3.12     Query

Interpretation of Section 293 (1)(d) of the

Companies Act, 1956.

 Section 293 (1)(d) of the Companies Act provides that the Board of Directors of a Public Company or a Private Company which is a subsidiary of a Public Company shall not, except with the consent of the Company in General Meeting, borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the Company (apart from the temporary loans obtained from the Company’s Bankers in the ordinary course of business) will exceed the aggregate of the paid-up capital of the Company and its free reserves, that is to say reserves not set apart for any specific purpose. The explanation to the said section states that every resolution passed by the Company in General Meeting in relation to the exercise of the power referred to in Clause (d) shall specify the total amount up to which moneys may be borrowed by the Board of Directors under Clause (d). Explanation II specifies the meaning of the term “temporary loans”. Companies were passing the resolutions providing that the borrowings shall not exceed the paid-up capital of the Company and its free reserves by more than Rs.------lacs. A doubt was expressed regarding the validity of such resolution as the said resolution fixes the maximum amount up to which the Board of Directors can borrow moneys by reference to the paid-up capital and its free reserves. The question arises as to whether the company can pass a resolution fixing the limit, not with reference to paid up capital and reserves, but providing that the total amount which may be borrowed by the Board of Directors shall not exceed Rs.------- lacs at any time besides temporary loans and cash credit advances obtained from the Company’s Bankers and security deposits and service advance received from the Electricity consumers in the ordinary course of business. Can it be said in the case of a resolution as stated above, that the resolution fixes the total amount up to which moneys may be borrowed by the Board of Directors?

                                       Opinion                                                                         March 18, 1966

The Committee was of the opinion that the resolution to be passed under Section 293 (1)(d) of the Companies Act, authorising the Board of Directors to borrow moneys in excess of paid-up capital and free reserves, may either specify a maximum amount up to which borrowings may be made or alternatively specify an amount by which the borrowings could exceed the paid-up capital and free reserves. The first method is, in the Committee’s view to be preferred, as it has the advantage of being unambiguous and practical. The second procedure may involve the risk of the borrowing limit fluctuating with the paid-up capital and free reserves of the Company.

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