Other Borrowings Tools – Corporate Funding and Listings in Stock Exchanges Important Questions
Question 1.
Explain “Commercial Paper”.
Answer:
“Commercial Paper”: Commercial Paper (CP) is an unsecured money market instrument issued in the form a promissory note. CP is a private placed instrument. It enables highly rated corporate borrowers to diversify their sources of short-term borrowings and provides an additional instrument to investors.
Question 2.
Comment on the following: Issue of unsecured debentures by a company to another company, where the debenture have an option for compulsory conversion into equity shares within seven years, cannot be termed as deposits.
Answer:
As per section 73 of Companies Act, 2013 read with Rule 2(l)(c) of Companies (Acceptance of Deposits) Rules, 2014 define the term ‘deposit’.
As per Rule 2(1)(c)(ix), deposit shall not include any amount raised by issue of bonds or debentures secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule m 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.
Since comprehensive reading of the above clause the unsecured debenture issued having option of compulsory conversion into shares of the company within ten years shall not be treated as deposits.
In the given 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 3.
Define the term ‘deposits’ and list out the receipts of money which are not considered as deposits.
Answer:
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 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.
→ 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.
→ 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 Section 2(bii) of the Reserve Bank of India Act, 1934.
→ any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this be-half 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.
→ 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.
→ any amount received by a company from any other company.
→ 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.
→ any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company.
However, the director of the company or relative of the director of the private company, as the case may be, 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 and the company shall disclose the details of money so accepted in the Board’s Report.
→ 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 m of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within Ten years.
However, if such bonds or debentures are secured by the charge of any assets referred to in Schedule HI 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.
→ any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.
→ any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit.
→ any non-interest bearing amount received and held in trust.
→ any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act.
→ any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982.
→ any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India.
→ an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person.
Question 4.
Tree Reserves’ and ‘Net Worth’ under the provisions of Companies Act, 2013.
Answer:
As per section 2(43) of Companies Act, 2013: Tree Reserves’ mean such reserves which, as per the latest audited Balance Sheet of a company, are available for distribution as dividend. Provided that any amount representing unrealized gains, notional gains or revaluation of assets whether as a reserve or otherwise or any change in carrying amount of an asset or a liability recognized in equity, including profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.
As per section 2(57) of Companies Act, 2013: ‘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 not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.
Question 5.
What is the difference between a Fixed Deposit and Inter-Corporate Deposit? In case of default by a company, explain the role of regulator.
Answer:
Fixed Deposit and Inter-Corporate Deposit:
Corporate 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 corporate, this market allows corporate with surplus funds to lend to other corporate facing shortage of funds. Another aspect of this market is that the better-rated corporate 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.
Role of Regulator in case of default by a company:
If company fails to repay the depositor may apply to Tribunal and tribunal may direct that:
→ 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 one crore rupees but which may extend to ten crore rupees; and
→ 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 lakh rupees but which may extend to two crore rupees, or with both.
However, 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 of Companies Act, 2013.
→ 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.
→ 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 sub-section (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.
Question 6.
Distinguish between the following: Commercial Paper and Inter Corporate Deposit.
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 eligible to issue Commercial Paper.
A company would be eligible to issue Commercial Paper provided:
- the tangible net worth of the company, as per the latest audited balance sheet, is not less than ₹ 4 crores.
- the company has been sanctioned working capital limit by bank/s or FIs and
- the borrowal account of the company is classified as a Standard Asset by the financing bank/institution.
Inter Corporate Deposits (ICD):
- Corporate 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 corporate, this market allows corporate with surplus funds to lend to other corporate facing shortage of funds.
- Another aspect of this market is that the better-rated corporate 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. Thus, the risk inherent is high.
- ICD market is an unorganised market with very less information available publicly about transaction details.
Question 7.
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.
Answer:
- According to section 2(68) of Companies Act, 2013: 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), it may issue such security to any person (number of persons not exceeding 200).
- As per provisions of section 73(2) read with Exemption Notification dated 5th June, 2015:
A private company may accept from its member’s 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 8.
Comment on the following: A private limited company can accept deposit from its members under the provisions of the companies Act, 2013.
Answer:
A private limited company can accept deposit from its members in accordance with Section 73 of the Companies Act, 2013 and rules made there under. 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 per cent 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 anybody 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:
However, 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 9.
What are the merits and demerits of customer advance? Explain.
Answer:
Merits of Customer Advance:
(i) Interest free: Amount offered as advance is interest free. Hence funds are available without involving financial burden.
(ii) 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.
(iii) No repayment obligation: Money received as advance is not to be refunded. Hence there are no repayment obligations.
Demerits of Customer Advance:
(i) 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.
(ii) Limited period: The period of customers’ advance is only up to the delivery goods. It cannot be reviewed or renewed.
(iii) Penalty in case of non-delivery of goods: 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 10.
Sunbeam Ltd. failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue such directions. Advice the company suitably.
Answer:
Facts of the case: The given facts are similar to a decided case law. Sun-beam Ltd. failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue such directions.
Applicable provisions: The National Consumer Dispute Redressal Commission pointed out that after the Amendment Act, 1993, a consumer forum can direct payment of amounts due to a depositor under the provisions of Section 18 of the Consumer Protection Act, 1986. An order directing payment of the outstanding amount to the depositors can now be made under the provisions of the Section 14.
Conclusion: In nutshell, the contention of Sun-beam Ltd. is not valid. The payment of interest to the deposit holder should be made as per the order of the consumer forum.
Question 11.
Board of Directors of Joy Ltd., by a resolution passed at its meeting, decided 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 reserve 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?
Answer:
Applicable provisions: In accordance with the section 186 of the Companies Act, 2013 no company shall, directly or indirectly:
1. Give any loan to any person or other body corporate;
2. Give any guarantee, or provide security, connection with a loan to any other person body corporate or person; and
3. 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. 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.
Facts of the case: 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 meeting by a special resolution and the Board meeting with the consent of all the directors present.
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 12.
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 violate 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.
Answer:
Applicable provisions: 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.
Facts of the Case: 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 INR 10 lakhs as advance towards the supply of goods to certain parties on an agreement to supply goods after two years from date of deposit.
Conclusion: As per applicable provision, the amount so accepted by the company is “deposit”.
Question 13.
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 registrar of investments in securities not held in company’s name and annual return of Grow (Pvt.) Ltd. He also want to take copies thereof. Examining the relevant provisions of the Companies Act, 2013, advise Virat whether he would be successful in this regard.
Answer:
Applicable provision(s):
Section 187 read with rule 14 of Companies (Meetings of Board and its Powers), Rules, 2014 provides that every company shall maintain Register of Investment in securities not held in company’s name in Form MI3P-3. Sub-section 3 of the section provides that such register shall be open to inspection by any member or debenture-holder of the company without any charge during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impose.
Section 94 provides that copies of annual return filed under section 92 shall be kept at registered office of the company. Further the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner during business hours without payment of fees and by any other person on payment of such fees as may be prescribed under Companies (Registration office & fee) Rules, 2014. Further he may take a copy of the return on payment of such fees as may be prescribed in above said rules.
Facts of the Case: In the given case, 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 registrar of investments in securities not held in company’s name and annual return of Grow (Pvt.) Ltd. Also he wants to take copies.
Conclusion(s):
- In the given case, Virat who is not a member of the company is not eligible to inspect the Register of Investment in securities not held in company’s name.
- In the given case, Virat may inspect and take copy of Annual Return and not the Register of Investment in securities not held in company’s name.
Question 14.
Board of Directors of Green Field Ltd. decides to accept deposits from the public at a compound interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board can go ahead with its proposal.
Answer:
- Facts of the case: Board of Directors of Green Field Ltd. decides to accept deposits from the public at a compound interest rate of 12% per annum.
- Question Arises: Whether the Board can go ahead with its proposal or not?
Applicable Provisions:
As per Rule 3(6) of the Companies (Acceptance of Deposits) Rules, 2016: No company under section 73 (2) 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.
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 Rtichi Ltd., wants to inspect 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?
Answer:
Facts of the Case: Suresh, a member of Ruchi Ltd. wants to inspect the register of deposits maintained by the Company as required under the provisions of the Companies Act, 2013.
In the given case, company refused to provide the register for inspec-tion without assigning any reason.
Applicable provisions: 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 provision, this register is not open for inspection by members and company may refuse to open it for inspection.
Conclusion: In the given case, Ruchi Limited can refuse to provide the register for inspection 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 reserve 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:
Applicable provisions:
As per 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) of the Companies Act, 2013, the loan amount must not exceed 6096 of its paid-up capital, free reserves and securities premium account or 10096 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.
Facts of the case:
As per the facts of the given case, 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 reserve 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.
In absence of adequate information, even if we assume that INR 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.
Conclusion: The resolution of the Board of Directors therefore, is not 4 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.
Answer:
Applicable provisions: As per section 186 of the Companies Act, 2013 a company shall make investments upto 60 per cent of paid up share capital and free reserves or 100 per cent of free reserves and securities premium account whichever is more.
Facts of the Case: In the given case, XYZ Ltd., a company has a paid up share capital of ₹ 60 crores and free reserves of ₹ 25 crores desires to make a loan of ₹ 20 crores to M Ltd. XYZ Ltd. has already made investments in many other companies including loans to the extent of ₹ 35 crores.
Conclusion:
- In this case, company can make maximum investment of 60% (60+25) = INR 51 crores.
- In the given case as per facts of the case, XYZ Ltd. has already invested INR 35 crores, thus it can further invest 16 crores only.
To invest up to 20 crores approval of shareholders through a special resolution required.
Question 18.
Commercial paper is sold at a discount from its face value and re-deemed 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.)
Answer:
= \(\frac{(5,00,000-4,80,000) \times 360 / 180}{4,80,000}\)
= 8.33%
Question 19.
Discuss merits of Commercial Paper?
Answer:
Merits of Commercial Paper:
- It provides more funds compared to other sources.
- It is freely transferable in nature therefore it has high liquidity also.
- It produces 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.
Question 20.
Discuss demerits of Commercial Paper?
Answer:
Demerits of Commercial Paper:
- 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.
- New and moderately rated organizations are not in a position to raise funds by this method. Only financially secure and highly rated organizations can raise money through commercial paper.
Question 21.
In short, discuss the guidelines for issue of commercial paper.
Answer:
The RBI has issued guideline for issuance of commercial papers which is explained as:
Companies, Primary Dealer(s) and Financial Institutions (FIs) are per-mitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligible to issue Commercial Paper (CP).
A company would be eligible to issue CP provided:
- Tangible net worth of the company, as per the latest audited balance sheet, is not less than INR 4 crores.
- Company has been sanctioned working capital limit by bank(5) or FIs.
- Borrowers’ account of the company is classified as a Standard Asset by the financing bank/institution.