Inter‑corporate investments ‑ In excess of limits ‑ Scope of the section clarified and explained - Companies Law - No. 48(50)‑CL-IV/61,

Circular : No. 48(50) ‑ CL-IV/61, dated 12 ‑ 2 ‑ 1962. Subject:- Inter ‑ corporate investments ‑ In excess of limits ‑ Scope of the section clarified and explained 1. Previous approval of the company in general meeting and of the Central Government is required to be obtained before a company invests in the shares of another body corporate in excess of the limits prescribed in the section. As the Central Government will not accord ex post facto approval to any investment attracting section 372(4), any such investment made without the prior approval of Government would attract the penal provisions of section 374. 2. If a company proposes to make investments in the shares of another company which will have the effect of making the latter company its subsidiary after such investment, the Central Government s prior approval will be required in terms of section 372(4). Only such investments as are made by a holding company in its subsidiary after it became a holding company are saved by the provisions of clause (d) of sub‑section (14) of section 372. 3. In calculating the aggregate of the investments made in all other bodies corporate, for the purpose of computing the percentages specified in sub‑section (2) and the provisos thereto, the investments made by a company in its subsidiary or subsidiaries must also be taken into account. 4. For purposes of calculating the prescribed limit of 20 per cent or 30 per cent of the subscribed capital of the investing company, the actual cost of the investments (and not the nominal value of the shares to be purchased or subscribed) is to be taken into account; the limit of 10 per cent of the subscribed capital of the investee company is, however, to be computed on the basis of the full normal value of the shares of that company proposed to be purchased or subscribed. 5. In view of the specific provisions contained in sub‑section (5) of section 372, the power of the board of directors to invest the funds of a company in the shares of another body corporate in pursuance of sub‑section (2) of the said section cannot be delegated to any committee or director, the managing director, the manager or any other person specified in the first proviso to section 292(1). 6. As the provisions of the amended section have not retrospective effect, the investments made by a company prior to December 28, 1960, in accordance with the provisions of the Act obtaining at that time, would not require the approval of the Central Government under section 373 even if the percentage limits prescribed in section 372(2) had been exceeded. Nor would a company be required to dispose of any of the said investments so as to conform to the said percentage limits. Such investments will, however, have to be taken into account for purposes of computing the aggregate of the investments as provided in sub‑section (3) of section 372. 7. When a private company is converted into a public company or becomes a public company by virtue of the provisions of section 43A, the investments made by it prior to the date of its becoming a public company would not be hit by the provisions of either section 372(4) or section 373, and it would not, therefore, be necessary for that company to dispose of any of the said investments so as to bring them down to the percentage limits prescribed in section 372(2). Such investments will, however, have to be taken into account for purposes of computing the aggregate of the investments as provided in section 372(3). 8. As companies dealing in shares, stocks, debentures and other securities have not been exempted from the operation of section 372, investments which are held by such companies as part of stock‑in‑trade will be hit by the restrictive provisions of section 372. The limit of 30 per cent applies to all investments by a company in the share of any other body corporate, irrespective of whether such shares are held for short or long periods or as long‑term investment or for sale or purchase. Investment companies, however, will not be subject to the 30 per cent limit in view of the provisions of sub‑section (13) of the said section. 9. A company seeking Government s approval under section 372(4) must specify in its application the name or names of the company or companies whose shares/debentures are proposed to be purchased or subscribed. In other words, this Department would not entertain applications for blanket approval of investments in such companies as the board of the investing company may decide from time to time, without specifying either their names or the particulars of the proposed investments. All the applications for Government s approval under section 372(4) are required to be made in Form 34B prescribed by the Companies (Central Government s) General Rules Forms (Amendment) Rules, 1961 accompanied by the treasury challan in token of payment of the appropriate fee prescribed by the Companies (Fees on Applications) Rules, 1962.