Wednesday, Sep 28, 2022

In The Right Company

Despite their recent notoriety, Section 25 companies are not for profiteering.

section-25 Section 25 not-for-profit companies may be at the receiving end of much criticism, but Prime Minister Narendra Modi knows their worth.

Thanks to Subramanian Swamy, Section 25 not-for-profit companies may have become rather controversial, but Prime Minister Narendra Modi knows their worth — after all, he was the chief minister of Gujarat. His favourite undertaking, the Sabarmati riverfront project, was planned and implemented by a not-for-profit company. Bimal Patel, president and acting director of Ahmedabad-based CEPT (Centre for Environmental Planning and Technology) University, who planned and supervised the implementation of the prestigious project, runs his own organisation, Environmental Planning Collaborative, a Section 25 not-for-profit company. Finance Minister Arun Jaitley, who is a Rajya Sabha member of Parliament from Gujarat, knows the structure well.

Indeed, Jaitley also championed farmer-owned producer companies as corporate enterprises. I know this because he had asked me to chair a group to design them. The Companies (Amendment) Act, 2002, which gave legal recognition to farmer producer companies, was based on the Alagh Committee report.

Thanks to NGOs, “corporate social responsibility wallahs” and assorted young people wanting to start social enterprises, Section 25 non-profit companies get a lot of attention. When anybody starts a social enterprise, the first thing to do is think about its organisational structure. Cooperative societies are still the most popular organisational form. But registrars of cooperative societies across all states tend to be difficult, almost tyrannical, and so alternative forms of organisation get importance. It was Verghese Kurien, the father of the White Revolution, who, in the Anand Declaration towards the end of the last century, raised the question of the organisational reform of cooperative institutions.

The first alternative considered was a producer company, and I was asked to prepare an institutional design for it. It should have the structure of a cooperative, but not the bureaucracy and sarkari control that goes with a cooperative. The design allowed for the “one share, one vote” principle of cooperative governance along with the organisational nimbleness of a company. As long as you had elections for the post of director and an annual audit, there was no government control.

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These recommendations of the Alagh Committee were scrutinised by a parliamentary committee, which was generally sympathetic to its ideas. But when the Companies Act was redesigned in 2012, they were opposed by a major chamber of commerce. The argument was that these organisations were not part of the corporate sector. This was correct, but some of us argued that India is not a corporate state. Pratham organised the counter lobby and meetings were held in Delhi to discuss and support the move. When the companies bill was taken up later in 2012, producer companies had been dropped. But we again lobbied and were eventually able to get them included in the new legislation. This was reportedly supposed to be an interim measure, until fresh legislation could be introduced for such companies.

As an example, the i-Shakti pulses producer organisations are in the form of producer companies. New groups are constantly enthusiastically setting a fresh one up or expanding an existing set-up.

A Section 25 not-for-profit company — under the new legislation, these come under Section 8 — is another method of organising a social enterprise. This is not a company that works for profit, and its dividends are reinvested into the company itself for expanding its social obligations. There is, therefore, no question of anybody misappropriating its funds for private profit. There have been a number of interesting institutional experiments for running social enterprises using this method because it is transparent and does not
for allow for private profit.

First published on: 22-12-2015 at 12:08:58 am
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