Description
Latin corporatus, past participle of corporare (“to make into a body”), which in turn was formed from corpus (“body”). See also corpse.
2.INTERCORPORATELOANS ANDINVESTMENTS
NO. QUESTION SECTION 372A 372A(8) 372A(5)&(6) 372A(9)&(10) ABC PAGE
1. 2. 3. 4.
Requirementsformakingintercorporate loans&investments. Non-applicabilityof Sec.372A. Register of intercorporateloans and investments. Penaltyforcontravention of Sec.372A.
Q.NO.1.WHAT CONDITIONSHAVE BEEN IMPOSEDBYTHE COMPANIES ACT RELATING TO INTERCORPORATELOANS AND INVESTMENTS?(SEC.372A) ProvisionsregardingintercorporateloansandinvestmentswereearliercontainedinSec?s.370 and372.TheseprovisionshavebeenconsiderablymodifiedbyinsertionofSec.372A,w.e.f. 31.10.98. Sec?s.370and372have beenmadenon-operationalbyinsertionofSec.372A.
A.ScopeofSec.372A:
Sec.372A regulates thefollowing transactions:
1. Makinganyloan to anybodycorporate. 2. Acquiringthesecuritiesof anyotherbodycorporate. 3. Givinganyguaranteeorprovidinganysecurity to:
a. Apersonwhogives a loan to anybodycorporate; or
b. Abodycorporatewhichgives a loanto anyotherperson.
B.Requirementsformakingloan,investment,guaranteeorsecurity:
1. ApprovaloftheBoard:Followingpointsmay benotedin thisregard: a. Approvalinallcases:ApprovaloftheBoardisrequiredinallcasesirrespectiveof thequantum of loan, investment, guarantee, or security.
b. Prior approval:
Approval of Board is to be obtained prior to making of loan, investment, guarantee,orsecurity. ResolutionpassedataBoardmeeting:TheapprovalofBoardshall passingaresolution at aBoardmeetingonly.Circularresolution resolution of committeeof directors isnotsufficient. beobtainedby underSec.289ora
c.
d. Powerto make intercorporateloans
andinvestmentscannot bedelegated:It must beensuredthat delegationof powerunderSec.292(1)(d)or292(1)(e) doesnot resultinacontraventionofSec.372A. Powertomakeintercorporateloansand investmentscannotbedelegated byapubliccompany.
e. Unanimous approval: AllthedirectorspresentattheBoardmeetingmustvotein favourof theresolution. f. Nospecificnotice: thedirectors. UnderSec.372A,thereisnorequirementofgivingspecificnotice to
2. Approvalbyspecialresolution: a. „Ceilinglimit'. Theceilinglimitonmakingloan,investment,guarantee,orsecurity is higher of the following: i. 60% of theaggregateofpaid-up share capitaland free reserves ofthecompany. ii. 100% offree reserves ofthe company. Paid up capital shall include paid up equity share capital as well as paid up
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preference share capital. b. Whereceiling limit isnotexceeded:Wheretheceilinglimit specifiedaboveisnot exceeded, nospecialresolution isrequired. c. Wherethe ceiling limit is exceeded:Wheretheaggregateofloan,investment, guarantee,orsecurityalready madetogether withloan,investment,guarantee,or securityproposedto bemadeexceedstheceilinglimit,previousauthorisationbya specialresolution isrequired. Timeofpassingspecialresolution:IflimitunderSec.372Aisexceeded,specialresolution isrequiredpriortomakinganyintercorporateloan,investment,guaranteeorsecurity. i. Thespecialresolutionshallbepassedinthegeneralmeeting(whetherannual general meetingorextraordinary general meeting).
d.
e. Mannerofpassingspecialresolution:
ii. However,thespecialresolutionshallbepassedbypostalballot,ifthefollowing2 conditionsare satisfied: Thecompanyis a listedcompany. The proposedbusiness relates to making of any intercorporate loan, guarantee, orsecurity. Itisevidentthatspecialresolutionshallbepassedingeneral meeting(andnot ballot)iftheproposedbusinessrelatestomakingofanyintercorporate (irrespective of thefact thatcompany isa listed companyornot). f. by postal investment
Disclosure requirementsin notice of special resolution:Thenoticeofspecial resolution muststate clearly thefollowingparticulars: i. Thespecificlimits ii. Theparticularsofotherbodycorporateinwhichinvestmentisproposedtobe madeorloan,guarantee, or securityisproposedto be given. iii.Purposeofmakingloan, investment, guarantee, or security. iv.Specificsources of funding. v. Otherrelevantdetails.
g.
Noblanket permissionto be given by the shareholders: Thenoticemustalso specifythespecificsecuritiesinwhich theinvestmentsareproposedto bemade.A blanketoren-blockapprovalbytheshareholdersempoweringtheBoardtomake loans,investments,guarantee,orsecurity upto a certain limit willnot beadequate complianceof theprovisions(except inthecaseof guaranteewheretheresolution may indicate an amountonannualbasis)[DepartmentCircularNo.8/99,dated4.6.1999].
3.
ApprovalofPublicFinancialInstitution:TheCompanyshallobtainthepriorapprovalofthe PublicFinancialInstitutionfromwhichithastakenatermloan.Thepriorapprovalisrequired eveniftheloanagreementdoesnotspecifyanysuchcondition.Theexpression'PublicFinancial Institution'hasbeendefinedunderSec.4AandincludesICICI,IFCI,IDBI,LICandUTI. Nodefaultinrespect ofpublicdeposits issubsisting.A companywhich has defaulted incompliancewithSec. 58A(relatingto pubicdeposits)cannotmakeanyloan, investment,guarantee, orsecurity,untilsuchdefaultissubsisting.Assuch,wherea companyfailsto repaypublicdepositsorinterestthereon,ontheduedate,itmaymake loan, investment, guarantee, securityonlyafterthe defaulthasbeen madegood. Minimum rateofinterest:Therateofinterestchargeableonanyintercorporateloan shallnotbelessthantheprevailingbankrate.„Bankrate' meanstherateat whichRBI lends moneytocommercialbanks.
4.
5.
C.Relaxationsinconditions:
1. Nospecialresolutionforguarantee:TheBoard maygiveguaranteeinexcessoftheceiling
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limitwithoutpassingaspecialresolutionifthefollowingthreeconditionsaresatisfied: a. A unanimous resolution ispassed in a Board meeting forgivingguarantee. b. Thereexistexceptionalcircumstanceswhichpreventthecompanyfrompassinga specialresolution. c. Theresolution of theBoardisconfirmedwithin 12months: i. in thegeneralmeeting of thecompany; or ii. intheannual generalmeeting. HeldimmediatelyafterpassingoftheBoard's resolution;whichever isearlier.
2. No approvalof Public Financial Institution:NopriorapprovalofPublicFinancial Institution isrequired, if thefollowingtwoconditionsare satisfied:
a. Theaggregateofloans,investments,guarantee,orsecurityalreadymadetogether withloan,investment,guarantee,orsecurityproposedtobemadedoesnotexceed 60% of theaggregateofpaidupshare capitaland free reserves.
b. ThereisnodefaultinrepaymentofloaninstallmentsorinteresttoPublicFinancial Institution.
Refertopractical questionsfromExamination. P1:Listed Companymakingloansinexcessoftheceilings. P2:Givinga loan to apubliccompanyinwhichto Directorshold30%ShareCapital. P3:Legalrequirementsfor givingguaranteeandprovidingsecurity. P4: Whetherproposed loan and investments ispermissiblewithoutpassingspecialresolution. P5:Makingloansandinvestments. P6&P7:Investmentexceedingtheceiling. Q.NO.2.WHATARETHE TRANSACTIONSTOWHICHSEC.372ADOES NOT APPLY?SEC.372A(8) Transactionsexcluded: Sec.372A isnotapplicableto: 1. Loan/Guarantee/Security /Investmentmade/given by: a. A BankingCompany, or b. AnInsuranceCompany, or c. AHousing Finance Company, or d. ACompanyestablishedwiththeobjectoffinancingindustrialenterprisesorproviding infrastructural facilities, e. ACompanywhoseprincipalbusinessistheacquisitionofshares,stock,debenturesor othersecurities, f. APrivateCompany,unless it isa Subsidiary ofa PublicCompany. 2. Investmentmadein sharesallottedu/s81(1)(a), i.e. RightsShares, 3. Loanmadebya HoldingCompanyto itswholly– ownedSubsidiary, 4. Guaranteegiven or securityprovidedbya HoldingCompany, inrespect of loan madeto its wholly– ownedSubsidiary,or
5. AcquisitionbyaHoldingCompanybywayofsubscription,purchasesorotherwise,the
In theordinarycourseof its business.
securitiesofitswholly– owned Subsidiary.
Q.NO.3. WRITESHORTNOTES ONMAINTENANCE OF REGISTER INRESPECT OF INTERCORPORATELOANS AND INVESTMENTSU/S372A?(SEC.372A(5)&(6))
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1. Contents: Every Companyshall keepaRegister showingthefollowingparticularsin respect ofeveryinvestmentor loanmade,guaranteegivenorsecurityprovidedbyitinrelationto BodyCorporate:
a. Nameof theBodyCorporate. b. Amount, termsandpurpose of theinvestment/ loan / security/guarantee. c. Dateonwhich the investment/ loan hasbeenmade, and d. Dateonwhichtheguaranteehasbeen givenorsecurityhasbeen providedinconnection with a
loan.
2.
Date-wise: Theparticularsofinvestment,loan,guaranteeorsecurityshouldbeentered chronologicallyin theRegister.
3. Time Limit: The particulars should be entered within 7 days of the making of the investment orloan, orthegiving oftheguarantee ortheprovision ofsecurity. 4. Place:The Registershould bekeptat theRegister Officeof theCompany. 5. RightsofMembers:TheMembersof theCompanyhavethe right to:
a. Inspect theRegistermaintained at the Registered Office. b. TakeextractsandcopiesfromtheRegister. 6.
Inthesamemanneras RegisterofMembers.
Consequences ofdefault: TheCompanyandeveryOfficerindefaultshallbepunishable withfineuptoRs.5,000andwithafurtherfineuptoRs.500for everydayafterthefirst day duringwhich thedefault continues. CONSEQUENCES OF NON-COMPLIANCE WITH SEC.372A (SEC.372A(9)&(10))
Q.NO.4. WHAT ARE THE REQUIREMENTS? 1.
TheCompanyand everyOfficerindefault shallbepunishablewithimprisonmentupto2 years,orwithfineuptoRs.50,000.Whererepaymentsofloanshavebeen madeinfull, imprisonmentshallnotbeimposed,andwherepartpaymentsaremade,imprisonment shall beproportionately reduced. Allpersonswhoareknowinglypartiestoanycontraventionshallbeliablejointlyand severallytotheCompanyfor: a. Repaymentof theloan,or b. MakinggoodthesumwhichtheCompanymayhavebeencalledupontopayonaccount of theguarantee givenorthesecurities providedbysuchCompany.
2.
3. Transaction inviolation of Sec.372 is void
and ineffective. A transactionwhich is forbidden inpublicinterestcannotbe madelawfulbypayingapenaltyforit.
PRACTICAL QUESTIONS
P.Q.1.TheBoardofdirectorsofM/sGreenfield Projects Limited,acompanywhosesharesareonthe DelhiStockExchangeproposes togiveloanstoasistercompanyinexcessoftheprescribedunder section372A(1)oftheCompaniesAct,1956.Thenextannualgeneralmeetingthecompanyis dueonly aftersixmonths.SincetheBoardisanxioustocompletetheformalitiesquicklywithoutwaitingforthe dayofthenextannual general meeting,advisetheBoardaboutthestepstobetakentocomply with thelegalrequirementsundertheCompaniesAct,1956. [CA(Final),May2002] Ans.Followingrequirementsshallbecompliedwithiftheceilinglimitprescribedundersection 372A isexceeded; 1. UnanimousapprovaloftheBoardshallbeobtainedbypassingaresolutionataBoardmeeting. 2. Aspecialresolutionshallbepassedinageneralmeeting.Thereisnorequirementthatthespecial resolutionshallbepassedonlyatanannualgeneralmFollowingpointsmustbenoted: a. Thepostalballotismandatoryinthecaseofalistedcompanyifthelimitprescribed
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under Sec.372A(1) is exceeded [Sec.192Aread with Rule 4 of Companies (Passing of ResolutionbyPostalBallot)Rules,2001). b. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompany towhichloanistobegiven,specificsourceoffunding andotherrelevantdetails.
c. Thecompanyshallfileacopyofthespecial resolution withtheregistrarwithin30daysof passingthe specialresolution. 3. Therateof interestchargeableon theloanshallnotbelessthantheprevailingbankrate. 4. ThecompanyshallobtainthepriorapprovalofthePublicFinancialInstitution fromwhomit hastaken atermloan. 5. Thecompanyshallensurethatnodefaultinrespectof Sec.58A(publicdepositsissubsisting. Theprescribed particularsshallbeentered intheregister maintainedunderSec.372A(5). P.Q.2.ABCForgings Limitedproposes tomakealoanofRs.5lakhstoPQRLimited,aCompany in whichtwodirectorsofABCForgings Limitedhold30percentofthetotalequitysharecapital.The proposedloantogetherwiththeintercorporateloansandinvestmentsalreadymadedonotexceed 60percentofpaid-upsharecapitaland100percentoffreereserves ofABCForgings Limited.Examinetheaboveproposalwithreferencetotheprovisionsofsection372AoftheCompaniesAct 1956.Whethertheprovisionsof section295containingthemarginalnotesof 'Loansto Director,etc.' wouldalsobeapplicablein thiscase? [CA(Final),Nov.2003] (OR) DEPLimitedhavingsubscribedsharecapitalofRs.5croresandfreereservesof Rs.3croreshas not sofargivenanyloanorguaranteetobodycorporates.Examinewithreferencetotheprovisionsof theCompanies Act,1956thelegalrequirements tobecomplied withbythecompanyforgrantinga loanofRs.10lakhstoMNLimited inwhich30%oftheequitysharesisheldbyoneofthedirectors of DEPLimited. [CA(Final,May,1998] Ans.AsperSec.295,apubliccompanyshallnot,directlyorindirectly, make anyloantoadirectoror anyotherpersonspecifiedunderSec.295,unless itobtainspreviousapprovaloftheCentral Government.`Abodycorporateatageneralmeetingofwhich25%ormorevotingpowerisexercisedbya directorofthecompany' isalsocoveredunderSec.295.Moreover,whereacompany makesaloantoa corporate,itshallcomplywiththeprovisionsofSec.372A. Thefollowinglegalrequirementsmustbecompliedwithinthepresentcase: 1. TheBoardofABCForgingsLimitedshallconsiderthecontractrelating togiveloantoPQR Limited.SincetwodirectorsofABCForgingsLimited areinterested theyshalldisclosetheir interest,shall notbecountedinquorum,andshall notvoteSec? s.299 and300).Necessary entrieswillbemade intheregisterofcontracts(Sec.301). ABCForgingsLimitedshallmakeanapplicationtotheCentralGovernmentforapproval undersection295.OnlyonreceiptoftheapprovaloftheCentralGovernment, ABCForgings Limitedwillmake aloantoPQRLimited(Sec. 295]
2.
TheFollowingrequirementsof Sec.372Ashallalsobefulfilled: a. b. AresolutionshallbepassedataBoardmeeting ofalltheDirectorspresentmeeting. ofABCForgingsLimitedwiththeconsent
ApprovalofPublicFinancialInstitutionshallbeobtained.However;ifthereisnodefault inrepaymentofprincipalorinterest,theapprovalofPublicFinancialInstitution isnot required(sincetheceilinglimitof60%isnotexceeded). c. ThecompanyshallensurethatnodefaultofSec.58A(relatingtopublicdeposits)issubsisting. Since,theceilinglimitspecifiedunderSec.372A(60%ofaggregate freereservesor100%offreereserves,whicheverishigher}is not resolutionisrequired. ofpaidupcapita!and exceeded,nospecial
d.
P.Q.3. Premier Housing Finance Company Limited is prepared to give housing loans to the employeesofSupremeChemicals Limitedsubjecttothecondition thattheloansareguaranteed by SupremeChemicalsLimited.SupremeChemicalsLimitedisnotalistedcompanyandthecompany
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willbeexceedingthelimitsprescribedunder theCompaniesAct,1956byprovidingsuchguarantee. Thecompanydesirestogivetheguarantee earlyaspartofemployees' welfaremeasurewithoutfor thenextannualgeneralmeeting,whichisdueonlyaftereightmonths.Advisethecompanyabout thelegalrequirements undertheCompanies Act,1956togiveeffecttotheaboveproposal.What wouldbeyouradvice,ifthecompanywasrequiredtoprovidesecurityinsteadof guarantee? Ans:Refer QuestionNo.1Aboveforexceptionsfromspecialresolutionof shareholders. 1. SincetheAGMisdueto beheldin8months,the Boardmaygiveguaranteewithoutbeing previouslyauthorizedbyspecialresolutionsubjecttofulfillmentof 3conditionsstated. 2. Theaboveexceptionsisonlyfor “guarantee”andnotfor“security”.So, thecompanyhasto obtainedpriorapprovalof theshareholdersforproviding“security”. P.Q.4.FollowingdataisavailablefromtheauditedBalanceSheetasat31-03-2008ofASKLtd. Liabilities SHARECAPITAL: Equitysharecapital (5,00,000 shares of Rs.10 each fullypaidupincash) Less:Callsin Arrears Preferencesharecapital Shareapplicationmoney RESERVESANDSURPLUS: Securitiespremium Capitalredemptionreserve Fixed assetsrevaluationreserve Sinkingfundreserve GeneralReserve ProfitandLossAccount DividendEqualisationReserve SECUREDLOANS: CashCredit facility fromBank Fixed Deposits (from general publicmaturingafter31-12-2008 CURRENTLIABILITIES &PROVISIONS: Currentliabilities ProvisionforTaxation Total Rs. Assets FIXEDASSETS: Goodwill LandandBuildingsPlantan dMachineryFurniture andotherassets INVESTMENTS: Equity sharesin wholly-owned subsidiaryKMCLtd. Equitysharesrepresenting90% of sharecapitalof MTCLtd. Debenturesin SKTLtd. PreferencesharesinHUTLtd. Capital account balance in partnershipfirm–BKP&Co. CURRENTASSETS: StockandBookDebts CashandBankBalances LOANSANDADVANCES: Intercorporatedeposits BusinessAdvances Rs. 10,00,000 75,00,000 1,50,00,000 2,50,000
50,00,000 50,000 49,50,000 15,00,000 10,00,000 15,00,000 12,00,000 10,50,000 11,00,000 40,00,000 22,00,000 6,00,000 1,00,00,000 20,00,000
12,50,000 4,50,000 12,00,000 5,00,000 8,00,000 14,00,000 1,00,000 25,00,000 14,00,000
12,50,000 10,00,000 3,33,50,000 Total 3,33,50,000
TheDirectorsof theCompanywantto makefurtherinvestmentsstatedbelowby takingadecisionin themeetingof theBoardof Directorwithoutseekingapprovalof theShareholders. a)LoantoKMCLtd. Rs.25,00,000 b)Loanto MTCLtd. Rs.15,00,000 c) Purchaseof furtherDebenturesin SKTLtd. Rs.8,00,000 d)Purchaseof sharesfromtheopenmarketin GlaxoLtd. Rs.15,00,000 StatewhethertheDirectors candosoandmention therelevant calculations. Ans.Notes /Observations: 1. ShareApplicationMoneyisnotincludible inFreeReserves.[Sec.372A] 2. CapitalRedemptionReserve,FixedAssetRevaluationReserveandSinkingFundReservearenot availablefordistributionofdividend,andhencenot"FreeReserves". 3. DividendEqualisationReserveisheldfor distributionasdividend,andhencea"FreeReserve". 4. ItisobservedthatCompanyhasnotdefaultedu/s58AinrespectofPublicDeposits. 5. EquitySharesheldinwholly-ownedSubsidiary,andproposedloantowholly-ownedSubsidiary isoutsidethepurviewofSec.372A.
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6. InvestmentinCapitalofPartnershipFirmis not"Investment"forSec.372Apurposes. 7. Purchaseof SharesincludesPurchasefromOpenMarketalso. Particulars 1. PaidUpCapital(a)EquityShareCapital (b)PreferenceShareCapital 2. FreeReserves: (a)SecuritiesPremium (b)GeneralReserve (c)Profit&LossA/c (d)DividendEqualisationReserve 3. MaximumAmount u/s 372A without Shareholders' Approval=Higherof (a)60%ofPaidUpCap.&FreeReserves[60%of (64,50,000+ 83,00,000)] (b)100%ofFreeReserves. 4. Investments/ Loansalreadymade: (a) EquitySharesinMTCLtd. (b)DebenturesinSKTLtd. (c)PreferenceSharesinHUTLtd. (d)Inter-Corporatedeposits. Rs. 49,50,000 15,00,000 15,00,000 40,00,000 22,00,000 6,00,000 Rs. 64,50,000
83,00,000
88,50,000 83,00,000 4,50,000 12,00,000 5,00,000 25,00,000
88,50,000
46,50,000 42,00,000
5. Further amount that can be Shareholders'Approval=(3)-(4) 6. Proposed Investments/ Loans: (a)Loanto MTCLtd. (b)Debenturesin SKTLtd. (c)Sharesin GlaxoLtd.
invested
without
15,00,000 8,00,000 15,00,000
38,00,000
Conclusion: Sincetheproposed additional investmentiswithintheamountpermissibleas calculatedabove,theDirectors,bypassingaunanimousresolutioninaBoardMeeting,canmake theproposedadditionalinvestment/ loans. P.Q.5.FollowingisthelatestauditedBalanceSheetof XYZLtd. CapitalandLiabilities EquityShareCapital (10,000sharesof Rs100each) LessCallsunpaid PreferenceShareCapital Securities PremiumA/c CapitalRedemptionReserves GeneralReserveProfita ndLossA/cSinkingFu ndReserve DividendEqualisationReserve Loanfrom TICC DepositsfromS Ltd Liabilities ProvisionforTaxation 10,000 9,90,000 1,50,000 1,50,000 2,25,000 5,00,000 2,20,000 1,10,000 60,000 10,00,000 2,00,000 1,25,000 1,00,000 38,30,000 38,30,000 Rs. 10,00,000 Goodwill Land and buildings PlantandMachinery EquitySharesin ALtd. PreferenceSharesinBLtd. SecuritiesPremiumA/c DebenturesinCLtd SharesinPLtd. CapitalinZ&Co. CurrentAssets Assets Rs. 1,00,000 10,50,000 20,25,000 1,25,000 50,000 1,50,000 1,00,000 2,25,000 1,00,000 55,000
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Thefollowingistheadditionalinformation:
1. Theequitysharecapital,3,000shareshavebeenissuedasrightssharesand2,000sharesas bonusshares. 2. BLtd.issubsidiaryofXYZLtd.with90%shareholding,whereasALtd.iswhollyowned subsidiaryof
XYZLtd.
3. Z &Co.isa partnershipfirm.
Thedirectorsseekadviseastowhetherthefollowingadditionalinvestmentscanbemadeby decisiontakenina BoardMeeting:
1. LoantoALtd: 2. Debenturesin BLtd. 3. Purchaseof sharesof ShreeLtd.intheopenmarket
StateReasons. Ans. Particulars
Rs. 10,00,000 Rs2,25,000 Rs.95,000
1. PaidUpCapital(a)EquityShareCapital 2. FreeReserves:
(b)PreferenceShareCapital (a)SecuritiesPremium (b)GeneralReserve (c)Profit&LossA/c (d)DividendEqualisationReserve
Rs. 9,90,000 1,50,000 1,50,000 5,00,000 2,20,000 60,000
Rs. 11,40,000
9,30,000
3. MaximumAmount u/s 372A without Shareholders'
Approval=Higherof (a)60%ofPaidUpCap.&FreeReserves [60%of(11,40,000+9,30,000)] (b)100%ofFreeReserves 12,42,000 9,30,000 50,000 1,00,000 2,25,000 without
12,42,000
4. Investmentsalreadymade
(a)PreferenceSharesinBLtd;(b)D ebenturesinCLtd. (c)SharesinPLtd. 5. Further amount that can be invested Shareholders'Approval=(3)-(4) 6. Proposed Investments: (a)DebenturesinBLtd. (b)SharesinShreeLtd. Conclusion: 1. Sincethe additionalproposedinvestmentis withinthe resolutionat aBoardmeetingandobtainingtheconsentof proposedinvestment.Specialresolutionis notnecessary.
3,75,000 8,67,000
2,25,000 95,000
3,20,000
limit,theDirectorsmay,by passinga alltheDirectorspresent, approvethe
2.
PriorapprovaloftheFinancial Institution, TICCisnotrequiredassuch,sincetheproposed investments islessthan60%paidupcapitalandfreereservesandifthereisnodefaultin repaymentofloaninstallmentsorinterestthereonas pertermsandconditionsof suchloan.
Note: SinceALtd.isawholly-ownedsubsidiary,existinginvestmentisEquitySharesand proposedloanis excludedinthe abovecalculationofceilinglimit u/s 372A. P.Q.6.ABCEngineering Limitedproposes toinvestRs.20lakhsintheequitysharesofPQRTrading Limited.Theproposedinvestmenttogetherwiththeinvestmentsinsecuritiesofcompaniesandloansto bodycorporatealreadymadeexceed60percentofthepaid-upsharecapitalandalso 100offreereserves ofthe company.ThecompanyhastakentermloansfromIDBI.Explaintheprocedure tobefollowedby ABCEngineeringLimitedtogiveeffecttotheproposedinvestment. [CA(Final,May2004]
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Ans.IntercorporateloansandinvestmentsaregovernedbytheprovisionsofSec.372A.Inthe presentcasetheproposed investmentofRs.20lakhsintheequitysharesofPQRTradingLimited togetherwiththeinvestments insecuritiesofcompaniesandloanstobodycorporatealreadymade exceedtheCeilinglimit,i.e.,60percentofthepaid-up sharecapital or100percentoffreereserves, whicheverishigher.Therefore,aspecialresolutionisrequired fortheproposedinvestment.The companyshalladoptthefollowing procedureformakinginvestmentsinPQRTrading Limited: 1. Unanimousapprovalof theBoardshallbeobtainedbypassinga resolutionat a Boardmeeting. 2. A specialresolutionshallbepassedinthegenera!meeting. a. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompanyto whichloanis proposedtobegiven,specificsourceof fundingandotherrelevantdetails. b. Thecompanyshallfileacopyofspecialresolutionwiththeregistrarwithin30daysof passingthespecialresolution. c. Ifthecompanyisalisted company,itshallpasstheresolutionbypostalballotasprescribed undersection192A. 3. Thecompanyshallobtainthepriorapproval ofIDBI,thePublicFinancialinstitutionfromwhom it hastakena termloan. 4. Thecompanycanmakesuchinvestmentsonlyifnodefaultin respectof depositsissubsisting. 5. Theprescribedparticularsshallbeenteredin theregistermaintainedunderse372A(5). P.Q.7.M/s.ShardaFertilizersLtd.proposestoacquireequitysharesof ABC Ltd. worthRs.19lakhson thebasisofthefollowinginformationadviseShardaFertilizersLtd.abouttherequirements tobe compliedwithunderCompaniesAct,1956fortheproposedinvestmentinABCLtd.: AuthorisedShareCapital Issuedsubscribedandpaid-upcapital FreeReserves Rs.50,00,000 Rs.25,00,000 Rs. 5,00,000
(CA(Final.Nov. 2002 (NewCourse)] Ans.Intercorporateloansandinvestmentsaregovernedbytheprovisionsofsection372A Firstdetermine whetheraspecialresolutionis requiredformaking freshinvestments.Thiscan bedeterminedas follows: Paidupcapitalofthecompany(A) Rs.25,00,000 Freereserves(B) Rs.5,00,000 Aggregateofpaid up capitaland free reserves(C) Rs.30,00,000 60%ofaggregateofpaidupcapitalandfreereserves(D) Rs.18,00,000 Higherof (B)or(D), i.e., theceiling limitforintercorporateloans, Investmentsetc.withoutrequiringaspecialresolution Rs.18,00,000 ProposedinvestmentinequitysharesofABCLimited Rs.19,00,000 Sincetheproposedinvestmentexceedstheceilinglimit,aspecial resolutionisrequired. ThecompanyshalladoptthefollowingprocedureformakinginvestmentsinABCLtd. 1. Unanimousapproval of the Board shall be obtained by passing a resolution at a Boardmeeting. 2. Aspecialresolutionshallbepassedinthegeneralmeeting. a. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompanyto whichloanis proposedtobegiven,specificsourceof fundingandotherrelevantdetails. b. Thecompanyshallfileacopyofspecialresolutionwiththeregistrarwithin30daysof passingthespecialresolution. c. Ifthecompanyisalisted company,itshallpasstheresolutionbypostalballotasprescribed undersection192A. 3. ThecompanyshallobtainthepriorapprovalofthePublicFinancialInstitution,ifany,from whomit hastakena termloan. 4. ThecompanycanmakesuchinvestmentsonlyifnodefaultinrespectofPublicdepositsis subsisting. 5. Theprescribedparticularsshallbeenteredin theregistermaintainedunderSec.372A(5)
TheEnd
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doc_150539511.docx
Latin corporatus, past participle of corporare (“to make into a body”), which in turn was formed from corpus (“body”). See also corpse.
2.INTERCORPORATELOANS ANDINVESTMENTS
NO. QUESTION SECTION 372A 372A(8) 372A(5)&(6) 372A(9)&(10) ABC PAGE
1. 2. 3. 4.
Requirementsformakingintercorporate loans&investments. Non-applicabilityof Sec.372A. Register of intercorporateloans and investments. Penaltyforcontravention of Sec.372A.
Q.NO.1.WHAT CONDITIONSHAVE BEEN IMPOSEDBYTHE COMPANIES ACT RELATING TO INTERCORPORATELOANS AND INVESTMENTS?(SEC.372A) ProvisionsregardingintercorporateloansandinvestmentswereearliercontainedinSec?s.370 and372.TheseprovisionshavebeenconsiderablymodifiedbyinsertionofSec.372A,w.e.f. 31.10.98. Sec?s.370and372have beenmadenon-operationalbyinsertionofSec.372A.
A.ScopeofSec.372A:
Sec.372A regulates thefollowing transactions:
1. Makinganyloan to anybodycorporate. 2. Acquiringthesecuritiesof anyotherbodycorporate. 3. Givinganyguaranteeorprovidinganysecurity to:
a. Apersonwhogives a loan to anybodycorporate; or
b. Abodycorporatewhichgives a loanto anyotherperson.
B.Requirementsformakingloan,investment,guaranteeorsecurity:
1. ApprovaloftheBoard:Followingpointsmay benotedin thisregard: a. Approvalinallcases:ApprovaloftheBoardisrequiredinallcasesirrespectiveof thequantum of loan, investment, guarantee, or security.
b. Prior approval:
Approval of Board is to be obtained prior to making of loan, investment, guarantee,orsecurity. ResolutionpassedataBoardmeeting:TheapprovalofBoardshall passingaresolution at aBoardmeetingonly.Circularresolution resolution of committeeof directors isnotsufficient. beobtainedby underSec.289ora
c.
d. Powerto make intercorporateloans
andinvestmentscannot bedelegated:It must beensuredthat delegationof powerunderSec.292(1)(d)or292(1)(e) doesnot resultinacontraventionofSec.372A. Powertomakeintercorporateloansand investmentscannotbedelegated byapubliccompany.
e. Unanimous approval: AllthedirectorspresentattheBoardmeetingmustvotein favourof theresolution. f. Nospecificnotice: thedirectors. UnderSec.372A,thereisnorequirementofgivingspecificnotice to
2. Approvalbyspecialresolution: a. „Ceilinglimit'. Theceilinglimitonmakingloan,investment,guarantee,orsecurity is higher of the following: i. 60% of theaggregateofpaid-up share capitaland free reserves ofthecompany. ii. 100% offree reserves ofthe company. Paid up capital shall include paid up equity share capital as well as paid up
_2.1
preference share capital. b. Whereceiling limit isnotexceeded:Wheretheceilinglimit specifiedaboveisnot exceeded, nospecialresolution isrequired. c. Wherethe ceiling limit is exceeded:Wheretheaggregateofloan,investment, guarantee,orsecurityalready madetogether withloan,investment,guarantee,or securityproposedto bemadeexceedstheceilinglimit,previousauthorisationbya specialresolution isrequired. Timeofpassingspecialresolution:IflimitunderSec.372Aisexceeded,specialresolution isrequiredpriortomakinganyintercorporateloan,investment,guaranteeorsecurity. i. Thespecialresolutionshallbepassedinthegeneralmeeting(whetherannual general meetingorextraordinary general meeting).
d.
e. Mannerofpassingspecialresolution:
ii. However,thespecialresolutionshallbepassedbypostalballot,ifthefollowing2 conditionsare satisfied: Thecompanyis a listedcompany. The proposedbusiness relates to making of any intercorporate loan, guarantee, orsecurity. Itisevidentthatspecialresolutionshallbepassedingeneral meeting(andnot ballot)iftheproposedbusinessrelatestomakingofanyintercorporate (irrespective of thefact thatcompany isa listed companyornot). f. by postal investment
Disclosure requirementsin notice of special resolution:Thenoticeofspecial resolution muststate clearly thefollowingparticulars: i. Thespecificlimits ii. Theparticularsofotherbodycorporateinwhichinvestmentisproposedtobe madeorloan,guarantee, or securityisproposedto be given. iii.Purposeofmakingloan, investment, guarantee, or security. iv.Specificsources of funding. v. Otherrelevantdetails.
g.
Noblanket permissionto be given by the shareholders: Thenoticemustalso specifythespecificsecuritiesinwhich theinvestmentsareproposedto bemade.A blanketoren-blockapprovalbytheshareholdersempoweringtheBoardtomake loans,investments,guarantee,orsecurity upto a certain limit willnot beadequate complianceof theprovisions(except inthecaseof guaranteewheretheresolution may indicate an amountonannualbasis)[DepartmentCircularNo.8/99,dated4.6.1999].
3.
ApprovalofPublicFinancialInstitution:TheCompanyshallobtainthepriorapprovalofthe PublicFinancialInstitutionfromwhichithastakenatermloan.Thepriorapprovalisrequired eveniftheloanagreementdoesnotspecifyanysuchcondition.Theexpression'PublicFinancial Institution'hasbeendefinedunderSec.4AandincludesICICI,IFCI,IDBI,LICandUTI. Nodefaultinrespect ofpublicdeposits issubsisting.A companywhich has defaulted incompliancewithSec. 58A(relatingto pubicdeposits)cannotmakeanyloan, investment,guarantee, orsecurity,untilsuchdefaultissubsisting.Assuch,wherea companyfailsto repaypublicdepositsorinterestthereon,ontheduedate,itmaymake loan, investment, guarantee, securityonlyafterthe defaulthasbeen madegood. Minimum rateofinterest:Therateofinterestchargeableonanyintercorporateloan shallnotbelessthantheprevailingbankrate.„Bankrate' meanstherateat whichRBI lends moneytocommercialbanks.
4.
5.
C.Relaxationsinconditions:
1. Nospecialresolutionforguarantee:TheBoard maygiveguaranteeinexcessoftheceiling
_2.2
limitwithoutpassingaspecialresolutionifthefollowingthreeconditionsaresatisfied: a. A unanimous resolution ispassed in a Board meeting forgivingguarantee. b. Thereexistexceptionalcircumstanceswhichpreventthecompanyfrompassinga specialresolution. c. Theresolution of theBoardisconfirmedwithin 12months: i. in thegeneralmeeting of thecompany; or ii. intheannual generalmeeting. HeldimmediatelyafterpassingoftheBoard's resolution;whichever isearlier.
2. No approvalof Public Financial Institution:NopriorapprovalofPublicFinancial Institution isrequired, if thefollowingtwoconditionsare satisfied:
a. Theaggregateofloans,investments,guarantee,orsecurityalreadymadetogether withloan,investment,guarantee,orsecurityproposedtobemadedoesnotexceed 60% of theaggregateofpaidupshare capitaland free reserves.
b. ThereisnodefaultinrepaymentofloaninstallmentsorinteresttoPublicFinancial Institution.
Refertopractical questionsfromExamination. P1:Listed Companymakingloansinexcessoftheceilings. P2:Givinga loan to apubliccompanyinwhichto Directorshold30%ShareCapital. P3:Legalrequirementsfor givingguaranteeandprovidingsecurity. P4: Whetherproposed loan and investments ispermissiblewithoutpassingspecialresolution. P5:Makingloansandinvestments. P6&P7:Investmentexceedingtheceiling. Q.NO.2.WHATARETHE TRANSACTIONSTOWHICHSEC.372ADOES NOT APPLY?SEC.372A(8) Transactionsexcluded: Sec.372A isnotapplicableto: 1. Loan/Guarantee/Security /Investmentmade/given by: a. A BankingCompany, or b. AnInsuranceCompany, or c. AHousing Finance Company, or d. ACompanyestablishedwiththeobjectoffinancingindustrialenterprisesorproviding infrastructural facilities, e. ACompanywhoseprincipalbusinessistheacquisitionofshares,stock,debenturesor othersecurities, f. APrivateCompany,unless it isa Subsidiary ofa PublicCompany. 2. Investmentmadein sharesallottedu/s81(1)(a), i.e. RightsShares, 3. Loanmadebya HoldingCompanyto itswholly– ownedSubsidiary, 4. Guaranteegiven or securityprovidedbya HoldingCompany, inrespect of loan madeto its wholly– ownedSubsidiary,or
5. AcquisitionbyaHoldingCompanybywayofsubscription,purchasesorotherwise,the
In theordinarycourseof its business.
securitiesofitswholly– owned Subsidiary.
Q.NO.3. WRITESHORTNOTES ONMAINTENANCE OF REGISTER INRESPECT OF INTERCORPORATELOANS AND INVESTMENTSU/S372A?(SEC.372A(5)&(6))
_2.3
1. Contents: Every Companyshall keepaRegister showingthefollowingparticularsin respect ofeveryinvestmentor loanmade,guaranteegivenorsecurityprovidedbyitinrelationto BodyCorporate:
a. Nameof theBodyCorporate. b. Amount, termsandpurpose of theinvestment/ loan / security/guarantee. c. Dateonwhich the investment/ loan hasbeenmade, and d. Dateonwhichtheguaranteehasbeen givenorsecurityhasbeen providedinconnection with a
loan.
2.
Date-wise: Theparticularsofinvestment,loan,guaranteeorsecurityshouldbeentered chronologicallyin theRegister.
3. Time Limit: The particulars should be entered within 7 days of the making of the investment orloan, orthegiving oftheguarantee ortheprovision ofsecurity. 4. Place:The Registershould bekeptat theRegister Officeof theCompany. 5. RightsofMembers:TheMembersof theCompanyhavethe right to:
a. Inspect theRegistermaintained at the Registered Office. b. TakeextractsandcopiesfromtheRegister. 6.
Inthesamemanneras RegisterofMembers.
Consequences ofdefault: TheCompanyandeveryOfficerindefaultshallbepunishable withfineuptoRs.5,000andwithafurtherfineuptoRs.500for everydayafterthefirst day duringwhich thedefault continues. CONSEQUENCES OF NON-COMPLIANCE WITH SEC.372A (SEC.372A(9)&(10))
Q.NO.4. WHAT ARE THE REQUIREMENTS? 1.
TheCompanyand everyOfficerindefault shallbepunishablewithimprisonmentupto2 years,orwithfineuptoRs.50,000.Whererepaymentsofloanshavebeen madeinfull, imprisonmentshallnotbeimposed,andwherepartpaymentsaremade,imprisonment shall beproportionately reduced. Allpersonswhoareknowinglypartiestoanycontraventionshallbeliablejointlyand severallytotheCompanyfor: a. Repaymentof theloan,or b. MakinggoodthesumwhichtheCompanymayhavebeencalledupontopayonaccount of theguarantee givenorthesecurities providedbysuchCompany.
2.
3. Transaction inviolation of Sec.372 is void
and ineffective. A transactionwhich is forbidden inpublicinterestcannotbe madelawfulbypayingapenaltyforit.
PRACTICAL QUESTIONS
P.Q.1.TheBoardofdirectorsofM/sGreenfield Projects Limited,acompanywhosesharesareonthe DelhiStockExchangeproposes togiveloanstoasistercompanyinexcessoftheprescribedunder section372A(1)oftheCompaniesAct,1956.Thenextannualgeneralmeetingthecompanyis dueonly aftersixmonths.SincetheBoardisanxioustocompletetheformalitiesquicklywithoutwaitingforthe dayofthenextannual general meeting,advisetheBoardaboutthestepstobetakentocomply with thelegalrequirementsundertheCompaniesAct,1956. [CA(Final),May2002] Ans.Followingrequirementsshallbecompliedwithiftheceilinglimitprescribedundersection 372A isexceeded; 1. UnanimousapprovaloftheBoardshallbeobtainedbypassingaresolutionataBoardmeeting. 2. Aspecialresolutionshallbepassedinageneralmeeting.Thereisnorequirementthatthespecial resolutionshallbepassedonlyatanannualgeneralmFollowingpointsmustbenoted: a. Thepostalballotismandatoryinthecaseofalistedcompanyifthelimitprescribed
_2.4
under Sec.372A(1) is exceeded [Sec.192Aread with Rule 4 of Companies (Passing of ResolutionbyPostalBallot)Rules,2001). b. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompany towhichloanistobegiven,specificsourceoffunding andotherrelevantdetails.
c. Thecompanyshallfileacopyofthespecial resolution withtheregistrarwithin30daysof passingthe specialresolution. 3. Therateof interestchargeableon theloanshallnotbelessthantheprevailingbankrate. 4. ThecompanyshallobtainthepriorapprovalofthePublicFinancialInstitution fromwhomit hastaken atermloan. 5. Thecompanyshallensurethatnodefaultinrespectof Sec.58A(publicdepositsissubsisting. Theprescribed particularsshallbeentered intheregister maintainedunderSec.372A(5). P.Q.2.ABCForgings Limitedproposes tomakealoanofRs.5lakhstoPQRLimited,aCompany in whichtwodirectorsofABCForgings Limitedhold30percentofthetotalequitysharecapital.The proposedloantogetherwiththeintercorporateloansandinvestmentsalreadymadedonotexceed 60percentofpaid-upsharecapitaland100percentoffreereserves ofABCForgings Limited.Examinetheaboveproposalwithreferencetotheprovisionsofsection372AoftheCompaniesAct 1956.Whethertheprovisionsof section295containingthemarginalnotesof 'Loansto Director,etc.' wouldalsobeapplicablein thiscase? [CA(Final),Nov.2003] (OR) DEPLimitedhavingsubscribedsharecapitalofRs.5croresandfreereservesof Rs.3croreshas not sofargivenanyloanorguaranteetobodycorporates.Examinewithreferencetotheprovisionsof theCompanies Act,1956thelegalrequirements tobecomplied withbythecompanyforgrantinga loanofRs.10lakhstoMNLimited inwhich30%oftheequitysharesisheldbyoneofthedirectors of DEPLimited. [CA(Final,May,1998] Ans.AsperSec.295,apubliccompanyshallnot,directlyorindirectly, make anyloantoadirectoror anyotherpersonspecifiedunderSec.295,unless itobtainspreviousapprovaloftheCentral Government.`Abodycorporateatageneralmeetingofwhich25%ormorevotingpowerisexercisedbya directorofthecompany' isalsocoveredunderSec.295.Moreover,whereacompany makesaloantoa corporate,itshallcomplywiththeprovisionsofSec.372A. Thefollowinglegalrequirementsmustbecompliedwithinthepresentcase: 1. TheBoardofABCForgingsLimitedshallconsiderthecontractrelating togiveloantoPQR Limited.SincetwodirectorsofABCForgingsLimited areinterested theyshalldisclosetheir interest,shall notbecountedinquorum,andshall notvoteSec? s.299 and300).Necessary entrieswillbemade intheregisterofcontracts(Sec.301). ABCForgingsLimitedshallmakeanapplicationtotheCentralGovernmentforapproval undersection295.OnlyonreceiptoftheapprovaloftheCentralGovernment, ABCForgings Limitedwillmake aloantoPQRLimited(Sec. 295]
2.
TheFollowingrequirementsof Sec.372Ashallalsobefulfilled: a. b. AresolutionshallbepassedataBoardmeeting ofalltheDirectorspresentmeeting. ofABCForgingsLimitedwiththeconsent
ApprovalofPublicFinancialInstitutionshallbeobtained.However;ifthereisnodefault inrepaymentofprincipalorinterest,theapprovalofPublicFinancialInstitution isnot required(sincetheceilinglimitof60%isnotexceeded). c. ThecompanyshallensurethatnodefaultofSec.58A(relatingtopublicdeposits)issubsisting. Since,theceilinglimitspecifiedunderSec.372A(60%ofaggregate freereservesor100%offreereserves,whicheverishigher}is not resolutionisrequired. ofpaidupcapita!and exceeded,nospecial
d.
P.Q.3. Premier Housing Finance Company Limited is prepared to give housing loans to the employeesofSupremeChemicals Limitedsubjecttothecondition thattheloansareguaranteed by SupremeChemicalsLimited.SupremeChemicalsLimitedisnotalistedcompanyandthecompany
_2.5
willbeexceedingthelimitsprescribedunder theCompaniesAct,1956byprovidingsuchguarantee. Thecompanydesirestogivetheguarantee earlyaspartofemployees' welfaremeasurewithoutfor thenextannualgeneralmeeting,whichisdueonlyaftereightmonths.Advisethecompanyabout thelegalrequirements undertheCompanies Act,1956togiveeffecttotheaboveproposal.What wouldbeyouradvice,ifthecompanywasrequiredtoprovidesecurityinsteadof guarantee? Ans:Refer QuestionNo.1Aboveforexceptionsfromspecialresolutionof shareholders. 1. SincetheAGMisdueto beheldin8months,the Boardmaygiveguaranteewithoutbeing previouslyauthorizedbyspecialresolutionsubjecttofulfillmentof 3conditionsstated. 2. Theaboveexceptionsisonlyfor “guarantee”andnotfor“security”.So, thecompanyhasto obtainedpriorapprovalof theshareholdersforproviding“security”. P.Q.4.FollowingdataisavailablefromtheauditedBalanceSheetasat31-03-2008ofASKLtd. Liabilities SHARECAPITAL: Equitysharecapital (5,00,000 shares of Rs.10 each fullypaidupincash) Less:Callsin Arrears Preferencesharecapital Shareapplicationmoney RESERVESANDSURPLUS: Securitiespremium Capitalredemptionreserve Fixed assetsrevaluationreserve Sinkingfundreserve GeneralReserve ProfitandLossAccount DividendEqualisationReserve SECUREDLOANS: CashCredit facility fromBank Fixed Deposits (from general publicmaturingafter31-12-2008 CURRENTLIABILITIES &PROVISIONS: Currentliabilities ProvisionforTaxation Total Rs. Assets FIXEDASSETS: Goodwill LandandBuildingsPlantan dMachineryFurniture andotherassets INVESTMENTS: Equity sharesin wholly-owned subsidiaryKMCLtd. Equitysharesrepresenting90% of sharecapitalof MTCLtd. Debenturesin SKTLtd. PreferencesharesinHUTLtd. Capital account balance in partnershipfirm–BKP&Co. CURRENTASSETS: StockandBookDebts CashandBankBalances LOANSANDADVANCES: Intercorporatedeposits BusinessAdvances Rs. 10,00,000 75,00,000 1,50,00,000 2,50,000
50,00,000 50,000 49,50,000 15,00,000 10,00,000 15,00,000 12,00,000 10,50,000 11,00,000 40,00,000 22,00,000 6,00,000 1,00,00,000 20,00,000
12,50,000 4,50,000 12,00,000 5,00,000 8,00,000 14,00,000 1,00,000 25,00,000 14,00,000
12,50,000 10,00,000 3,33,50,000 Total 3,33,50,000
TheDirectorsof theCompanywantto makefurtherinvestmentsstatedbelowby takingadecisionin themeetingof theBoardof Directorwithoutseekingapprovalof theShareholders. a)LoantoKMCLtd. Rs.25,00,000 b)Loanto MTCLtd. Rs.15,00,000 c) Purchaseof furtherDebenturesin SKTLtd. Rs.8,00,000 d)Purchaseof sharesfromtheopenmarketin GlaxoLtd. Rs.15,00,000 StatewhethertheDirectors candosoandmention therelevant calculations. Ans.Notes /Observations: 1. ShareApplicationMoneyisnotincludible inFreeReserves.[Sec.372A] 2. CapitalRedemptionReserve,FixedAssetRevaluationReserveandSinkingFundReservearenot availablefordistributionofdividend,andhencenot"FreeReserves". 3. DividendEqualisationReserveisheldfor distributionasdividend,andhencea"FreeReserve". 4. ItisobservedthatCompanyhasnotdefaultedu/s58AinrespectofPublicDeposits. 5. EquitySharesheldinwholly-ownedSubsidiary,andproposedloantowholly-ownedSubsidiary isoutsidethepurviewofSec.372A.
_2.6
6. InvestmentinCapitalofPartnershipFirmis not"Investment"forSec.372Apurposes. 7. Purchaseof SharesincludesPurchasefromOpenMarketalso. Particulars 1. PaidUpCapital(a)EquityShareCapital (b)PreferenceShareCapital 2. FreeReserves: (a)SecuritiesPremium (b)GeneralReserve (c)Profit&LossA/c (d)DividendEqualisationReserve 3. MaximumAmount u/s 372A without Shareholders' Approval=Higherof (a)60%ofPaidUpCap.&FreeReserves[60%of (64,50,000+ 83,00,000)] (b)100%ofFreeReserves. 4. Investments/ Loansalreadymade: (a) EquitySharesinMTCLtd. (b)DebenturesinSKTLtd. (c)PreferenceSharesinHUTLtd. (d)Inter-Corporatedeposits. Rs. 49,50,000 15,00,000 15,00,000 40,00,000 22,00,000 6,00,000 Rs. 64,50,000
83,00,000
88,50,000 83,00,000 4,50,000 12,00,000 5,00,000 25,00,000
88,50,000
46,50,000 42,00,000
5. Further amount that can be Shareholders'Approval=(3)-(4) 6. Proposed Investments/ Loans: (a)Loanto MTCLtd. (b)Debenturesin SKTLtd. (c)Sharesin GlaxoLtd.
invested
without
15,00,000 8,00,000 15,00,000
38,00,000
Conclusion: Sincetheproposed additional investmentiswithintheamountpermissibleas calculatedabove,theDirectors,bypassingaunanimousresolutioninaBoardMeeting,canmake theproposedadditionalinvestment/ loans. P.Q.5.FollowingisthelatestauditedBalanceSheetof XYZLtd. CapitalandLiabilities EquityShareCapital (10,000sharesof Rs100each) LessCallsunpaid PreferenceShareCapital Securities PremiumA/c CapitalRedemptionReserves GeneralReserveProfita ndLossA/cSinkingFu ndReserve DividendEqualisationReserve Loanfrom TICC DepositsfromS Ltd Liabilities ProvisionforTaxation 10,000 9,90,000 1,50,000 1,50,000 2,25,000 5,00,000 2,20,000 1,10,000 60,000 10,00,000 2,00,000 1,25,000 1,00,000 38,30,000 38,30,000 Rs. 10,00,000 Goodwill Land and buildings PlantandMachinery EquitySharesin ALtd. PreferenceSharesinBLtd. SecuritiesPremiumA/c DebenturesinCLtd SharesinPLtd. CapitalinZ&Co. CurrentAssets Assets Rs. 1,00,000 10,50,000 20,25,000 1,25,000 50,000 1,50,000 1,00,000 2,25,000 1,00,000 55,000
_2.7
Thefollowingistheadditionalinformation:
1. Theequitysharecapital,3,000shareshavebeenissuedasrightssharesand2,000sharesas bonusshares. 2. BLtd.issubsidiaryofXYZLtd.with90%shareholding,whereasALtd.iswhollyowned subsidiaryof
XYZLtd.
3. Z &Co.isa partnershipfirm.
Thedirectorsseekadviseastowhetherthefollowingadditionalinvestmentscanbemadeby decisiontakenina BoardMeeting:
1. LoantoALtd: 2. Debenturesin BLtd. 3. Purchaseof sharesof ShreeLtd.intheopenmarket
StateReasons. Ans. Particulars
Rs. 10,00,000 Rs2,25,000 Rs.95,000
1. PaidUpCapital(a)EquityShareCapital 2. FreeReserves:
(b)PreferenceShareCapital (a)SecuritiesPremium (b)GeneralReserve (c)Profit&LossA/c (d)DividendEqualisationReserve
Rs. 9,90,000 1,50,000 1,50,000 5,00,000 2,20,000 60,000
Rs. 11,40,000
9,30,000
3. MaximumAmount u/s 372A without Shareholders'
Approval=Higherof (a)60%ofPaidUpCap.&FreeReserves [60%of(11,40,000+9,30,000)] (b)100%ofFreeReserves 12,42,000 9,30,000 50,000 1,00,000 2,25,000 without
12,42,000
4. Investmentsalreadymade
(a)PreferenceSharesinBLtd;(b)D ebenturesinCLtd. (c)SharesinPLtd. 5. Further amount that can be invested Shareholders'Approval=(3)-(4) 6. Proposed Investments: (a)DebenturesinBLtd. (b)SharesinShreeLtd. Conclusion: 1. Sincethe additionalproposedinvestmentis withinthe resolutionat aBoardmeetingandobtainingtheconsentof proposedinvestment.Specialresolutionis notnecessary.
3,75,000 8,67,000
2,25,000 95,000
3,20,000
limit,theDirectorsmay,by passinga alltheDirectorspresent, approvethe
2.
PriorapprovaloftheFinancial Institution, TICCisnotrequiredassuch,sincetheproposed investments islessthan60%paidupcapitalandfreereservesandifthereisnodefaultin repaymentofloaninstallmentsorinterestthereonas pertermsandconditionsof suchloan.
Note: SinceALtd.isawholly-ownedsubsidiary,existinginvestmentisEquitySharesand proposedloanis excludedinthe abovecalculationofceilinglimit u/s 372A. P.Q.6.ABCEngineering Limitedproposes toinvestRs.20lakhsintheequitysharesofPQRTrading Limited.Theproposedinvestmenttogetherwiththeinvestmentsinsecuritiesofcompaniesandloansto bodycorporatealreadymadeexceed60percentofthepaid-upsharecapitalandalso 100offreereserves ofthe company.ThecompanyhastakentermloansfromIDBI.Explaintheprocedure tobefollowedby ABCEngineeringLimitedtogiveeffecttotheproposedinvestment. [CA(Final,May2004]
_2.8
Ans.IntercorporateloansandinvestmentsaregovernedbytheprovisionsofSec.372A.Inthe presentcasetheproposed investmentofRs.20lakhsintheequitysharesofPQRTradingLimited togetherwiththeinvestments insecuritiesofcompaniesandloanstobodycorporatealreadymade exceedtheCeilinglimit,i.e.,60percentofthepaid-up sharecapital or100percentoffreereserves, whicheverishigher.Therefore,aspecialresolutionisrequired fortheproposedinvestment.The companyshalladoptthefollowing procedureformakinginvestmentsinPQRTrading Limited: 1. Unanimousapprovalof theBoardshallbeobtainedbypassinga resolutionat a Boardmeeting. 2. A specialresolutionshallbepassedinthegenera!meeting. a. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompanyto whichloanis proposedtobegiven,specificsourceof fundingandotherrelevantdetails. b. Thecompanyshallfileacopyofspecialresolutionwiththeregistrarwithin30daysof passingthespecialresolution. c. Ifthecompanyisalisted company,itshallpasstheresolutionbypostalballotasprescribed undersection192A. 3. Thecompanyshallobtainthepriorapproval ofIDBI,thePublicFinancialinstitutionfromwhom it hastakena termloan. 4. Thecompanycanmakesuchinvestmentsonlyifnodefaultin respectof depositsissubsisting. 5. Theprescribedparticularsshallbeenteredin theregistermaintainedunderse372A(5). P.Q.7.M/s.ShardaFertilizersLtd.proposestoacquireequitysharesof ABC Ltd. worthRs.19lakhson thebasisofthefollowinginformationadviseShardaFertilizersLtd.abouttherequirements tobe compliedwithunderCompaniesAct,1956fortheproposedinvestmentinABCLtd.: AuthorisedShareCapital Issuedsubscribedandpaid-upcapital FreeReserves Rs.50,00,000 Rs.25,00,000 Rs. 5,00,000
(CA(Final.Nov. 2002 (NewCourse)] Ans.Intercorporateloansandinvestmentsaregovernedbytheprovisionsofsection372A Firstdetermine whetheraspecialresolutionis requiredformaking freshinvestments.Thiscan bedeterminedas follows: Paidupcapitalofthecompany(A) Rs.25,00,000 Freereserves(B) Rs.5,00,000 Aggregateofpaid up capitaland free reserves(C) Rs.30,00,000 60%ofaggregateofpaidupcapitalandfreereserves(D) Rs.18,00,000 Higherof (B)or(D), i.e., theceiling limitforintercorporateloans, Investmentsetc.withoutrequiringaspecialresolution Rs.18,00,000 ProposedinvestmentinequitysharesofABCLimited Rs.19,00,000 Sincetheproposedinvestmentexceedstheceilinglimit,aspecial resolutionisrequired. ThecompanyshalladoptthefollowingprocedureformakinginvestmentsinABCLtd. 1. Unanimousapproval of the Board shall be obtained by passing a resolution at a Boardmeeting. 2. Aspecialresolutionshallbepassedinthegeneralmeeting. a. Thenoticeofspecialresolutionshallstatethespecificlimits,particularsofthecompanyto whichloanis proposedtobegiven,specificsourceof fundingandotherrelevantdetails. b. Thecompanyshallfileacopyofspecialresolutionwiththeregistrarwithin30daysof passingthespecialresolution. c. Ifthecompanyisalisted company,itshallpasstheresolutionbypostalballotasprescribed undersection192A. 3. ThecompanyshallobtainthepriorapprovalofthePublicFinancialInstitution,ifany,from whomit hastakena termloan. 4. ThecompanycanmakesuchinvestmentsonlyifnodefaultinrespectofPublicdepositsis subsisting. 5. Theprescribedparticularsshallbeenteredin theregistermaintainedunderSec.372A(5)
TheEnd
_2.9
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