Section 372a of companies act
This query is : Resolved
15 March 2014
DO INVESTMENTS MADE IN BY PUBLIC LTD COMPANY WITH VARIOUS FINANCIAL INSTITUTIONS WILL BE OUTSIDE THE AMBIT OF SEC 372A IF THESE INSTN. FALLS UNDER THE TRUST STRUCTURE. LIKE UNITS OF MUTUAL FUND OF IIFL
15 March 2014
Mutual fund units are 'securities' and hence such investments attracts section 372A (1)(c) of the Companies Act,1956.
15 March 2014
Thank you so much Mr. Chackrapani. but some financial instn claim they r registered under trust structure and hence sec 372A is not applicable for funds invested with them.
23 July 2025
You're referring to **Section 372A of the Companies Act, 1956**, which deals with **inter-corporate loans and investments** made by companies. Let's clarify the issue with respect to investments in **mutual funds** or other financial institutions registered under a **trust structure**.
---
### 🔹 Summary of Section 372A (Companies Act, 1956):
Section 372A governs **loans, guarantees, securities, and investments** made by **companies** (excluding banking and certain other exempted companies). Specifically, subsection (1)(c) states that:
> No company shall make any investment by way of subscription, purchase or otherwise in the **securities of any other body corporate** beyond prescribed limits without passing a **board resolution** and sometimes a **special resolution**.
---
### 🔹 Are **Mutual Fund Units** covered under Section 372A?
✅ **Yes**, mutual fund units are considered **"securities"** under the **Securities Contracts (Regulation) Act, 1956**, and thus are **within the ambit of Section 372A(1)(c)**.
* Even if the mutual fund is **structured as a trust**, the **investment made by the company is in securities issued by a body corporate** (i.e., the Asset Management Company managing the scheme), and not directly in the trust.
* The key test is whether the **instrument is a "security"**. Units of mutual funds **are securities**, so Section 372A applies.
---
### 🔹 Claim: Financial Institutions say they're under a **Trust Structure**, so 372A doesn't apply?
This claim is **misleading**. Here's why:
* The **legal structure** of the mutual fund (usually a trust) is not relevant.
* What matters is **whether the instrument purchased by the company is a "security" issued by a body corporate**.
* The **mutual fund trust** is managed by an **Asset Management Company (AMC)**, which is a **body corporate**.
* Thus, the investment is **indirectly in the AMC’s scheme**, and hence, **Section 372A is triggered**.
---
### 🔹 Important Clarification from MCA (Ministry of Corporate Affairs):
MCA has, in various clarifications, upheld that **investments in mutual funds** are considered **investments in securities** and thus are **subject to the limits and approvals under Section 372A**.
---
### ✅ Conclusion:
* **Yes, Section 372A applies** to investments made by a **public limited company** in **mutual funds**, **even if those funds are under a trust structure**.
* Such investments fall under **Section 372A(1)(c)** because mutual fund units are **classified as securities**.
* Claims by financial institutions to the contrary are **not valid** under the law.
---
If you are working with the **Companies Act, 2013**, note that **Section 372A has been replaced by Section 186**, which has similar provisions but some procedural changes. Let me know if you'd like a comparison.
---
### 🔹 Summary of Section 372A (Companies Act, 1956):
Section 372A governs **loans, guarantees, securities, and investments** made by **companies** (excluding banking and certain other exempted companies). Specifically, subsection (1)(c) states that:
> No company shall make any investment by way of subscription, purchase or otherwise in the **securities of any other body corporate** beyond prescribed limits without passing a **board resolution** and sometimes a **special resolution**.
---
### 🔹 Are **Mutual Fund Units** covered under Section 372A?
✅ **Yes**, mutual fund units are considered **"securities"** under the **Securities Contracts (Regulation) Act, 1956**, and thus are **within the ambit of Section 372A(1)(c)**.
* Even if the mutual fund is **structured as a trust**, the **investment made by the company is in securities issued by a body corporate** (i.e., the Asset Management Company managing the scheme), and not directly in the trust.
* The key test is whether the **instrument is a "security"**. Units of mutual funds **are securities**, so Section 372A applies.
---
### 🔹 Claim: Financial Institutions say they're under a **Trust Structure**, so 372A doesn't apply?
This claim is **misleading**. Here's why:
* The **legal structure** of the mutual fund (usually a trust) is not relevant.
* What matters is **whether the instrument purchased by the company is a "security" issued by a body corporate**.
* The **mutual fund trust** is managed by an **Asset Management Company (AMC)**, which is a **body corporate**.
* Thus, the investment is **indirectly in the AMC’s scheme**, and hence, **Section 372A is triggered**.
---
### 🔹 Important Clarification from MCA (Ministry of Corporate Affairs):
MCA has, in various clarifications, upheld that **investments in mutual funds** are considered **investments in securities** and thus are **subject to the limits and approvals under Section 372A**.
---
### ✅ Conclusion:
* **Yes, Section 372A applies** to investments made by a **public limited company** in **mutual funds**, **even if those funds are under a trust structure**.
* Such investments fall under **Section 372A(1)(c)** because mutual fund units are **classified as securities**.
* Claims by financial institutions to the contrary are **not valid** under the law.
---
If you are working with the **Companies Act, 2013**, note that **Section 372A has been replaced by Section 186**, which has similar provisions but some procedural changes. Let me know if you'd like a comparison.
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