3.7       Query

Interpretation of Section 372(5) of the Companies

Act, 1956

Sub-section 5 of Section 372 of the Companies Act, 1956 as amended in 1960 requires that no investment shall be made by the Board in the shares of another  body corporate unless it is sanctioned by a resolution passed at a meeting of the Board. Kindly let me know your view point in respect of Companies whose business is to purchase and sell shares in ‘BADLA’. According to the Stock Exchange Rules, the shares purchased or sold in  ‘BADLA” are supposed to be taken delivery on each delivery date although the transaction is actually settled simply by paying the difference only. If such a resolution has to be passed then please let me know the procedure which should be adopted and on what lines the resolution should be passed.

                                                            Opinion                                                     August 3,1962

 A transaction by way of ‘BADLA’ is fundamentally in the nature of a lending operation, under which one party lends money to another on the security of the shares. In view of this, the Committee is of the view that the provisions of Section 372 of the Companies Act, 1956, are not applicable to such transactions. The form in which the transaction is carried out must be distinguished from its substance. It must be remembered particularly that when a ‘BADLA’ is carried out, sale and purchase contracts are entered into  simultaneously, and in substance this is purely a lending operation according to commercial usage and practice.

 The provisions of the Companies Act, 1956, applicable to loans given by companies to managing agents, directors, etc., should no doubt be observed.

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