Query No. 51
Subject: Applicability of section 370(1B) of the Companies Act, 1956, for the purposes of MAOCARO 1988 and Schedule VI to the Act.1
1. The
Companies (Amendment) Act, 1999, added the following sub- section to section
370 and to section 372 of the principal Act.
“Nothing contained in this section shall apply to a company
on or after the commencement of the Companies (Amendment) Act, 1999.” 2. Section 370
relates to loans
etc., to companies
under the same management. Sub-section (1B) of section
370 prescribes when two bodies corporate shall be deemed to be under the same
management. 3. The
expression ‘companies under the same management’ has also been used
in section 372
of the Companies
Act, 1956. Besides,
the expression is also relevant for the following purposes: • Schedule VI
to the Act requires that debts as well as loans and advances due
from companies under
the same management within the meaning of sub-section
(1B) of section 370 should be
separately disclosed in
the balance sheet
along with the names of such companies. Further, note
(1) to Part I of Schedule VI, inter alia,
requires that in
the statement of
investments annexed to the balance sheet, the names of bodies corporate
under the same management be separately given.
• MAOCARO
requires the auditor to state,
inter alia, whether the rate
of interest and
other terms and
conditions of loans taken from or granted to companies
under the same management as
defined under sub-section
(1B) of section
370 of the Companies Act, 1956, are prima facie
prejudicial to the interests of the company.
4. As per
the querist, sections
370 and 372
of the Companies
Act,1956 have been
rendered ineffective by
the Companies (Amendment) Act, 1999. The restrictions on
inter-corporate loans and investments are now governed by section 372A which
was inserted in the principal Act by
the aforesaid Amendment
Act. Section 372A
does not contain
any separate provisions applicable
only to companies
under the same management. As per the querist,
therefore, this expression has no relevance for this section. However, since
Schedule VI and MAOCARO 1988 have not been amended, the expression continues to
remain therein.
5. While
amendment to section 370 makes it inoperative, the section is still a part of
the Act; it has not been repealed.
B. Query
6. The querist
has sought the opinion of the Expert Advisory Committee
C. Points
considered by the Committee
7. The
Committee notes that sections 370 and 372 of the Companies
8. The
Committee further notes that section 370 has not been omitted/ repealed/deleted
from the Act. It has only been rendered inoperative by virtue of insertion of
sub-section (6) to section 370. The Committee also notes that neither the
relevant clauses of the MAOCARO, nor Schedule VI to the Act have similarly been
amended, and the references therein to companies under the same management
continue to be as ‘defined under sub-section
(1B) of section
370’ and as
‘within the meaning
of sub- section (1B) of section
370’, respectively.
9. The
Committee is of the view that if the legislature had intended to render the
definition/meaning of the
term ‘companies under
the same management’ under
section 370(1B) of the Companies
Act, 1956, ineffective for
purposes other than those under section
370 of the Act, such as MAOCARO 1988,
and Schedule VI, the legislature would have specifically
repealed/omitted/deleted section 370 from the statute book
10. On the
basis of the
above, the Committee
is of the
view that the auditor should, for the purposes of
MAOCARO 1988, continue to apply the relevant audit procedures and report on
loans given to or taken from companies
under the same
management. Similarly, the
auditor should continue to
verify whether disclosures
as required under
Schedule VI regarding companies
under the same management had been made, and, if not, report appropriately in
his audit report.
11. In this
context, it may
be noted that
if the transactions
stipulated under section 370 get attracted by the requirements of
Accounting Standard
D. Opinion
12. On the
basis of the
above, the Committee
is of the
opinion that despite the
insertion of sub-section (6) to section 370 of the Companies Act, 1956,
requirements of Schedule
VI and MAOCARO
relating to companies under the
same management are still applicable. In other words, loans and advances due
from the companies under the same management within the meaning of section
370(1B) of the Companies Act, 1956, are required to be disclosed separately as
per the requirements of the Schedule VI
to the Companies
Act, 1956. Further,
the auditor should,
for the purposes of
MAOCARO 1988, continue
to apply the
relevant audit procedures and
report on loans given to or taken from companies under the same
management. In this
context, it may
be noted that if the
transactions stipulated under section 370 get attracted by the requirements
|