Query No. 30

Subject:           

Whether short-term deposits with banks constitute ‘investment’ for the purpose of

section 292(1)(d) of the Companies Act, 1956.1

A.   Facts  of  the  Case

1. Company ‘X’ is a  joint venture  company set  up  with  equal  equity contribution by the  Government  of India  (GOI) and  the  Government  of National Capital Territory of Delhi (GNCTD) to implement a project.  The proceeds of a soft loan to GOI from a foreign bank are provided as Pass Through Assistance to company ‘X’ to finance this project.

2. The equity capital of company ‘X’ has been contributed by the GOI and the GNCTD in equal proportion at the beginning of the year.  Similarly, based on the projections for the utilisation of funds made for a particular year, funds on account of soft loan are also being provided in advance by the GOI as  pass through  assistance to be  utilised in due  course.  As per the querist, in a construction organisation like company ‘X’, short-term surpluses of funds arise since there are considerable uncertainties in cash outflow to contractors due to various reasons. Under the Letter of Credit opened by company ‘X’ for payment to various contractors, debit advices emerge any time and unless funds are kept ready, penal interest is leviable. The temporary cash surpluses available with company ‘X’ are, therefore, kept in short term deposits with authorised scheduled commercial banks to generate optimum return on its surplus funds.

3. While auditing the accounts of the company for the financial year 2001- 2002, the C&AG audit team observed as follows and sought the comments of management:

“Section 292 of the Companies Act, 1956 stipulates, inter alia, that powers to invest funds are to be exercised by the Board only at a meeting.  However, as per proviso to this section, these powers can be delegated by the Board to the Managing Director (MD) subject to the condition stated in section 292(3) of the Act, that every resolution delegating the powers to invest the funds should specify the total amount upto which the funds may be invested, and the nature of investments which may be made by the delegate.

The Board of Directors of the company vide Item No 8. of their 13th meeting held on 12th January, 1998, passed the following resolution, inter alia, for delegation of powers to the MD :

“Resolved that in terms of clause 21 of Article 162 of the ‘Articles of Association’ of the company, the Managing Director be and is hereby delegated all powers as are exercisable by the Board of Directors, subject to the restrictions under Article 161 and proviso to sections 292 and 293 of the Companies Act, 1956, with further restriction that such delegation shall be subject to the approval of the Board in the following circumstances:

(a)        For any substantive change in the scope of work of the project from the DPR (Detailed Project Report);

 

(b)        For any item of expenditure where more than Rs. 10 crore is involved which is not contemplated in the DPR.”

Now since the said resolution of the Board did not specify the total amount upto which the funds may be invested, and the nature of investment which may be made by the MD, the delegation is an unrestricted one and is, thus, against the very spirit of section 292 of the Companies Act which stipulates that such powers are to be exercised by the Board only at the meeting and if delegated, should be delegated with the restraints stated in section 292(3). Thus, delegation of powers made through the above mentioned resolution conferring unrestricted and unspecified powers on the MD in regard to investment of funds is in violation of section 292 of the Companies Act, 1956”.

4. The querist has stated that the management is of the view that the sums kept in short term deposits with authorised banks in the normal course of business, do not constitute as an investment in terms of section 292 of the Companies Act, 1956. According to the querist, this opinion of the company finds favour from the opinion of the Expert Advisory Committee of the Institute of Chartered Accountants of India, published in Volume III (Ref: Company Law and Allied Matters, query 2.2 pages XIII-124 to 128).  As per the opinion of the Committee, such deposits are an exception to section 292(1)(d) of the Companies Act, 1956.

5. According to the querist, in the case of company ‘X’, the company has approached various scheduled commercial banks whose head offices/regional offices have authorised particular branches for transacting business with the company. From these authorised branches, company ‘X’ obtains quotations and the surplus funds are kept with the selected bank branches for various periods, keeping in view the cash flow projections for future months so as to obtain optimum return. Thus, the company is keeping surplus funds as short- term deposits with authorised banks in the normal course of business.  In case funds are required earlier than projected, the deposits are immediately encashed for meeting the construction project requirements.

6. As per the querist, it may also be pertinent to note that, nowadays commercial banks offer interest on current account balances maintained by corporates. There are schemes wherein surplus money in current account is automatically placed in term deposits and brought back to the current account as and when cheques are presented. These are routine transactions in the course of business.

7. The querist has also referred to a legal case under which the meaning and purport of the word ‘invest’ was a subject matter of judicial interpretation (Re: Wamanlal Chhotalal Parekh Vs. Scindia Steam Navigation Co. Ltd (1944) 14  Com Cases 69:  AIR  1994  Bom 131).   In  this case, the court observed that, “The word does not necessarily mean the conversion of money into something which must yield a return. The word ‘invest’ means the conversion of the fluid character of money by the substituted thing possessing fixity or durable character while it lasts. From this point of view, conversion of money into Government promissory notes, treasury bonds, shares, or immovable property would be investments.” According to the querist, as against this, when money is deposited with a commercial bank as a short term deposit instead of in a current account, there is a clear understanding that as and when needed, the money can be taken back by the company, albeit with some loss of interest. The money does not lose its liquid character.

8. The querist has stated that in Schedule VI to the Companies Act, 1956, the format of balance sheet has been prescribed.  On the assets side of the balance  sheet,  (1)  Investments  in  government  or  trust  securities,  (2) Investments in shares, debentures or bonds, (3) Immovable properties, (4) Investments in the capital of partnership firms, and (5) Balance of unutilised monies raised by the issue, have been shown under a separate head designated as ‘Investments’.  On the other hand, the term deposits with scheduled banks is listed under  ‘Current Assets, loans & advances’ and invariably shown under ‘Cash & Bank balances’. Considering the above, it would appear that the  short  term deposits  with commercial  banks  are  not  in  the  nature  of investments under the scheme of the Companies Act, 1956.

B .  Query

9. The querist has sought the opinion of the Expert Advisory Committee on the issue as to whether the investment of surplus funds with scheduled commercial banks is ‘investment’ for the purpose of section 292(1)(d) of the Companies Act, 1956.

C.   Points  considered  by  the  Committee

10. The Committee notes that the reference made by the querist, in paragraph 4 of the facts of the case, to an earlier opinion of the Committee relates to Volume III of the Compendium of Opinions.  However, the query no. and the page nos. mentioned by the querist within the parenthesis relate to Volume XIII. The Committee further notes that the opinion of the Committee published in Volume XIII of the Compendium of Opinions states that the short term deposits  are  investments  for  the  purposes  of  the  Companies  Act,  1956, (paragraph 5(b) of the opinion) and, thus, it does not state that such deposits are an exception to section 292(1)(d) of the Companies Act, 1956.   The Committee notes that paragraph 4 of the said opinion states that, “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 business”.  In other words, the exception is with regard to the necessity of passing a resolution in respect of each deposit in normal course of business. Accordingly, in the view of the Committee, the aforesaid opinion did not entirely exempt passing of resolution. Thus, the delegation of the power to invest should be by passing one resolution in accordance with the proviso to section 292(1)(d).  The Committee also notes that the opinion contained in Volume III is in respect of classification of short term deposits as ‘investments’ or under the head ‘Current Assets’, and this opinion nowhere states that such term deposits with banks are an exception to section 292(1)(d) of the Companies Act, 1956.

11. The Committee notes that the querist has argued that the investment in short term deposits with banks, in ordinary course of business, is not an investment and, therefore, section 292(1)(d) does not apply. The Committee has, therefore, examined this aspect.   The Committee notes that the term ‘investment’ has not been defined under the Companies Act, 1956.   The querist has contended that since under the heading of ‘Investments’ in the format of balance sheet prescribed under Schedule VI to the Companies Act, 1956, short-term deposits with banks are not included, these do not constitute an investment.  The Committee is of the view that format of the balance  sheet  prescribed  under  the  Act  should  not  be  the  basis  of determination  of  nature  of  short-term  deposits.    Further,  judicial pronouncements should be examined in the context of the particular case to which they relate.  The Committee is, accordingly, of the view that the term ‘investment’ should be construed in the normal commercial parlance.

12. In this context, the Committee notes that Accounting Standard (AS) 13,  ‘Accounting  for  Investments’,  issued  by  the  Institute  of  Chartered Accountants of India, defines the term ‘investments’ 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’.”

13. The definition of ‘investments’ as given in AS 13 states that any asset that is being held by an enterprise for earning income by way of dividends, interest, etc., should be considered as an investment.  It may be noted that the surplus funds are being invested by the company as short-term deposits with scheduled commercial banks for the purpose of earning interest thereon. The Committee is, accordingly, of the view that short-term deposit of funds with scheduled commercial banks, in return of ‘interest’, is an ‘investment’ for the purpose of section 292(1)(d) of the Companies Act, 1956.

D.  Opinion

14. On the basis of the above, the Committee is of the opinion that, in the facts  and  circumstances  of  the  case,  placement  of  surplus  funds  by  the company in short-term deposits with scheduled commercial banks to earn interest thereon is an ‘investment’ for the purpose of section 292(1)(d) of the Companies Act, 1956.

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1  Opinion finalised by the Committee on 30.1.2003.