COMPANIES ACT AND ALLIED ISSUES
2.1 Query
Subsidy received under Central Government Outright Grant or Subsidy Scheme, 1971 – Whether a ‘Free Reserve’ under Companies (Acceptance of Deposits) Rules,1975.
1.A company received a subsidy of Rs. 15 lakhs, on its fixed capital investment, from the Government of India under the Central Government Outright Grant or Subsidy Scheme, 1971. The amount was disbursed to the company by Assam Financial Corporation on behalf of the Central Government on executing a Bond on March 8, 1976. The Company has shown the entire amount of the subsidy as a Capital Reserve in its balance sheet under the head ‘Reserve and Surplus’.
2.The querist has submitted the following extracts from the said Bond deed describing the terms and conditions of the subsidy: NOW THIS INDENTURE WITNESSETH as follows: -
(i)That in pursuance of the said agreement and in consideration aforesaid the Corporation has disbursed a sum of Rs. 15,00,000.00 (being full amount) under the Central Government Outright Grant or Subsidy Scheme, 1971 (the receipt of which the Mortgagor Company doth hereby admit and acknowledge).
(ii)The Mortgagor Company binds itself, its heirs, legal representatives and assigns to abide by the following terms and conditions hereinafter mentioned –
(a)That the Mortgagor Company shall utilize the said amount of the grant now disbursed and the balance that may be disbursed to the Mortgagor Company for development of its industry.
(b)If the Corporation is satisfied that the 15% subsidy or grant to the Mortgagor Company has been obtained by misrepresentation as to an essential fact, furnishing of false information or if the unit goes out of production within 5 years after commencement, the Corporation as Agent of the Central Government may claim refund of the grant or subsidy from the owner of the unit after giving an opportunity to them to be heard and the Mortgagor Company and the Guarantors undertake to repay the said amount to the Corporation.
(c)Without taking prior approval of the Corporation, the Mortgagor Company after receiving a part or the whole of the 15% grant or subsidy, shall not change the location of the whole or any part of the industrial unit or effect any substantial construction or disposal of a substantial part of its total fixed capital investment within a period of 5 years after its going into production.
(d)In respect of the Industrial unit of the Mortgagor Company to whom 15% grant or subsidy is disbursed by the Corporation, the Mortgagor Company shall furnish a report to the Corporation that it has fully utilized the subsidy for the development of its industry so that a certificate of utilization of the grant or subsidy for the purposes for which it was given shall be furnished to the Central Ministry of Industrial Development by the Corporation within a period of one year from the date of the receipt of the first instalment/full amount.
(e) After receiving 15% grant or subsidy, the Mortgagor Company, shall submit annual progress report to the Ministry of Industrial Development or State Government/Union Territory Administration concerned about its working for a period of 5 years after going into production.
(f)The said bond shall remain operative, binding, and in full force and only on satisfactory performance of the obligations herein contained and undertaken by the Mortgagor Company, the said Bond shall become void and inoperative.
3.The querist has sought the opinion of the Expert Advisory Committee on the following two issues:
(i)Whether or not the said subsidy should be included in ‘Free Reserves’ for the purpose of the Companies (Acceptance of Deposits) Rules, 1975;
(ii)Whether or not the said subsidy is in the nature of a ‘Free Reserve’ since the date it was granted.
4.In this context, the querist has quoted the definition of ‘Free Reserves’ from the Companies (Acceptance of Deposits) Rules, 1975, as below:
“Free Reserves” includes the balance in the share premium account, capital and debenture redemption reserve and any other reserves shown or published in the balance sheet of the Company and created by appropriation out of the profit of the company, but does not include the balance in any reserve created;
(i) for repayment of any future liability or for depreciation in assets or for bad debts;
(ii) by the revaluation of any assets of the Company”
5. The querist is of the view that it is apparent from the above definition that capital reserves like balance in share premium account and the capital and debentures redemption reserves are regarded as ‘Free Reserves’ even though they are not available for distribution as dividends to share holders.
Opinion* March 20,1984
1.The Company Law Committee is of the opinion that a capital reserve can be regarded as a ‘Free Reserve’ as defined in the said rules, provided
(i) it is created on receipt of actual cash, and
(ii) there is no stipulation as to the manner of its utilization,
(iii) if there is a stipulation as to the manner of utilization, the stipulation has been wholly met with.
2.The Company Law Committee felt that in the absence of the complete details of the Subsidy Scheme it was not possible for it to state categorically whether in the case under discussion, all the stipulations had been with or not.
*The query was referred to the Company Law Committee for its opinion. In view of the fact that the subject was of general interest to the members, the Committee also referred the query to the Department of Company Affairs, whose opinion is reproduced below:
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