Advances by a public company

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ayushijain882 (Querist)
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06 August 2013 A public company has given advance to a private company as per its balance sheet but it is not mentioned for what purpose the advance has been given in any of its financial statement.

Please clarify
1) if section 295 and 296 would be applicable
2) what are the various exemptions of section 295 and 296 a public company has, while giving advances
3) Please cite relevant case laws, if any

Ajay Mishra

Ajay Mishra (Expert)
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06 August 2013 Hi

It will be better to discus the same with company management about the purpose of advance. Balance sheet will explain its note to account about such money.

Ajay Mishra

Ajay Mishra (Expert)
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06 August 2013 Applicability:

Section 295 is applicable to a public company or a private company, which is a subsidiary of a public company. Therefore, a private company shall be exempted from the provisions of section 295 of the Act.

Exemption:

Following companies are exempted from provisions of section 295 and these companies can give loan to their directors without the approval of Central Government:
(a) Private Company which is not a subsidiary of public company;
(b) Banking Company;
(c) Government Company'
(d) Loan made by holding company to its subsidiary company;
(e) Guarantee given or security provided by holding company in respect of any loan made to its subsidiary company.

NON APPLICABILITY OF PROVISION OF SECTION 295
Section 295 put restrictions on a public company or a private company being a subsidiary of a public company intending to make any type of transaction with a director of the company or partner or relative of a director, etc. whether, directly or indirectly to make any loan, or to give any guarantee, to provide any security in connection with a loan made by any other person by, and it calls for obtaining the previous approval of Central Government.
Section 295 applies to the loan given by company directly or indirectly. As per clarification issued by the MCA vide General Circular No. 24/2011 dated 12.05.2011, when the beneficiary of the loan/guarantee/security is a Public Limited Company, approval of Central Government should only be sought if the provisions of sub-section (d) or (e) of section 295 of the Companies Act, 1956 are attracted and the application should also clearly bring out the fact in this regard.

Ajay Mishra

Ajay Mishra (Expert)
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06 August 2013
Persons covered under section 295:

The section has wider scope and any transaction with the following types of persons by a public company or a private company which is a subsidiary of a public company shall be within the purview of section:—
(a) any director of the lending company;
(b) any director of the holding company;
(c) any partner of any such director;
(d) any relative of any such director;
(e) any firm in which any such director is a partner;
(f) any firm in which a relative of such a director is a partner;
(g) any private company of which any such director is a director;
(h) any private company of which any such director is a member;
(i) any body corporate of which not less than 25% of the total voting power may be exercised or controlled at a general meeting by any director or by two or more directors together; and
(j) any body corporate, the Board of directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

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