BORROWING POWERS OF PUBLIC COMPANY

BASI C LEGAL PROVI SI ON:- - - - - - - -

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.
MEANI NG OF TEMPORARY LOAN AND I TS I MPLI CATI ON:- - - - - - -

Temporary loan obtained from the companys 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.
CERTAI N THI NGS NOT TAKEN I NTO ACCOUNT FOR LI MI T 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).
MEANI NG 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:----------
General reserve.
Balance held in the Security Premium Account.
Capital and Debenture Redemption Reserve.
The amount of surplus shown in the Profit & Loss Account and carried
forward under the heading Reserve and Surplus in the Balance
Sheet.
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.
Central Governments 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).
Prepared By
Rajeev Nayak