Discuss the provisions of the Companies Act, 1956 relating to inter- corporate

1. What are the conditions imposed by Companies Act, 1956 as regards investments of a company?

OR
Discuss the provisions of the Companies Act, 1956 relating to inter- corporate
investments.

OR
What are the provisions of the Companies Act, 1956 as regards purchase by a
company of shares of other companies?

J2Lns .

Inter-company Investments
The Companies (Amendment) Act, 1999 [w.eJ. 31.10.98] has introduced a new section, viz., Section 372-A. This newly introduced Section has consolidateq the provisions with respect to inter-corporate loans and investments. Section 372-A with regard to investments provides as follows:
1. Ceiling on Investments. Clause (c) of sub-section (1) of Section 372-A provides that no company shall, directly or indirectly, acquire (by way of subscription, purchase or otherwise) the securities of any other body corporate exceeding: (i) 60% of its paid-up share capital and free reserves', or (ii) 100% of its free reserves whichever is more.
Please note that in case a company has or is proposing to make loans or give guarantee or security in respect of any loan to any body corporate(s), then it is the aggregate of the loans, guarantees, etc., and investments which cannot exceed the aforesaid ceiling.

2. Approval by way of Special Resolution. Where the aggregate of the investments/loans, etc., so far made in all other bodies corporate, alongwith investments loans, etc., proposed to be made exceeds the aforesaid limits, no investment shall be made unless previously authorised by a special resolution passed in a general meeting.
3. Matters to be Specified in the Notice of Special Resolution. Second proviso to sub-section (1) of Section 372-A requires that the notice of the special resolution as aforesaid must indicate clearly:
(i) the specific limits;
(ii) the particulars of the body corporate in which the investment is proposed to
be made;
(iii) the purpose of the investment;
(iv) specific sources of funding and such other details.
The Department of Company Affairs has, through a circular", warned companies
against:

" 'Free Reserves' means those reserves which, as per latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.
*" Economic Times 18 August 1999