1.27     Query

Applicability of MAOCARO 1975 requirements to an investment company

1. XYZ is a private limited investment company as defined in sub-clause(c) of paragraph 2 of the MAOCARO 1975 as it deals in the buying and selling of shares, stocks and debentures. In the course of its business, XYZ has acquired certain shares in private limited companies. These shares have been treated as stock-in-trade, and accordingly XYZ has disclosed in its profit and loss account, the opening stock, purchases and closing stock of shares, stocks and debentures in which it deals.

2. In the context of the above facts, the opinion of the Expert Advisory Committee has been sought on the following points:

(i) Since XYZ is engaged in the business of buying and selling shares, stocks and debentures, is it a trading company, under the MAOCARO? If yes, then would sub-clause (iii) of clause 4(A) of the Order dealing with the physical verification of finished goods, stores, spare parts and raw materials and the valuation thereof be applicable to XYZ and accordingly is the auditor of XYZ required to comment on physical verification of share etc.?

(ii) Is XYZ a trading company for the purpose of sub-clause (b) of paragraph 3 (ii) of Notes in Part II of Schedule VI to the Companies Act, 1956, and accordingly is it required to disclose the quantitative break-up of opening stock, purchases and closing stock of shares?

Opinion          October 13, 1987

1. The Committee notes that the terms ‘investment company’ and ‘trading company’ have been defined separately in clause 2(c) and 2(h) respectively of the MAOCARO 1975, as below:

“investment company” means a company engaged in the business of acquisition and holding, or dealing in shares, stocks, bonds, debenture stocks or securities issued by the Central or any State Government or by any local authority or in other marketable securities of a like nature.”

“trading company” means a company engaged in the business of buying and selling goods.”

2. On the basis of the above, the Committee is of the opinion that the XYZ Pvt. Ltd., is not a trading company for the purpose of MAOCARO, 1975.

3. Regarding the applicability of clause 4(A) (iii) of the Order (related to manufacturing companies) to the investment companies, the Committee notes that clause 4(D) (i) of the Order (related to investment companies) requires comments from the auditor in respect of “all matters specified in clause (A) to the extent to which they are applicable”. However, in the opinion of the Committee, since clause 4(A)

(iii) deals only with the comments by the auditor on physical verification by the management in respect of finished goods, stores, spare parts and raw materials, it cannot be construed that the same is applicable in respect of shares, debentures and the other securities held by the investment company. The Committee is of the view that clause 4(D)(i) (reproduced earlier) relates to those aspects of clause 4(A) which would be relevant to the investment company also, e.g., aspects related to fixed assets, loans etc.

4. With regard to applicability of clause 3(ii)(b) of Part II to Schedule VI to the Companies Act, 1956, the Committee notes that the term ‘investment company’ has been defined in Note (1) to Part I of Schedule VI to the Companies Act, 1956, as “a company whose principal business in the acquisition of shares, stock, debentures or other securities.” In view of this, the company in question is an investment company. The Committee is therefore of the opinion that the aforesaid clause 3(ii)(b) of Part II of Schedule VI applicable to trading companies will not apply to an investment company. The Committee is further of the opinion that in case of an investment company the residuary clause 3(ii)(e) will apply according to which “the gross income derived under different heads” is required to be disclosed.

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