Expert Advisory Committee

2.2 Query:

Applicability of section 292(1)(d) of the Companies Act, 1956.

1. A government company is engaged in buying and selling of cotton, both in domestic as well as in the international market. The authorised and paid up capital of the company are Rs. 25 crores and Rs. 23 crores, respectively.

2. The cotton season is spread over between September and August, of which the peak marketing season is considered to be the four months period between December and March when the company requires funds for purchasing Kapas from the growers, processing the same into fully pressed cotton bales and thereafter selling the baled cotton to the textile industry, including the units in public and co-operative sectors in addition to State-owned textile mills. Although, it has all through been the endeavour of the company to sell against cash payment, yet it has to allow credit to some of its buyer mills, particularly to the mills in the public sector. With the manifold rise that has taken place in the level of trading activities, the company has to depend heavily on borrowings, both from banking system and from the Government, to meet its working capital requirements. Apart from borrowings from the banking system, the company has also obtained interest –bearing loans from the Government. The company, as per the querist, regularly provides for its liability toward interest due on loan amounts that are still outstanding for repayment to the Government but it has not been regular in making repayment of either the loan amounts to the Government or interest due on such loans. Total amount repaid by the company to the Government upto 31^st March, 1993 was Rs.52.01 crores. Even after adjusting the above repayments, the balance amount still due for repayment by the company to the Government as on 31^st March, 1993, work out to Rs. 167.72 crores which includes interest dues of Rs. 90.09 crores.

3. Because requirements for funds are high mainly in periods when the cotton marketing season is at its peak as aforesaid, the company generally has with it funds in excess of its requirements in lean cotton season, i.e., between June and September. Since aforesaid funds are not required before the peak procurement season starts, the company keeps the same placed with nationalised banks and/or with their subsidiaries, purely on short-term basis for periods varying between 30 and 90 days only, in order to earn some interest thereon. The querist has clarified that the deposits with the subsidiaries of the nationalised banks are of identical and same nature as deposits with the nationalised banks. (The querist has supplied some receipts of deposits with the subsidiaries of nationalised banks, for the perusal of the Committee ).

4. In this connection, the querist has pointed out that in terms of sub-clause 12 of clause 90 of the Articles of Association of the company, its functional directors are empowered to take decision, among others, about placing its funds as authorised by its Memorandum of Association. As per sub-clause 18 of the object clause of Memorandum of Association the company is authorised to invest and/or deal with monies of the company which are immediately not required in any manner, as the company may determine from time to time. (The querist has enclosed the relevant extracts of the aforesaid clause/sub-clause as contained in the Memorandum and Articles of Association of the company for the perusal of the Committee). The querist, however, feels that ‘power to invest’ is different from the power to deal with the moneys not immediately required. In the view of the querist, short term deposits with nationalised banks and their subsidiaries fall under the latter category and not under investments.

5. On the basis of the above, the querist is of the view that the amounts placed with the nationalised banks and their subsidiaries by the company in order to earn some interest under above arrangement can not reasonably be termed as ‘investment’ within the meaning of the Companies Act, 1956, as amended from time to time. Hence, it does not attract the provision contained at Section 292(1)(d) of the said Act.

6. The querist has informed that the company did not obtain separate approval from its board of directors in respect of the aforesaid placement of funds with the nationalised banks and/or with their subsidiaries, because in the view of the company’s management, it is not in the nature of an investment. However, as per the querist, the board of directors were fully aware of such placement of funds as these were separately disclosed in the annual account of the company. Also, neither the statutory auditors, nor the government auditors, have ever objected in this regard.

7. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether placement of funds with nationalised banks and/or with their subsidiaries, under the circumstances as aforesaid, is in contravention of the requirement laid down in Section 292(1)(d) of the Companies Act, 1956, where Articles of Association of the company read with its Memorandum of Association confer authority on its functional directors to take decision, among others, about placing of funds belonging to the company which are not immediately required in any manner deemed fit.

(b) Whether aforesaid placement of funds by the company with nationalised banks and/or with their subsidiaries, temporarily for periods not exceeding 90 days can be termed as ‘investment’ within the meaning of Companies Act, 1956, particularly when such temporary placement of funds can not be said to have resulted in creating any asset of the nature which will generate income to the company by way of dividend, royalty, rental or capital appreciation etc.

Opinion February 8, 1994

1. The opinion of the Committee expressed herein is restricted to the question of applicability of Section 292(1) (d) of the Companies Act, 1956, in the given circumstances. The Committee has not considered the question of compliance or otherwise, with the other provisions of the Act, e.g., section 370 or section 372.

2. The Committee notes sections 9 and 292(1) of the Companies Act, 1956, which, inter alia, read as follows:

“9. Save otherwise expressly provided in the Act-

(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and

(b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provision of this Act, become or be void, as the case may be.

292. (1) The Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board:

(a) the power to make calls on shareholders in respect of money paid on their shares;

(b) the power to issue debentures;

(d) the power to invest the funds of the company; and

(e) the power to make loans;

Provided that the Board may, by a resolution passed at a meeting, delegate to any Committee of directors, the managing director, [the managing agent, secretaries and treasures,] the manager or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e) to the extent specified in sub-sections (2) (3) and (4) respectively, on such conditions as the Board may prescribe.”

3. The Committee notes that the term ‘investment’ has not been defined under the Companies Act. Therefore, it has to be construed, for the purposes of this Act, as it is understood in the common business parlance. In this context, the Committee notes that Accounting Standard (AS) 13 on ‘Accounting for Investments’, issued by the Institute of Chartered Accountants of India, defines the term ‘investment’ as “…assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not investments.” The Committee also notes that in a decision the Bombay High Court in Re. Wamanlal vs. Scindia Steam Navigation Co., (AIR 1944 Bom. 131*) has held that words “invest” and “investment” are to be understood in the business sense of laying out money for interest or profit. The Committee is, accordingly, of the view that deposit of funds, with nationalised banks and/or their subsidiaries, in return of ‘interest’, is an ‘investment’ for the purpose of section 292(1) (d).

4. The Committee is of the view that as per the provisions of the Companies Act, 1956, the board of directors of a company can exercise the power to invest funds of the company, on behalf of the company only by means of resolutions passed at a meeting of the board. However, the board may resolve to delegate such powers to any Committee of directors or other persons as specified in the first proviso to section 292(1) of the Act, as reproduced at para 1 above. Anything provided in the articles or memorandum of the company shall be void to the extent it is repugnant to these provisions. In the view of the Committee, there could be only one exception, i.e., in case of the deposits of funds with the authorised bankers of the company, by a person duly authorised by the board in this regard, a separate resolution of the board may not be necessary every time such deposit is made, in the normal course of the business of the company.

5. On the basis of the above, and subject to para 1 above, the Committee is of the following opinion in respect of the issues raised by the querist at para 6 of the query:

(a) Yes, in the facts and circumstances of the query and notwithstanding anything contained in the articles and/or memorandum of association of the company, any investment of surplus funds with banks (other than with the authorised bankers of the company in the normal course of business of the company) and/or their subsidiaries is in contravention of section 292(1)(d) of the Companies Act, 1956.

(b) Yes, placement of surplus funds by the company in fixed deposits with banks and/or subsidiary companies to earn interest thereon is investment within the meaning of the Companies Act, 1956.

* Reported at page 899 of the Company Law by Dutta, Fifth Edition, 1992.