processes

Have an implementation plan in place - Business Plan

implementation should be done in a phased manner,
wherein business activities of higher priority of member
farmers have been planned first.

Internal Systems
Need to have strong internal systems in place

Setting up handling procedures for produce grading and storage, quality control,
humidity, procedure for minimizing losses and pilferage, etc.

Formation of committees purchase committee, sales committee, Finance Committee

Procuring of trading infrastructure weighing scales, tarpaulins, cleaning equipment,

etc.

MIS system for supply chain management.

Accounting systems internal control, cash management, working capital

management.

Inventory management closing stock, quantity, quality, prices

Risk Management systems Insurance, Cash Handling procedures, transit insurance,

stock insurance, etc.

Financial Management
Ensuring required capital and general financial management is
a pre-requisite for running the business successfully.
This is required for
Arranging initial capital for the company;
Organising working capital for stock / inventory;
Arranging finance for investment in infrastructure;
Fixing margin for input and output selling;
Distribution of margin / profit amongst stakeholders;

RISK MANAGEMENT SYSTEMS

Strengthen risk management systems
Identification of risks
In both external and internal environment of the organization
(Systematic issues , Human lapses, misuse and frauds),
Market risk,
Environmental risk,
Political risk etc.

To identify the areas and act on mitigating risks

Design,
Develop,
Strengthen systems

Transport Failure
Accident
Damage due to food perishing
Strikes etc

Machinery Failure
Shortage of skilled manpower
High demand of leasing machinery increases the cost and time.
Poor or no warehouse for fnished goods, Infrastructure Failure
Shortage of Skilled Labour
Adverse weather conditions
Infrastructure failures: Power, Water etc.

Shortage of seeds and fertilizers.

Unavailability of quality seeds
Middlemen Involvement
Delay in Supply

Logis
tic
Risks
Proce
ssing
Risks
Produ
ction

Risks
Input
Risks

Some examples of risks

Compliances for Farmers Groups

Registered under Producer Companies
Act

Internal
The FPOs promoted will have following compliances.

Election:

The group will ensure that the Board of Directors is elected before the expiry of
the term of the existing directors. These elections need to be in accordance with
the by-laws.

Meetings:

The general body needs to meet at least once a year and the board of directors at
least once in three months. AGM has to be held within 6 months of the
completion of financial year. The by-laws of the society may prescribe a higher
frequency of meetings. The AGM minutes have to be circulated to all attendants
within 30 days of the meeting.

Statutory Records:

Some of the important books of account that the Act requires of all producer companies are:

Cash book
Accounts of assets and liabilities
Accounts of all purchases and sales of goods
Updated register of members
Copies of audit reports and special audits
Copy of the law
Updated bylaws with all amendments
Minutes Book
Bye laws book

Internal Audit:

A producer company may get its accounts audited internally twice a year

Internal Audit has become an important management tool for following reasons:

It ensures compliances of Companies (Auditors Report)

Order, 2003.
Internal auditing is a specialized service to look into the
standards of efficiency of business operation.
Internal auditing can evaluate various problems
independently in terms of overall management control and
suggest improvement.
Internal audit is an integral part of Management by System.
Internal audit ensures the adequacy, reliability and accuracy
of financial and operational data by conducting appraisal and
review from the independent angel

Financial Reporting

Submission of Returns

A Producer company needs to submit the following returns within 30 days of conduct of the annual general
body meeting:

Annual report of activities

Annual audited statements of accounts with auditors report
List of members at the close of the year under reporting with
services provided to each member
Statement on the disposal of surplus or on the allocation of deficit
List of names of directors, their addresses and their terms of office
and
Compliance reports relating to audit, special audit and inquiry, if
any.

External Compliances:

Registration of the organization:

The Act deals with number of members required for incorporation of a producer
company after complying with the requirements and provisions of the act in respect of
registration.

The producer institution needs to follow the following compliances to register under
producer company Act:

Form No.

Form-1A

Brief Description
1. A fee of Rs. 500 will be also sent .the applicant shall give four alternative names.
The name of the promoters should also be the subscribers to the memorandum.
The last words of the company should be ..producer company limited
2. The registrars confirmation of availability of name will be valid for six months
and if a company with that name is not registered within six months, a fresh
application will have to be made to the registrar with fees of Rs. 500

Registration compliances:
The producer company need to submit following document for registration:
Document required
Memorandum
association

Form No. Brief Description

of

Articles of association

Declaration

Declaration of director

Form-29

Particulars of director

Form -32

Address of register office Form -18

Deposit of incorporation
fee

Memorandum of association duly signed by

the subscribers and witnessed
Articles of association duly signed by the
subscribers and witnessed
Declaration need to be made by an advocat
or a charted accountant or the director as per
the MOU that all the requirements of the act
and the rules there under have been
complied with in respect of registration
List of persons named in the MOA as first
directors and their consents
duplicate giving particulars of the said
persons named as directors
situation of registered office
The receipt of incorporation of fee deposit

No
of
copies
2 copies
2 copies

1 copies

1 copies
1 copies
1 copies
1 copies

Preparing to seek credit

Documentation to be in place
Brief profile of the PC and resumes of the key Director/CEO
Background, Company and Business overview, Shareholder profiles, Infrastructure, Geography, Demography,
Agriculture and Irrigation, Existing Organogram, Roles and Responsibilities of management

Copies of leases, if any

Letters of reference
Contracts/work order/MoU for selling produces etc.
Legal documents (registration, business license, etc.)
Details on existing institutional mechanism including
promoter organization
Past Sources of Funds

Plans and Studies

Business Plan ( Evolving If possible SWOT should be carried out)

Value Chain Study

Market Study for

Existing Products and Services

Future Products and Services

Preparing to seek credit

Financial Documents

Cash flow statement ( past and projections)

Income statement ( past and projections)
Balance sheet ( past and projections )

Break-even analysis

Debt-service ratio

Focus on Key Ratios

Profitability Ratios

Gross Profit Margin

Operating Profit Margin

Net Profit Margin

Efficiency Ratios

Inventory Turnover Ratio

Operating/Cash Conversion Cycle

Return on Average Equity

Return on Average Assets

Capital Structure Ratios

Interest Coverage Ratio

Debt-to-Total Capital Ratio

Debt-to-Equity Ratio

Governance Best Practices

What is Governance in FPOs?

Governance relates to consistent management, cohesive policies, guidance,
processes and decision-rights for a given area of responsibility
FPOs are created to perform and function as a Business and have
responsibility to ensure economic benefits to its members.

Why do we need Good Governance ?

For increased efficiency so that we can maximise the benefits we
provide to members with limited resources
For effectiveness so that our work actually benefits those who are
not adequately served by the state and the market institutions
For ethical behaviour, so that we can influence actors in state and
market institutions as well to behave ethically

What comes to your mind when you think of of good

governance and successful farmer groups ????

 Membership base and member ownership

Organizational structure, constitution and legal recognition
Management systems, regularity of statutory meetings
Responsible and responsive leadership, accountable to members
Internal knowledge and skills, professionalism of the organization
Culture, values and integrity
Open communication and internal trust
Financial management and accountability
Financial autonomy, independence from external financial support
Political independence, no Government interference
Relations with other stakeholders
Quality of service provision to members

Elements of good governance

Why do we need Good Governance in

FPOs

POs are accountable to their communities

POs have to be committed to the highest level of accountability especially to its members
For a PO, being accountable means
Demonstrating regularly to members that it uses its resources wisely and
Ensuring inclusive and equitable support to all members
The Board/Managements does not take advantage because of their special status and
decision making powers.
An accountable PO has to be
Transparent and ethical in all transactions with its stake holders
Prepared for public scrutiny of its accounts and records by funders, beneficiaries, and others.
Main reasons POs run into difficulties or collapse:
Poor governance and the breakdown of trust between members, leaders, and managers.
Managing a group of producers with different priorities is a difficult task, especially when
POs become larger

How will Good Governance happen in

POs?
In almost all POs governance is by a two-level structure.
First level is made up of all the POs members also known as the General Body. All
major decisions are made at the General Body meeting either an Annual General
Body Meeting (AGM)or Special meetings called for.
Second level is made up of the leaders elected at the AGM.
These leaders or directors form a management group, which is often called the
board of directors.
Role for the Board of Directors should be clear
Role of Management of the company and the Chief Executive
Having transparent and efficient systems and procedures and MIS
Decision making is done by a committee of representatives of the Board and
Management.
Diligent and efficient staff to carry out the directions of the decision making authority.

Who should be on the Board?

Elected representatives from the members

The ideal Board size is between seven to eleven

Ideally the Board Members should have an inclusive composition including with
representation from women

The ideal tenure for a Board member is six to eight years, split into two terms
of 3-4 years each.

Members should have different specialisations including not directly the subject
matter of the PO.

External Experts can be inducted to the Board but they have no voting rights

New Board members must be systematically identified and one or two inducted
every year.

New Board members must be given an orientation to the POs mission, strategy,
operations and history.

Boards should annually appraise their own contribution to the PO.

A Good PO should have the following

characteristics

A well developed vision and mission - goals and objectives

Goal-oriented constitution that is understood by all members

A vision of running the PO on clear business parameters making a it a good business for the
members as well as the PO itself

Clear definition of responsibilities, both for leaders and members

Elections of group officials as per constitution

Democratic and transparent leadership

Set rules and procedures to control decision making

Strategic planning

Open two-way communication and feedback mechanisms

Regular meetings

Proper record keeping and accountability procedures

Effective conflict management procedures and capacities

Basic functioning and dynamics of a

PO
A producers organization is like a boat

The boat symbolizes the social capital of the organization, members have put some
money together to undertake collective action (going by boat instead of swimming
alone).

Members are the passengers in the boat. The boat allows them to arrive together at
destination instead of swimming alone

Elected leaders steer the boat.

The mast of the sails symbolizes the constitution, as the backbone of the organization.

The sails are put up and positioned to go in the direction defined by the members and
the leaders.

Three types of resources determine the power of the wind and the speed of the boat:
human resources, financial resources and collaboration with other stakeholders.

Ask yourself Boat questions !!

Are the farmers organizations in your areas really the boat that brings
farmers to their destination ?

Who put up the sail and steer the boat ?

Is there a favourable wind for sailing the boat in your area?

Did you encounter cases where parts of the boat are lacking? What
happened?

Constitution (AoA, MoA)

Mast of the boat; backbone of a farmers organization

Reference document

Pre-requisite for formal registration

Provides purpose, direction and guidance

Many situations when a constitution is specifically needed

Eligibility of members
Election procedures
Member roles and obligations
Utilization of profits
Sanctions

Producer Organization Governance Structure

Board appoints full-time managers, as employees of the PO,

Manage the business and report back to the board on a regular basis.
Number of professional staff would depend on the volume of business, diversity of
activities and geographical spread of the business operation.

Main reasons why POs hire professional managers :

1. Difficult for elected leaders to govern the PO, manage the business, and have time to
manage their own private production.
2. Insufficient business and management skills and experience to manage the business
effectively.
3. Cutting down on bureaucracy - Managing a business in a dynamic market requires quick
decisions and a rapid response to changing conditions and new opportunities in the market.

Professional managers with delegated independence can often manage the business
more effectively

Producer Organization Governance

Structure
Annual General Body Meeting of
Members
( Primary Producers)

Board of Directors

Professional
Managers appointed
by Board

Good governance involves the separation of

governance and management
Challenge all POs face is to :
Adapt governance structures and systems to the capacity and needs of members, the demands of
the business, and their stage of development.
POs can be governed in many different ways and there is no single, best approach.
However good governance involves the separation of governance and management.
.The board governs and the staff manages
.The separation of governance and management involves a division of both duties and personnel.
The usual rule is that management runs the organization from day to day, while the board sets
policy, exercises oversight, and strategically guides the organization.

Basic tenet of good governance is that management and governance are separate.
Separation makes possible the checks and balances
That ensure the organization is well run and important decisions are made with the public interest in mind.

Good Governance in POs: Role of the

Board
The PO Board is the body for its governance
It must lay down the value framework and the vision of the PO
The Board must articulate / re-validate the mission every 4-5
years (Mission Validation)
The Board must ensure compliance with the mission in every
review (Mission Compliance)
The Board should lay down policy and work only through the
CEO and not be involved in operations
The Board must hold itself ultimately accountable

Some Good Governance Practices in

POs
The Board must meet at least once every 3-4 months, on dates
pre-specified well in advance.
Attendance should be at least two-thirds of members
A member who is absent, even with leave, for three
consecutive meetings should step down
The Board should seek detailed staff presentations / interaction
at least once every alternate meeting
The Board must meet part of the time in each meeting without
the staff, and the CEO if needed
The Board members should set some of the agenda

Professional staff and their relation with PO

leadership and members

Farmers as employers; delegation of executive

tasks from farmers to staff members
Separation of roles and functions between farmer
leaders and personnel
Redesign of organization chart and internal
regulations and procedures

Main areas of responsibility of most Chief Executive

Officer / Management
Hiring, firing, and supervising the staff.
Managing and evaluating programs and operations.
Identifying, acquiring, and managing resources.
Preparing an annual budget.
Proposing policies and strategic initiatives to the board.
Communicating with stakeholders.
Promoting the organization in the community.
Supporting the board in its work.

Risks and dilemmas

Staff often have a higher educational level than leaders
Staff setting the direction, or even taking over leadership of the
organization.
Staffs are recruited and may stay longer in office than elected
leaders.
Staff, through their executive functions, may become the actual
fund managers, with risks of financial mismanagement and
orientation at external support organizations
Staff get a salary, while leaders (in principle) work on a voluntary
basis
Board members have political roles and staff has a technical role.

Consequences for organisation chart and internal

regulations and procedures