CORPORATE INVESTMENTS IN OWN NAME – WHETHER APPLICABLE TO NON –SECURITY INVESTMENT

[Dr. Sanjiv Agarwal]

Section 292 of the Companies Act, 1956 provides power to the company to be exercised in board meetings to invest funds. Also section 49 of the Act provides that company should hold investments in its own name. There is often a confusion as to whether the purchase of non-securities such as land, plant etc. by the company shall be treated as investment for the purpose of section 49 of the Companies Act, 1956?

Investments of Company to be held in its own name (Section 49)

According to section 49 of the Companies Act, 1956,

a) all investments made by a company on its own behalf shall be made and held by it in its own name ; and

b) where any such investments are not so held at the commencement of this Act the company shall, within a period of one year from such commencement, either cause them to be transferred to, and hold them in, its own name, or dispose of them.

However, this shall not apply to investments made by a company whose principal business consists of the buying and selling of shares or securities.

This section does not prevent a company-

(a) from depositing with a bank, being the bankers of the company, any shares or securities for the collection of any dividend or interest payable thereon ; or

(b) from depositing with, or transferring to, or holding in the name of, the State Bank of India or a Scheduled Bank, being the bankers of the company, shares or securities, in order to facilitate the transfer thereof

(c)  from depositing with, or transferring to, any person any shares or securities, by way of security for the repayment of any loan advanced to the company or the performance of any obligation undertaken by it ;

(d) from holding investments in the name of a depository when such investments are in the form of securities held by the company as a beneficial owner.

 For the purpose of this section, "securities" include stock and debentures.

Applicable Accounting Standard

In Accounting Standard 13 (AS13) on ‘Accounting for Investments’, ‘Investment’ is defined as under –

“Investments are 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’.”

A current investment is an investment that is by its nature readily realizable and is intended to be held of not more than one year from the date on which such investment is made.

A long term investment is an investment other than a current investment.

An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.

As per Section 211(3A) of the Companies Act, 1956, profit & loss account and balance sheet of a Company must comply with Accounting Standards. The accounting standards are notified by Companies (Accounting Standards) Rules, 2006. These are also applicable as per clause 50 of the listing agreement.

As per Listing Agreement Clause 41(I)(e)(i),in case of companies having subsidiaries, the company may submit quarterly  and year to date consolidated financial results in addition of quarterly and year to date stand alone financial results to stock exchange. Simultaneously, as per Clause 50, company shall comply with accounting standards. As per The Companies Act, 1956 Section 211(3A) the Profit & Loss account and Balance Sheet of the companies should be prepared according to accounting Standards.  

AS 13 (Accounting Standard on ‘Accounting for Investments’) has defined investment to mean –

(i)  an asset,

(ii) held by an enterprise,

(iii) for earning income by way of dividend / interest / rentals, or

(iv) for capital appreciation, or

(v)  for other benefits to the investing enterprise.

Thus, any investment which does not fulfill the aforementioned conditions cannot be called investment.

According to AS-13, an investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.

Enterprises hold investments for diverse reasons. For some enterprises, investment activity is significant element of operations, and assessment of the performance of the enterprise may largely, or solely, depend on the reported results of this activity.

An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operation of, the investing enterprise. An enterprise holding investment properties should account for them as long-term investments. 

Investments of company should be held in its own name

The provisions of section 49 provide that all investments made by a company should be registered in the company’s name, ie, in its name The section enjoins on all companies to hold all investments in their own names and prohibits making any investment in the name of any other person. No investment made by company on its own behalf shall be made in any other name, i.e. benami. The expression “on its own behalf” is of wide amplitude. It means “in the interest of, on account of”. So, every investment in which the company has any kind of interest must be made in the company’s name. It should, further, be noted that if certain shares are held by a nominee on behalf of a company, then the nominee enjoys all rights of an owner such as right to dividends, right to vote, right to receive ‘rights’ in proportion to his investment in case of a rights issue etc., and that the investee company is restricted from taking notice of any trust which may be express, implied or constructive.

Scope of Investment

To understand the applicability of section 49 of the Companies Act, 1956, one needs to understand as to what is meant by investment.

The word ‘investment’ is neither defined nor explained. In its ordinary meaning this word has wide meaning, namely investment in any property or assets, movable and immovable as well or in securities; the investing of money or capital in order to gain profitable returns, as interest, income or appreciation in value.

In the Oxford Business Dictionary, the following meaning is given “The purchase of capital goods, such as plant and machinery in a factory in order to produce goods for future consumption. This is known as capital investment; the higher the level of capital investment in an economy, the faster it will grow. The purchase of assets, such as securities, works of art, bank and building- society deposits, etc., with a primary view to their financial return, either as income or capital gain. This form of financial investment represents a means of saving.”

Thus, the term ‘investment’ in section 49 is intended to mean any out lay of a company’s money or money’s worth, with a view of obtain profit.

However, in the context in which it is used in section 49, the scope of the word ‘investment’ would seem to confine to investment in shares, debentures and other securities. Sub-section (11) states that the word “securities” includes stock and debentures. This is an inclusive definition. The provisions of sub-sections (6) and (7) of this section support this view.

Conclusion

The provisions of section 49 in relation to investments of company to be held in its own name, prima-facie apply to investments made by the company in securities which includes stocks and debentures (by virtue of sub section 11 of section 49). Also ‘the term securities’  is defined in section 2(45AA) to mean the same as is defined in section 2(h) of the Securities Contracts (Regulation) Act,1956.

Accordingly, securities include all types of securities including shares, bonds, debentures, derivatives, units etc. but not immovable property. The various sub-sections of section 49 only provide for in relation to investment in securities only.

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