FRP Arrears, New Members and Cane Diversion at a Sugar Mill
Shri Dnyaneshwar Sahakari Sakhar Karkhana Ltd in Ahmednagar has 3,100 member cultivators and a crushing capacity of 2,500 TCD. In the last season it crushed 4.5 lakh tonnes of cane at an average recovery of 10.8%. The fair and remunerative price fixed for the season is ₹3,050 per quintal at a base recovery of 9.5%, with a premium payable for every 0.1 percentage point of recovery above the base; the state advised price is ₹3,400 per quintal. The mill has paid only ₹2,900 per quintal and has cane price arrears of ₹22 crore, which the board has described as a temporary cash-flow problem. At the same meeting the board admitted 400 new members who have never supplied cane, resolved to allow 60% of the command area's cane to be diverted to a private mill offering a higher rate, and proposed an 8% dividend on share capital for the year. The mill's term loan from the district central co-operative bank carries a covenant on cane payments.
1. Is the mill's payment of ₹2,900 per quintal legally defensible? Work out what its statutory obligation is and whether the recovery-linked premium applies.
Read the worked answer
No. The fair and remunerative price is a statutory minimum payable under the Sugarcane (Control) Order, and the mill's payment of ₹2,900 is below even the base FRP of ₹3,050, let alone the state advised price of ₹3,400. The shortfall is not a cash-flow matter; it is a default on a statutory obligation, and cane growers have a legally enforceable claim on it. Payment is required within the prescribed period from the date of delivery, and default attracts interest and penal provisions.
Recovery-linked premium. The FRP is expressed at a base recovery of 9.5%; for every 0.1 percentage point by which the mill's actual recovery exceeds the base, an additional premium per quintal becomes payable. At 10.8% recovery the mill is 1.3 percentage points above the base, i.e. thirteen increments of 0.1. The mill's obligation is therefore the base FRP plus thirteen times the notified premium rate per quintal - and the state advised price, being higher, is the practical benchmark for the state.
Consequence. The real arrears are larger than the ₹22 crore booked, because the board has under-provided for the premium. The board must compute the liability grower-wise on actual recovery, provide for it in the accounts, pay within the schedule, and approach the DCCB for working capital on the strength of a correct figure rather than behind a misdescribed 'temporary' problem.
2. Advise the board on the two membership-and-cane resolutions: admitting 400 non-supplying members and permitting diversion of 60% of cane to a private mill.
Read the worked answer
Admitting 400 non-suppliers. Membership of a processing society is built on a supply relationship: the bye-laws ordinarily require land in the factory's command area, a cane supply undertaking, and shareholding proportionate to the area planted. Admitting 400 people who do not grow cane for the mill converts the society from a producers' body into a membership-collection exercise, dilutes the voting weight of genuine cultivators and, if those members are aligned to a rival mill, hands them control of the mill's decisions. Membership is not to be refused capriciously, but here the board should seek a written cane supply undertaking for the forthcoming season from each applicant and defer admission till then.
Diversion of 60% of the command area's cane. This is a fundamental departure, not a pricing tactic. It breaches the supply agreement and bye-law obligation that members deliver cane to the society, and it damages the mill three ways: capacity utilisation falls below breakeven, fixed costs per tonne of cane rise, and the DCCB covenant on cane payments will be breached, jeopardising the term loan. A higher price from a private mill is short-term; a mill that loses its cane base loses its licence to remain viable. The correct response to the price gap is to press the state on the price realisation issue, improve recovery and sugar realisation, and negotiate the loan covenant - not to divert the crop.
3. How should the board treat the dividend proposal in the light of the arrears?
Read the worked answer
Dividend cannot be paid ahead of statutory cane dues. Three separate tests apply:
- Profit test. Dividend is payable only out of net profit after the reserve fund transfer required by the MCS Act, after depreciation, and after making full provision for known liabilities. The FRP liability of ₹22 crore - under-provided once the recovery premium is worked in - must be provided before any profit emerges. As things stand, the mill has no distributable profit.
- Dues test. A society in default on statutory or government dues cannot declare dividend; unpaid cane price is exactly such a due. Paying shareholders 8% while growers wait is both illegal and inequitable, since most shareholder-growers are also the creditors.
- Relationship test. In a sugar co-operative, member-suppliers are paid twice: as creditors via cane price and as owners via dividend. There is no defensible logic in shorting them as creditors to pay them less as owners.
Order of priority should be: pay FRP and the recovery-linked premium, provide for the term loan instalment and the DCCB covenant, build the reserve fund, then consider dividend only after the general body sees fully provided accounts. The board should withdraw the resolution and place the corrected liability before members at a general body meeting.