3.1     Query:  

Clarification regarding borrowing limit under section 293(1)(d) of the Companies Act, 1956.

1. A construction agency, being run by a public sector corporation, receives following advances in terms of the agreement executed with the clients:

(i) Mobilisation advance in terms of agreement against bank guarantee/indemnity bond.

                        (ii)       Machinery advance against hypothecation of equipments.

[these advances are either interest free or with interest in accordance with the terms of agreement]

                        (iii)       Advances against materials brought at site in terms of the agreement.

                                    [such advances are interest free]

                        (iv)       Deposits against works awarded to the corporation.

                                    [Deposits are interest free]

These advances are classified under the head ‘secured/unsecured loans’ in the balance sheet.

2. The querist has clarified that all these advances are adjusted from ‘on account bills’ as per the terms of agreements.

3. The querist has further stated that it also gives to its sub-contractors advances for mobilisation as well as advances against materials in terms of the agreement entered into with them.

4. The querist contemplates that such advances should not be treated as borrowings, since all these advances are in the ordinary course of the business connected with construction activities. It is a normal practice in construction field to receive mobilisation advances and advances against materials from clients and to pay to its sub-contractors. These advances being associated with the construction activities are necessary for development of corporation’s activities. Any restriction on receipt and payment of such advances in the view of the querist will restrict corporation’s business.

5. The querist seeks the opinion of the Committee as to whether the abovesaid advances granted to the corporation, in the ordinary course of business, are to be termed as borrowings u/s 293(1)(d) of the Companies Act, 1956.

                                                                Opinion                                March 31, 1992

1. The Committee notes section 293(1)(d) of the Companies Act, 1956, which states as follows:

“The board of directors of a public company or of a private company which is a subsidiary of a public company, shall not, except, with the consent of such public company or subsidiary in general meeting borrow moneys after the commencement of this Act, where the money already borrowed by the company (apart from temporary loans obtained from the company bankers in the ordinary course of business) will exceed the aggregate of the paid up capital of the company and its free reserves, i.e., reserves not set apart for any specific purpose.”

2. The Committee further notes that the term ‘borrow money’ has not been defined in the Companies Act, 1956. Thus, it has to be interpreted in accordance with its general commercial usage. In common parlance, the term borrowing means to receive from another, sum of money, upon agreement, express or implied, to repay it with or without interest. Hence, under the facts and circumstances of the query, the bona fide advances received by the company from its customers against sales consideration to be received, which the company has agreed to adjust against the bills to be raised for performance of work in terms of agreement, cannot be construed as borrowing of money.

3. The Committee is, therefore, of the opinion that under the facts and circumstances of the query, bona fide advances received by the company in its ordinary course of business cannot be termed as borrowing of money under section 293 (1)(d) of the Companies Act, 1956.

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