Sec 372a

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ASHISH AGARWAL (Querist)
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01 November 2013 I have one query under section 372A, One public company wants to provide loan to another company, but as per last audited balance sheet, company suffer losses and have debit balance in profit & loss account. Now my query is: For calculation of free reserves limits as per section 372A of the Act whether the losses in the profit and loss account need to be deducted or not. As per my understanding free reserves means those reserves which (as per the latest audited balance sheet), are free for distribution as dividend and hence debit balance in profit&loss account will not consider.

Please correct me, if i m wrong. I seek your valued suggestion on the above mentioned query.

Regards, CA Ashish Agarwal

Ajay Mishra

Ajay Mishra (Expert)
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01 November 2013 Hi

“Free reserve” means those reserves which, as per the latest audited balance sheet of the company, are free for distribution as
dividend and shall include balance to the credit to the security premium account but shall not include share application money. (Paid up capital can be considered as on the date of investment).

(It is not expressly provided that in arriving at the aggregate of the free reserve, the amount of accumulated balance of loss, balance of deferred revenue expenditure and other intangible assets, should be deducted. Capital and debenture redemption reserve is free reserve after redemption of preference shares and debenture respectively.)

ASHISH AGARWAL

ASHISH AGARWAL (Querist)
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01 November 2013 Thanks Mr. Mishra ,

But i am still not clear whether i can take a stand of not including the debit balance of P&L in Free Reserves.

Are there any FAQs or Departmental Views or any case laws providing for the same.

Thanks ,
Ashish Agarwal

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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23 July 2025 ### **Section 372A of the Companies Act, 1956 – Loan to Another Company**

**Section 372A** deals with the provisions regarding **loans, guarantees, and investments** made by a **public company** to **another company** (which can also include subsidiaries and associated companies). The section lays down certain limits for such transactions based on the company's **free reserves**.

### **Key Aspects of Section 372A:**

* **Loans, Guarantees, or Investments** made by a public company to another company (or its subsidiaries) should not exceed:

* **60% of its paid-up capital**, or
* **100% of its free reserves**, whichever is higher.
* The **approval of the shareholders** via a **special resolution** is required for such transactions if the amounts exceed the limits mentioned above.

### **Understanding Free Reserves and P\&L Account:**

#### **Free Reserves:**

* **Free reserves** are the reserves that are available for distribution as **dividends** or for any other use by the company, which are **not subject to any restrictions**.
* These typically include:

* General reserve
* Surplus in profit and loss account (excluding debit balance)

#### **The Debit Balance in the Profit & Loss Account:**

* The **debit balance** in the **Profit & Loss Account** (i.e., accumulated losses) **cannot** be considered part of the free reserves.
* The reason is that the accumulated losses represent a negative balance in the company's equity, and, therefore, cannot be used for the distribution of dividends or for other purposes without reversing these losses.

### **Calculation of Free Reserves in Context of Losses:**

You are correct in your understanding, as per Section 372A:

* If the **Profit & Loss account** shows a **debit balance** (i.e., accumulated losses), this **needs to be deducted** while calculating the free reserves.
* **Free reserves** should only include **positive balances** (like general reserve or surplus) that are available for distribution and are not tied up in covering losses.

### **Example to Clarify:**

* Suppose a public company has the following in its **latest audited balance sheet**:

* **Paid-up capital**: ₹10,00,000
* **General reserve**: ₹4,00,000
* **Profit & loss account**: ₹(2,00,000) (i.e., debit balance due to losses)
* In this case, **free reserves** would be calculated as:

* **General reserve**: ₹4,00,000
* **Profit & loss account**: Since there is a **debit balance**, it is **not** added.

Therefore, the **free reserves** available for lending or investment purposes under Section 372A would be **₹4,00,000**, and **not ₹6,00,000** (which would have included the profit & loss balance if there were no losses).

### **Conclusion:**

* **Yes**, for the calculation of free reserves under **Section 372A**, the **debit balance in the profit & loss account** (i.e., the losses) **must be deducted**.
* Therefore, the **available free reserves** would only include those reserves that are **positive** and **available for distribution**, such as **general reserves**. The **losses** in the profit & loss account are to be excluded in the calculation of free reserves for the purposes of the section.

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I hope this clarifies your query! Let me know if you need further assistance.

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