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APPLICABILITY OF 372 A

S A INBAVADIVU (SENIOR CONSULTANT) (39 Points)

08 April 2009

A COMPANY IS A PUBLIC LIMITED COMPANY AND HOLDING COMPANY OF B WHICH IS A PRIVATE LIMITED COMPANY.

SUBSIDIARY COMPANY B EXTENDED SECURITY TO ITS HOLDING COMPANY . B COMPANY HAS PASSED ONLY BOARD RESOLUTION. IN THE MEAN TIME THE HOLDING COMPANY WAS CONVERTED INTO PRIVATE LIMITED COMPANY.

372A(8) HAS NOT GIVEN ANY EXEMPTION .

PLZ LET ME KNOW WHETHER THE COMPANY HAS TO GO FOR COMPOUNDING OR 372A WILL NOT APPLICABLE AT THIS STAGE.

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7 Replies

ankit khanna (CA) (47 Points)
Replied 08 April 2009

A subsidiary of a public co. which is a pvt co. also falls within the defn of public cos. as per cos. act, hence while giving loan the holding co. has to comply with the conditions of secn 372A. As per ur data the co. has only passed a BOD resoln so I assume it as the inter corp loan was within the limits specified in secn 372A, else aprroval of sh.hold thru sp resoln is a must.

However if in ur case the subs is a 100% owned one then it would be exempted frm 372A. Prima facie it seems from ur case that if the subs co. is not a 100% owned one then 372A non compliance has occoured and penalty may be levied. Also there is a consequent non complaince of secns 295-299-300-301, which will also attract penalties. the co. may go fr compouding u/s 621A aftr giving an application to ROC. Compounding wiuld b done by Regional Director.

Sumit Jain (CA) (4760 Points)
Replied 08 April 2009

good answer ankit

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 10 April 2009

Dear Mr. S A INBAVADIVU

Mr. Ankit Khanna has completely misunderstood your query and consequently come up with an unexpected answer. I believe he thought that holding company is providing security to its subsidiary company. But I would certainly appreciate his efforts. And Mr. Sumit Jain has earned 2 valuable points for himself without application of his mind.

Anyways Mr. S A Inbavadivu lets come to your query:

What I understand from your query is as follows:

Company “A” is a public company and Holding Company of “B”.

Company “B” is a Private company and subsidiary company of “A”.

Subsidiary company “B” providing security in favour of its Holding company “A”.

Applicability of Section-372A in the above case

Yes section-372A is applicable to company “B” as it is subsidiary of company “A” a public company.

Now kindly appreciate since you are saying that Subsidiary company “B” extends security to its Holding Company “A” by passing Board Resolution. We may discuss the same with the help of 2 situations.

Situation:1

If at the time of passing of board resolution holding company “A” was still a public company then in that case Section-372A is very much applicable to both the companies above.

Hence, passing of board resolution by Subsidiary company “B” in its board meeting for the purpose of extending security to Holding Company “A” is sufficient compliance. (Here I am assuming that while providing security to company “A” limits provided by section-372A are not breached by company “B”)

If limits are exceeded then along with Board Resolution the consent of shareholders of company “B” is also required through Special Resolution.

Situation:2

If at the time of passing of board resolution holding company “A” has lost its status of a public company and convert into a private company then in that case Section-372A is not applicable at all to both the companies above. (As both the companies are private companies at the time of passing board resolution.)

Hence, passing of board resolution by Subsidiary company “B” in its board meeting for the purpose of extending security to Holding Company “A” again is sufficient compliance.

Exemption u/s 372A(8)

Regarding exemption u/s 372A (8) I would say there is no chance of any kind of exemption whether it is wholly owned subsidiary or not because in the above case a subsidiary is providing security to its holding company.

And case of exemption arises only when a holding company is providing Inter-corporate support to its Wholly Owned Subsidiary Company which is not the case in above query.

To conclude

On the basis of above discussion we may conclude that Mr. S A INBAVADIVU you are not violating any provision of section-372A and there is no possibility or necessity of Compounding under section-621A.

Hope I am able to bring some clarity on the above issue.

Views of other learned members are solicited.

Best Regards

Ankur Garg

Ajay Mishra (Company Secretary) (74332 Points)
Replied 11 April 2009

Dear Ankur

Realy Your effort is appreciable.

My opinion on Section 372A is same.

Take care

Regards

Ajay

HARDIK (COMPANY SECRETARY NCFM (Corporate Governance )) (664 Points)
Replied 13 April 2009

I agree with detail answer of Ankur.

Keep it up

HARDIK (COMPANY SECRETARY NCFM (Corporate Governance )) (664 Points)
Replied 13 April 2009

I agree with detail answer of Ankur.

Keep it up

Kanchi Agarwal (Technical Support & Student) (479 Points)
Replied 14 April 2009

I also agree with elaborate answer of Ankur Sir. Thank You.

Here I'd also like to critise Mr. Sumit Jain for his irresponsible answer for earning 2 cheap points. In fact i can understand his knowledge leval at PCC stage. So i'd suggest he should avoid his comments on such topics.