Chapter 10 Inter-Corporate Loans and Investment/Deposit – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.
Inter-Corporate Loans and Investment/Deposit – Corporate Funding & Listing in Stock Exchange Study Material
Question 1.
Distinguish between the following:
‘Free Reserves’ and ‘Net Worth’ under the provisions of Companies Act, 2013. ‘ (Dec 2017, 4 marks)
Answer:
Free Reserves
As per Section 2(43) ‘Tree reserves” means such reserves which, as per the latest audited balance Sheet of a company, are available for distribution as dividend:
Provided that:
- any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or
- any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.
Whereas
“Net Worth means the aggregate value of the paid-up share capital and all reserves created Out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does riot include reserves created out of revaluation of assets, write-back of depreciation and amalgamation Amendment made by Companies (Amendment) Act, 2017 account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
Question 2.
What is the difference between a Fixed Deposit and Inter-Corporate Deposit? In case of default by a company, explain thé role of Regulator. (June 2019, 5 marks)
Answer:
Corporates also have access to another market called the Inter Corporate Deposits (lCD) market. An ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporates, this market allows corporates with surplus funds to lend to other corporates facing shortage of funds. Another aspect of this market is that the better-rated corporates can borrow from the banking system and lend In this market to make speculative profits. As the cost of funds for a corporate in mud higher than that of a bank, thus, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent is high.
The role of regulator in case of default by e company:
1. If company fails to repay, the depositor may apply to Tribunal and tribunal may direct that:
(a) the company shalt, in addition to the payment of the amount of deposit or part thereof and the interest dúe, be punishable with fine which shall not be less than one crore rupee but which may extend to ten crore rupees; and
(b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakhs rupees but which may extend to two crore rupees, or with both:
Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under Section 447 of the Companies Act, 2013.
2. Where a company fails to repay the deposit or part thereof or any interest thereon referred to in Section 74 of the Companies Act, 2013 within the time specified in sub-section
(1) of that section or such further time as may be allowed by the Tribunal under sub-section
(2) of that section, and It is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in subsection
(3) of that section and liability under Section 447 of the Companies Act, 2013, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.
3. Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.
Question 3.
Distinguish between the following:
Commercial Paper and inter Corporate Deposit. (Dec 2019, 5 marks)
Answer:
Following are the differences between Commercial Paper and Inter Corporate Deposits:
Commercial Paper (CP):
It is an unsecured money market instrument issued In the form of a promissory note to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.
Companies, Primary Dealers and financial institutions (FIs) are permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligble to issue Commercial Paper.
A company would be eligible to issue Commercial Paper provided
(a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than ₹ 4 crores;
(b) the company has been sanctioned working capital limit by bank/s or Fls; and
(c) the borrowal account of the company is classified as a Standard Asset by the financing bank) institution.
Inter Corporate Deposits:
Corporates also have access to another market called the Inter Corporate Deposits (ICD) market. An ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporates, this market allows corporates with surplus funds to lend to other corporates facing shortage of funds.
Another aspect of this market is that the better-rated corporates can borrow from the banking system and lend in this market to make speculative profits. As the cost of funds for a corporate in much higher than that of a bank, thus, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent is high. The ICD market is an unorganised market with very less information available publicly about transaction details.
Question 4.
Explain the following financial instrument:
Commercial paper (June 2012, 2 marks)
Answer:
Commercial Paper (CP) s an unsecured money market instrument issued in the form promissory note. CP is a private placed instrument. It enables highly rated corporate borrowers to diversity their sources of short-term borrowings and provides an additional instrument to investors.
Question 5.
Your company, which is a public limited company wishes to make Investments in shares of a company. The total investment exceeds the statutory limit stipulated by the Companies Act, 2013. What are the formalities to be complied with in this regard? (June 2013, 4 marks) (CSEM – II)
Answer:
1. Provisions of Sec. 186
No Company shall, directly or indirectly:
(a) give any loan to any person or other body corporate;
(b) give any guarantee, or provide security, in connection with a loan to any other person body corporate or person; and
(c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate;
- Exceeding 60% of its paid-up share capital, free reserves and securities premium account OR
- 100% of its free reserves and securities premium account, Whichever is more unless the same is previously authorised by a special resolution passed in a general meeting.
2. Formalities to make Investment in excess of the limits as specified u/s 186
A public limited company wishing to make investments in shares of a company in excess of the above statutory limit provided in Section 186 of Companies Act, 2013 will have to comply with the following formalities:
1. General Meeting and SR.
It has to convene a general meeting and pass a special resolution beforé making the investment.
2. Contents of notice to GM
Notice of such resolution shall indicate:
- the specific limits;
- the particulars of body corporate in which the investment is proposed to be made;
- the purpose of the investment;
- specific sources of funding; and
- any other detail which is material.
Question 6.
Comment on the following:
Issue of unsecured debentures by a company to another company, where the debentures have an option for compulsory conversion into equity shares within seven years, cannot be termed as deposits. (Dec 2016, 5 marks)
Answer:
1. Analysis of the Present Case
Section 73 of Companies Act, 2013 read with Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014 define the term ‘deposit’. As per clause (ix) of Rule 2 (1)(c), deposit shall not include any amount raised by issue of bonds or debentures secured by first charge or a charge ranking pan passu with the first charge on any assets referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the company or the bonds or debentures compulsorily convertible into shares of the company within 10 years.
In view of comprehensive reading of the above clause the unsecured debenture Issued having option of compulsory conversion into shares of the company within 10 years shall not be treated as deposits.
Amendment made by Companies (Amendment) Act, 2017
In Section 73 of the Principal Act, in sub Section (2),— clause (d) shall be omitted;
2. Conclusion
In the above case the unsecured debentures issued by the company having option of compulsory conversion into shares of the company within seven years cannot be treated as deposits.
Question 7.
Define the term ‘deposits’ and list out the receipts of money which are not considered as deposits. (Dec 2016, 8 marks)
Answer:
As per Section 2(31) of the Companies Act, 2013 “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include:
(i) any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature;
(ii) any amount received from foreign governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under;
(iii) any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under Section 51 of the Banking Regulation Act, 1949, or a corresponding new bank as defined in clause (d) of Section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or in clause (b) of Section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 or from a co-operative bank as defined in clause (b-ii) of Section 2 of the Reserve Bank of India Act, 1934;
(iv) any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India, or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934;
(v) any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;
(vi) any amount received by a company from any other company;
(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for.
(viii) any amount received from a person who, at the time of the receipt of the amount, was a director of the company. The director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others;
(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within ten years. If such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
(x) any amount received from an employee not exceeding his annual salary, under a contract of employment with the company in the nature of non-interest bearing security deposit;
(xi) any non-interest bearing amount received or held in trust;
(xii) any amount received in the course of or for the purposes of the business of the company:
(a) as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from acceptance of such advance. In case of any advance which is subject matter of any legal proceedings before any Court of law, the said time limit of three hundred and sixty five days shall not apply.
(b) as advance, accounted for in any manner whatsoever, received in connection with consideration for an immovable property under an agreement or arrangement, provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement.
(c) as security deposit for the performance of the contract for supply of goods or provision of services.
(d) As advance received under long term projects for supply of capital goods except those covered under item (b) above.
If the amount received under (a), (b) and (d) above becomes refundable (with or without interest) because the company accepting the money does not have necessary permission or approval to deal in the goods or properties or services for which the money is taken, the amount received shall be deemed to be a Deposit under these rules.
(xiii) any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions:
(a) the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance; and
(b) the loan is provided by the promoters themselves or by their relatives or by both and
(c) the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter.
(xiv) any amount accepted by a Nidhi Company in accordance with the rules made under Section 406 of the Act.
Question 8.
Comment on the following:
A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons and can accept deposits from the public. (Dec 2017, 5 marks)
Answer:
According to the definition of private company under Section 2(68), a private limited company may not make an invitation to the public to subscribe for any securities of the company. However, under Section 42 read with Section 2(68), if may issue such security to any person (number of persons not exceeding 200).
In terms of provisions of Section 73(2) read with Exemption Notification dated 5th June, 2015, a private company may accept from its members monies not exceeding one hundred percent of aggregate of the paid-up share capital and free reserves, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, as may be agreed upon between the company and its members, subject to the fulfilment of certain conditions, as provided under the Act.
Question 9.
Comment on the following:
A private limited company can accept deposit from its members under the provisions of the Companies Act, 2013. (June 2017, 5 marks)
Answer:
A private limited company can accept deposit from its members in accordance with Section 73 of the Companies Act, 2013 and rules made thereunder. Moreover, the Government has exempted the private companies vide notification dated 13th June, 2017, from applicability of Section 73(1)(a) to (e).
Accordingly, a private company may accept deposit from its members:
(A) not exceeding one hundred percent of aggregate of the paid up share capital, free reserves and securities premium account; or
(B) is a start-up, for five years from the date of its incorporation; or
(C) if it fulfils all of the following conditions, namely:
(a) is not an associate or a subsidiary company of any other company;
(b) if the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:
Provided that the company referred to in clause (A), (B) or (C) shall file the details of monies accepted to the Registrar in such manner as may be specified.
Question 10.
What are the merits and demerits of Customer advance? Explain. (June 2019, 3 marks)
Answer:
Merits of Customer Advance:
- interest free: Amount offered as advance is interest free. Hence funds are available without involving financial burden.
- No tangible security: The seller is not required to deposit any tangible security while seeking advance from the customer. Thus assets remain free of charge.
- No repayment obligation: Money received as advance is not to be refunded. Hence there are no repayment obligations.
Demerits of Customer Advance:
- Limited amount: The amount advanced by the customer is subject to the value of the order. Borrowers’ need may be more than the amount of advance.
- Limited period: The period of customers’ advance is only upto the delivery goods. It cannot be reviewed or renewed.
- Penalty in case of non-delivery of goods: Generally advances are subject to the condition that in case goods are not delivered on time, the order would be cancelled and the advance would have to be refunded along with interest.
Question 11.
For listing and trading on SME-Initial Public Offer (IPO), what are the documents to be submitted BEFORE T+4 days? (Dec 2019, 5 marks)
Answer:
In case of listing and trading on SME-Initial Public Offer (IPO) following documents are required to be submitted before T+4 days (i.e. within 4 working days from the closure of the issue):
- Copy of Prospectus (also in Soft copy CD).
- Copy of the ROC filing acknowledgement for filing of Prospectus.
- Certified true copy of the additional material contracts and documents (mentioned in the final offer document/Prospectus) which have not been submitted earlier with the Exchange. (Soft copy for all the material contracts and documents)
- Certified true copy of Table showing region- wise collection of application money.
- Certificate from the bankers to the issue regarding the collection of application money.
- Certified true copy of the basis of allotment approved by the Designated Stock Exchange.
- Copy of the letter from Registrar addressed to Merchant bankers regarding the details they have verified with the depositories (NSDL/ CDSL).
Question 12.
Board of directors of Joy Ltd., by a resolution passed at its meeting, decide to provide a loan of ₹ 50 crore to Happy Ltd. The paid-up share capital of Joy Ltd. on the date of resolution was ₹ 100 crore and the aggregate balance in the free reserves and securities premium account stood at ₹ 40 crore. Examining the provisions of the Companies Act, 2013, decide whether the Board’s resolution to provide a loan of ₹ 50 crore to Happy Ltd. is valid? (June 2015, 4 marks)
Answer:
1. Provisions of Sec. 186(2)
(a) Limits
No company shall directly or indirectly —
No company shall directly or indirectly—
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,
Exceeding
- 60% of its paid-up share capital, free reserves and securities premium account or
- 100% of its free reserves and securities premium account, Whichever is more unless the same is previously authorised by a special resolution passed in the company’s general meeting.
(b) Unanimous Board resolution for loan/investment
No loan or investment shall be made or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all directors present at the meeting.
2. Analysis of the given problem
Accordingly, in the given case, the company can grant a loan of ₹ 50 crore, since the company can grant a loan up to ₹ 84 crore (i.e. 60% of ₹ 100 crore + ₹ 40 crore i.e. = ₹ 84 or ₹ 40 crore whichever is more) without the approval of the general meéting by a special resolution and the Board meeting with the consent of all the directors presént.
3. Conclusion
Only Board’s resolution to provide a loan of ₹ 50 crore to Happy limited without the approval of general meeting by a special resolution is valid.
Question 13.
Prism Ltd. has accepted ₹ 10 lakh as advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit. Later on, internal auditors qualified their report on the ground that the company has violated the provisions of the Companies Act, 2013. Directors explained that this is required to complete the order. Examining the relevant provisions of the Companies Act, 2013 state whether the explanation given by the directors is justified. (June 2016, 4 mark)
Answer:
1. Section 2(31)
According to the Section 2(31) of the Act read with Rule 2(c) of Companies (Acceptance of Deposits) Rules, 2014 “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include any amount received in the course of or for the purposes of the business of the company as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from acceptance of such advance.
2. Analysis of the given Problem
In case of any advance which is subject matter of any legal proceedings before any Tribunal of law, the said time limit of three hundred and sixty five days shall not apply. In the present case Prism Ltd. has accepted ₹ 1o lakhs as advance towards the supply of goods to certain parties on an agreement to supply goods after two years from date of deposit.
3. Conclusion
Considering the legal provision the amount so accepted by the company is deposit.
Question 14.
Virat, a person of 21 years of age is pursuing MBA (Finance) course at a reputed recognised business school. He is not a shareholder of Grow (Pvt.) Ltd. He wishes to inspect the register of investments in securities not held In company’s name and annual return of Grow (Pvt.) Ltd. He also wants to take copies thereof. Examining the relevant provisions of the Companies Act, 2013, advise Virat whether he would be successful in this regard. (June 2016, 4 marks)
Answer:
1.Section 73(2)
As per Rule 3(6) of the Companies (Acceptance of Deposits) Rules,2016 no company under or any eligible company shall invite or accept or renew any deposits in any form, carrying a rate of interest or pay brokerage thereon at a rate exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of india for acceptance of deposits by non-banking financial companies.
Amendment made by Companies (Amendment) Act, 2017
In Section 73 of the principal Act, in sub- section (2),— clause (d) shall be omitted;
2. Conclusion
Green Field Ltd. is advised to go ahead with the proposal carrying a rate of interest not exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.
Question 15.
Suresh, a member of Ruchi Ltd.. wants to iñspect the register of deposits maintained by the company as required under the provisions of the Companies Act. 2013. The company refused to provide the register for inspection without assigning any reason. Referring to the provisions of the Act, examine the validity of the company’s refusal. What shall be your answer if the same Register is demanded by the statutory auditors of the company for inspection and for their audit? (Dec 2016, 4 marks)
Answer:
1. Rule 14 of companies (Acceptance of deposits) Rules, 2014
According to Rule 14 of Companies (Acceptance of deposits) Rules, 2014, every company accepting deposits shall, from the date of such acceptance, keep at its registered office one or more separate registers for deposits accepted/renewed. In absence of any enabling piovision. this register is not open for inspection by members and company may refuse to open it for inspection.
2. Conclusion
In the given case Ruchi Limited can refuse to provide the register for inspecfìon without giving any reason because it is not open for inspection but in case of statutory auditors, the company cannot to do so. The Statutory Auditors have a right to inspect and check every register maintained by the company.
Question 16.
RR Limited has decided to make investment in other companies for ₹ 50 lakhs, which is in excess of 60% of the company’s paid- up share capital, free reserves and securities premium account. Company has 5 directors. Four directors were present in the Board meeting, three directors have given their consent but one director abstained from voting. The decision of the Board was noted in the minutes of Board meeting and decided to make such investment by passing of Board resolution with majority. Referring to the provisions of Companies Act, 2013, examine the validity of the Board’s decision. (June 2017, 4 marks)
Answer:
In accordance with the provisions of the Companies Act, 2013, as contained in Section 186 (5), no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.
Further, under the provisions of Section 186(2) and 186(3), the loan amount must not exceed 60% of its paid-up capital, free reserves and securities premium account or 100% of free reserves and securities premium account, whichever is more. In case, the company wishes to exceed the said limit, prior approval of company through special resolution would be acquired.
In the given case, in absence of adequate information, even if we assume that ₹ 50 lakh does not exceed the 100% of free reserves and securities premium account, RR limited has not complied with the provisions of Section 186 (5) of the Companies Act, 2013 where consent of all the directors present is required. The resolution of the- Board of Directors therefore, is not valid and has no legal effect.
Question 17.
XYZ Ltd., a company, has a paid up share capital of ₹ 60 crores and free reserves of ₹ 25 crores. It desires to make a loan of ₹ 20 crores to M Ltd. The company XYZ Ltd. has already made investments in many other companies including loans to the extent of ₹ 35 crores. Can the company go ahead with loan to M Ltd. ? Please advise the company about the procedure to be followed by it. (Dec 2017, 4 marks)
Answer:
As per Section 186 of the Companies Act, 2013 a company shall make investments upto 60 percent of paid up share capital and free reserves or 100 percent of free reserves and securities premium account whichever is more.
In this case, company can make maximum investment of 60%
(60+25) = 51 crores.
Since company has already invested 35 crores it can further invest 16 crores only.
To invest upto 20 crores they need to take approval of shareholders through a special resolution.
Question 18.
Commercial Paper is sold at a discount from its face value and redeemed at its face value. Calculate the pre-tax cost on annualised basis of commercial paper, if face value is ₹ 5,00,000, maturity period is 180 days and net amount realized is ₹ 4,80,000. (Assume 360 days in a year.) (June 2019, 3 marks)
Answer:
Cost of commercial paper
\(=\frac{\text { Face Value – Amount Reaslised (Net) }}{\text { Net Amount Realised }}\) × 360/Maturity Period
= \(\frac{(5,00,000-4,80,000) \times 360180}{4,80.000}\) = 8.33%
Question 19.
From the following particulars, calculate the effective interest cost per annum to ABC Ltd., which is planning a CP (Commercial Paper) issue:
Issue price of a CP : ₹ 97,350
Face Value : ₹ 1,00,000
Maturity Period : 3 Months (Dec 2020, 5 marks)
Answer:
Interest amount (₹) = ₹ 1,00,000 – ₹ 97,350
= ₹ 2,650
Maturity Period = 3 months
Effective interest = \(\frac{f-p}{p} \times \frac{12}{m} \times 100\)
Where, f = Face value
p = Issue price of CP
m = Maturity Period
= \(\frac{1,00,000-97,350}{97,350} \times \frac{12}{3} \times 100\)
= 10.89% (Effective Interest)
Question 20.
A Ltd. has been sanctioned Working Capital Limit of ₹ 2 crore from its banker at 11 % p.a. Its tangible Net Worth is ₹ 6 crore and its account is classified as a Standard Asset by banks/institutions. Till date company has not obtained any Credit Rating. Analysing the current trend of lower interest rate, CEO of A Ltd., Mr. X proposed to raise more funds by way of Commercial Papers (CPs) on the following terms:
(i) The period of the CPs shall be of 2 years.
(ii) The denomination of each CP shall be ₹ 1 Lakh and will be issued at Par Value.
(iii) The CPs shall be issued to retail investors.
(iv) The CPs shall be issued in Dematerialised Form only.
(v) The quantum of issue of CPs shall be of ₹ 4 Crore.
(vi) The trading of CPs will be purely on OTC basis.
You as Company Secretary of the A Ltd. have been asked to submit a Report advising the management on the following matters :
(a) Whether company is eligible for issuing Commercial Papers or not?
(b) Whether company can issue CPs for ₹ 4 Crore and that too in Dematerialised form only for the period of 2 years or not?
(c) Whether company can issue CPs to Retail Investors at Par Value in denomination of ₹ 1 Lakh each and trading shall be possible purely on OTC basis or not ? (Aug 2021, 15 marks)
Answer:
(a) Yes, A Ltd. is eligible for issuing Commercial Papers as it meets the following conditions, as issued by Reserve Bank of India (RBI)
- the tangible net worth of the company, as per the latest audited balance sheet, is not less than ₹ 4 crore;
- company has been sanctioned working capital limit by banks or Financial Institutions; and
- the borrowal account of the company is classified as a Standard Asset by the bank/ Financial Institution.
Although, A Ltd. shall get credit rating for issuance of Commercial Papers from any one of the SEBI registered Credit Rating Agencies (CRA). The minimum credit rating shall be ‘A21 The company shall also appoint an Issuing and Paying Agent for issuance of Commercial Paper.
(b) Commercial Paper can be issued in denominations of ₹ 5 lakh and multiples thereof. The amount invested by a single investor should not be less than ₹ 5 lakh (face value). Hence, the Company can issue CPs for ₹ 4 crore.
While option is available to company to issue/hold CP in dematerialised or physical form, issuers and subscribers are encouraged to opt for dematerialised form of issue/ holding.
Although, banks, Financial Institutions and Primary Dealers are required to make fresh investments and hold CP only in dematerialised form. Commercial paper can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue. The maturity date of the Commercial Paper should not go beyond the date up to which the credit rating of the issuer is valid. The Company therefore, can issue Commercial Paper for a period of 1 year or up to the period for which credit rating will be valid.
(c) Commercial Paper (CP) can be issued in denominations of ₹ 5 lakh and multiples thereof. The amount invested by a single investor should not be less than ₹ 5 lakh (face value). Therefore, company cannot issue CPs in denomination of ₹ 1 lakh.
Commercial paper may be issued to individuals, banking companies, other corporate bodies and unincorporated bodies, Non-Resident Indians and Foreign Institutional Investors. The initial investor in CP shall pay the discounted value and not the par value and that too by means of a crossed account payee cheque to the account of the issuer through Issuing and Paying Agent.
However, CPs can be traded on OTC but all trades shall be reported within 15 minutes of the trade to the reporting platform of Clearcorp Dealing Systems (India) Ltd. (CDSIL). Therefore, the SEBI has prescribed framework for listing of Commercial Papers (CP), Post listing, CPs will be accessible for trading on stock exchange’s trading platform.
Therefore, the SEBI has prescribed framework for listing of Commercial Papers (CP). Post listing, CPs will be accessible for trading on stock exchanges trading platform.
Question 21.
MSC Ltd would like to issue Commercial Paper (CP). Calculate the effective interest yield of the commercial paper (CP) from the following data :
| Particulars | Amount in ₹ |
| Face Value | 10,00,000 |
| Sale Price | 9,91,000 |
| Maturity Period | 120 days |
| Brokerage and other charges | 2.50% |
(June 2022, 5 marks)
Question 22.
Which companies are exempt from the provisions with regard to loans and investments by companies?
Answer:
Non Applicability of Section 186
Exemptions
Sub-section (11) of Section 186 provides that nothing contained in this section, except sub-Section (1), shall apply-
(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged In the business of financing industrial enterprises, or of providing infrastructural facilities;
(b) to any investment-
- made by an investment company;
- made in shares allotted in pursuance of clause (a) of sub-section (1) of Section 62 or in shares allotted in pursuance of rights issues made by a body corporate:
- made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.
Exemption from Applicability of Section 186 to Government Company
In view of the Central Government’s notification dated 5th June, 2015 under Section 462 of the Companies Act, 2013, Section 186 shall not apply to:
(a) a Government company engaged in defence production;
(b) a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section.
Penalty for Contravention of Section 186
If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to live lakh rupees and every officer of the company who is in default shalt be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees [Section 186(13)]
Inter-Corporate Loans and Investment/Deposit Notes
Investments
Investments’ has been used in a limited sense in the lesson to mean the investing of money in shares, stock, debentures or other securities.
Loans and Investments by Companies (Section 186)
A company shall unless otherwise prescribed, make investment through not more than two layers of investment companies. [Sub-section (1) of section 186]
However, the aforesaid provisions shall not affect,—
(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. [Proviso to sub-section (1) of Section 186]
Limits for Loans, Guarantees, Security and Investment – Section 186(2)
No Company shall, directly or indirectly:
(a) give any loan to any person or other body corporate;
(b) give any guarantee, or provide security, in connection with a loan to any other body corporate or person; and
(c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate;
exceeding 60% of its paid-up share capital, free reserves and securities premium account or 100% of Its tree reserves and securities premium account, whichever is more unless the same is previously authorised by a special resolution passed in a general meeting.
Non Applicability of Section 186
Sub-section (11) of Section 186 provides that nothing contained in this section, except sub-section (1), shall apply-
(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;
(b) to any investment—
- made by an Investment company;
- made in shares allotted in pursuance of clause (a) of sub-section (1) of Section 62 or In shares allotted in pursuance of rights issues made by a body corporate;
- made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.
Penalty for Contravention of Section 186
If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend, to two years and with fine which shall not be less than twenty-five thousand rupees but Which may extend to one lakh rupees. [Section 186(13))
Investments to be held in company’s own name
As per the Act, all investments made or held by a company in any property, security or other asset shall be made and held by it in its own name. This requirement is confined to only those investments which are made by it on its own behalf and not on behalf of someone else. However, in certain circumstances, the Act exempts the companies from complying with the above provisions.
Investment not held in company’s own home
When any shares or securities in which investments have been made by a company are not held by it in its own name as a beneficial owner when such investments are held in the name of a depository pursuant to permissible conditions given in the Act, the company shall forthwith enter in a register maintained by it for the purpose, particulars as specified in the Act.
Commercial Paper
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. CP, as a privately placed instrument, was introduced in India in 1990 with a view to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers (PDs), and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. ‘
The guidelines for issue of CP are given below:
Companies, PDs and financial institutions (FIs) are permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligible to issue CP.
A company would be eligible to issue CP provided:
(a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than ₹ 4 crores;
(b) the company has been sanctioned working capital limit by bank/s or FIs; and
(c) the borrowal account of the company is classified as a Standard Asset by the financing bank/ institution.
Merits of Commercial Paper
- It provides more funds compared to other sources, the cost of commercial paper to the issuing firm is lower than the cost of commercial bank loans.
- It is freely transferable in nature, therefore it has high liquidity also
- It produce a continuing source of funds. This is because their maturity can be tailored to suit the needs of issuing firm. It is highly secure and does not contain any restrictive condition.
Demerits of commercial Paper
- Only financially secure and highly rated organizations can raise money through commercial papers.
New and moderately rated organizations are not in a position to raise funds by this method - The amount Of money that can be raised through commercial paper is limited to the deductible liquidity available with the suppliers of funds at a particular point.
- The duration of commercial paper cannot be extended.
Deposits
As per Section 2(31) of Companies Act, 2013, ’’deposit” includes any receipt of money by way of depositor loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.
Eligible company
Eligible company public company may accept deposits, if it has a net worth of not less than ₹ 100 crores or a turnover of not less than ₹ 500 crores and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies and where applicable, with the Reserve Bank of India before making any invitation to the Public for acceptance of Deposits.
Deposit trustees
No company under sub-section (2) of Sections 73 or any eligible company shall issue a circular or advertisement inviting secured deposits unless the company has appointed one or more deposit trustees for creating security for the deposits.
Deposit Insurance
Amendment made by Companies (Amendment) Act, 2017
Contract providing for deposit insurance at least thirty days before the issue of circular or advertisement.
In Section 73 of the Principal Act, in sub- Section (2), – Clause (d) shall be omitted;
Foreign Investment
Repatriation Capital flow from a foreign country to the country of origin. This usually refers to returning returns on a foreign investment in case of a corporation or transferring foreign earnings home in case of an individual.
Quantum of deposits
| Type of company | Members | Public |
| Eligible Company | Upto 10% of aggregate of the paid-up share capital, free reserves and Security Premium Account. | Upto 25% of aggregate of the paid up share capital free reserves and Security Premium Account. |
| Company other than Eligible Company | Upto 35% of aggregate of the paid up share, free reserves and Security Premium Account. | Prohibited |
| Government Company |
– | Upto 35% of aggregate of the paid-up share capital, free reserves and Security Premium Account. |
Procedure of acceptance of deposit
(a) Points of difference
| Category of Company | Private Company | Public Company (other than eligible company) | Public company (eligible company under Section 76 of the Act) |
| Source of Deposits | From directors and members | From directors and members | From directors, members and general public |
| Condition for deposits to be taken from shareholders | It is allowed to be taken subject to the limit of 100% of the paid-up share capital, free reserves and Premium Security Account. | It is allowed to be taken subject to the limit of 35% of the paid-up share capital, free reserves and Premium Security Account. | It is allowed to be taken subject to the limit of 10% of the paid-up share capital, free reserves and Premium Security Account. |
| Conditions for deposits to be taken from Public | Prohibited | Prohibited | It is allowed to be taken subject to the limit of 25% of the paid-up share capital, free reserves and Premium Security Account. |
| Resolution | The company should pass a resolution in a general meeting | The company should pass a resolution in a general meeting | The company should pass a special resolution in a general meeting and file the same with the Registrar. However, ordinary resolution would be sufficient if the amount is within the limit specified under Section 180 of the Act. |
| Advertisement | Not necessary | Not necessary | Necessary |
| Circular | Circular shall be issued to its members by registered post with Acknowledgement due or by speed post or by electronic mode in Form DPT-1 | Circular shall be issued to its members by registered post with Acknowledgement due or by speed post or by electronic mode in Forhi DPT-1 | Circular shall be issued to its members by registered post with Acknowledgement due or by speed post or by electronic mode in Form DPT-1 |
| Display of circular on website | Optional | Optional | Mandatory, if any |
| Credit Rating | Required to be taken before the submission of the circular to the registrar | Required to be taken before the. submission of the circular to the registrar | Required to be taken |
(b) Points of Similarity
| Category of Company | Private Company | Public Company (other than eligible) | Public company (eligible company under Section company 76 of the Act) |
| Tenure of deposits | The deposit shall not be repayable on demand or upon receiving a notice within a period less than 6 months and more than 36 months. | ||
| Registration of circular | The circular signed by majority of directors or their agents duly authorised along with the statement shall be submitted to registrar 30 days before the date of such issue. | ||
| Validity of circular | 6 (six) months from the end of the financial year in which it was issued or the date on which the AGM is held whichever is earlier. | ||
| Return of deposits | A return shall be filed on or before 30th June of every year with the Registrar in Form DPT-3 along with fee giving the status as on 31st March of that year duly audited by the auditor of the company. | ||
| Penal rate interest | A penal Rate of 18% p.a. shall be payable for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid. | ||
| Premature payment |
In case of premature payment of deposits, 1% shall be reduced from the interest agreed to be paid. | ||
Amendment Made by Companies (Amendment) Act, 2015 Punishment for Contraction of Section 73 or 76 “Section 76A. Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under Section 73 or Section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under Section 73 or 76 or rules made thereunder or such further time as may be allowed by the Tribunal under Section 73:
(a) the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than ₹ 1 crore but which may extend to ₹ 10 crores; and
(b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than ₹ 25 lakhs but which may extend to ₹ 2 crores, or with both.
Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully With the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under Section 447.”
Customer Advance/Deposits
Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers’ advance represents a part of the payment towards price on the product (s) which will be delivered at a later date. Customers generally agree to make advances when such goods are not easily available in the market or there is an urgent need of goods. A firm can meet its short-term requirements with the help of customers’ advances.
Merits
(a) interest free: Amount offered as advance is interest free. Hence funds are available without involving financial burden.
(b) No tangible security: The seller is not required to deposit any tangible security while seeking advance from the customer. Thus assets remain free of charge.
(c) No repayment obligation: Money received as advance is not to be refunded. Hence there are no repayment obligations.
Demerits
(a) Limited amount: The amount advanced by the customer is subject to the value of the order. Borrowers’ need may be more than the amount of advance.
(b) Limited period: The period of customers’ advance is only upto the delivery goods. It cannot be reviewed or renewed.
(c) Penalty in case of non-delivery of goods: Generally advances are subject to the condition that in case goods are not delivered on time, the order would be cancelled and the advance would have to be refunded along with interest.