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India – Corporate & SCRA Snapshots.

28 January, 2014

 


  • Section 372A of the Companies Act, 1956 (‘1956 Act’) provides certain restrictions on intercorporate loans and investments, and Section 295 of the 1956 Act provided restrictions on loans, guarantees and security extended to directors and certain other persons (in whom directors are interested). Both these sections granted exemptions to private companies and wholly owned subsidiaries (‘Exemptions’). Section 185 of the Companies Act, 2013 (‘2013 Act’) (which has been notified in place of Section 295 of the 1956 Act) has excluded the Exemptions previously granted under Section 295 of the 1956 Act. Section 186 of the 2013 Act (not yet notified) has widened the scope of Section 372A of the 1956 Act considerably inter alia setting out restrictions on loans and investments by a company to any other person and has also excluded the previously granted Exemptions. To obviate the confusion arising on account of the notification of Section 185 but not Section 186 of the 2013 Act, the Ministry of Corporate Affairs, Government of India (‘MCA’), by its circular dated November 19, 2013, has clarified that Section 372A of the 1956 Act remains in force until Section 186 of the 2013 Act is notified.

 

  • In terms of Section 182 of the 2013 Act (which has been notified) a company, other than: (i) a Government Company; and (ii) a company that has been in existence for less than three financial years, is permitted to contribute directly or indirectly to political parties, an aggregate amount not exceeding 7.5% of its average net profits during the three immediately preceding financial years. As per Section 182(3) of the 2013 Act, a company that makes any political contribution is required to disclose in its profit and loss account, the amount so contributed and the name(s) of the party(ies) to which such amount has been contributed (‘Disclosure Requirements’).

 

MCA has, by way of notifications dated November 7, 2013, and a circular dated December 10, 2013, clarified inter alia that: (i) each company incorporated under Section 25 of the 1956 Act containing the expression “electoral trust” as a part of its name and approved in accordance with the procedure specified in the Electoral Trusts Scheme, 2013 (‘Electoral Trust Company’); as well as (ii) each company that makes monetary contributions directly to any political parties are subject to the Disclosure Requirements. On the other hand, companies contributing amounts to an Electoral Trust Company for contributing to a political party are exempt from the Disclosure Requirements.

 

  • Under the 1956 Act, any shares held or power exercisable by a company in a fiduciary capacity in another company was not treated as held or exercisable by it for purposes of determination of a holding-subsidiary relationship. This meant that companies holding shares in another company in a fiduciary capacity (like trustee companies) were not required to take into account the number or percentage of such shares or voting rights held, and were not regarded as the holding company of such other company. The definition of subsidiary company under the 2013 Act (which has been notified) excludes this exemption granted in the determination of holding – subsidiary relationship.

 

MCA, on receipt of numerous representations has re-examined the provisions of the 2013 Act and by way of a circular dated December 27, 2013, clarified that shares held by a company or power exercisable by it in another company in a fiduciary capacity are not to be counted for the purpose of determining holding – subsidiary relationship in terms of Section 2(87) of the 2013 Act. Ideally, this should have been done by way of an amendment to the 2013 Act.

 

AZB

 

For further information, please contact:

 

Zia Mody, AZB & Partners
[email protected]

 

Abhijit Joshi, AZB & Partners 
[email protected]


Shuva Mandal, AZB & Partners 
[email protected]

 

Samir Gandhi, AZB & Partners
[email protected]


Percy Billimoria, AZB & Partners 
[email protected]

 

Aditya Bhat, AZB & Partners 
[email protected]

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