Borrowing Power of Public Company

BORROWING POWERS OF PUBLIC COMPANY

BASIC LEGAL PROVISION:--------

·     Sec.293(1)(d) of the Companies Act 1956 ( the Act)  deals with the borrowing powers of the company. It provides that a public company or a private company which is a subsidiary of a public company can  borrow up to the limit of paid up capital and free reserves of the company without the approval of shareholders in general meeting.

·         If BODs wants to cross the limit, then it has to seek prior shareholders consent.

·         The provisions of this clause are not applicable to a plain private company which is not a subsidiary of public company. This means the BODs of a plain private company can borrow on its own without any limit without seeking the approval of shareholders.

·         Every such resolution passed by the shareholders clearly specifies the limit up to which BODs can borrow the money.

·      The Approval under this Clause is prior. The Board cannot exceed the power in the hope that general meeting will ratify the actions.

·         E-form 23 is required to be filed within 30 days of passing the Ordinary Resolution (OR) as per the requirement of Sec. 192.

MEANING OF TEMPORARY LOAN AND ITS IMPLICATION:-------

 

·         Temporary loan obtained from the company’s bankers in the ordinary course of business are to be excluded while calculating the limit up to which the company may borrow without shareholders approval.

·         It was also held that cash credit with bank is not a loan even it is described as Loan Account.

·         The expression TEMPORARY LOANS used in Sec. 293(1)(d) means loan repayable on demand or within 6 months from the date of loan such as short term cash credit arrangement, discount of bills etc. but does not include loan raised for the purpose of financing the expenditure of a capital nature. [Explanation II].

·         Thus if whole or part of the loan intended to be borrowed is raised for the purpose of financing expenditure of a capital nature, then ceiling specified in the Sec. 293(1)(d) will apply even though it is raised for a short period, may be less than 6 months. The reason being the loan raised for the purpose financing the capital expenditure is raised occasionally and it is different from temporary loan.

CERTAIN THINGS NOT TAKEN INTO ACCOUNT FOR LIMIT UNDER SEC. 293(1)(D):-----

·         Bonafide advances received by a company from its customers in the ordinary course of business cannot be construed as borrowing of money falling within the purview of Sec. 293(1)(d). [ICAI Compendium of Opinion]

·         Contingent liabilities like amount on deferent payment arrangement are not covered by Sec. 293(1)(d).

·         Sec. 293(1)(d) does not include debt on account of purchase of machinery on deferred payment.

·         The acceptance by a banking company, in the ordinary course of business, of deposits from the public repayable on demand or otherwise and withdrawal by cheque, drafts shall not be deemed to be a borrowing of money by the banking company falling within the ambit of Sec. 293 (1)(d).

MEANING OF FREE RESERVES:      

·         There is no clear definition of Free Reserves is given in the Sec. 293. It merely says that free reserves means reserves not set apart for any specific purposes.

·         It is also not clear that whether the term reserves used in the Sec. 293(1)(d) is restricted to Revenue Reserves only or it includes Capital Reserves as well.

·         It is submitted that in the absence of indication in Sec.293 and absence of general definition of free reserve, the term free reserve means to include both capital and revenue reserves.   

·         The term reserves are used in the different Section, like Sec. 205(2A) requires the transfer to reserve a portion of profit while declaring the dividend. The free reserves in this sub-section means revenue reserves and not the capital reserves.

·         The expression ‘free reserves’ also defined in Sec. 372A which means reserves, which as per latest audited balance sheet of the company, are free for distribution  as dividend and include the security premium account but shall not include share application money.

·         Though this section does not says that both paid up capital and free reserves should be taken as per latest audited balance sheet. However MCA under Deposit Rules clarified that limit under the Rules are to be computed with reference to free reserves and paid up capital as appearing in the latest audited balance sheet of the company.

·         In general free reserve means a reserve, the utilization of which is not restricted in any manner.

·         On the basis of general interpretation the following reserves will be treated as free reserve:----------

Ø  General reserve.

Ø  Balance held in the Security Premium Account.

Ø  Capital and Debenture Redemption Reserve.

Ø  The amount of surplus shown in the Profit & Loss Account and carried forward under the heading “Reserve and Surplus” in the Balance Sheet.

Ø  Any other reserve shown or appeared in the Balance Sheet and created by the appropriation of profits except balance held in the :-----

¨       Capital Reserve.

¨       Revaluation Reserve.

¨       Any reserve created for the repayment of any future liability.

Ø  Central Government’s Subsidy received under outright grant and subsidy scheme.

·         Though it is not specifically provided that arriving at the aggregate of free reserves, the amount of accumulated loss, balance deferred revenue expenditure should be deducted, it should be deducted in the arriving the amount of free reserve for the purpose of Sec. 293(1)(d).