Investment in Securities

Yes it can,  subject however to the limits and procedure specified in Section 372A.

Sundar-whats the idea behind this ? Trading or Investment. If investment-then have a luk to sec 372A and if trading and the co is not having any other business-pl hav a luk to the NBFC circular issued by RBI

Santosh,

The idea is to run the main business which is non financial by nature & also invest/trade in securities as a side business in the company's name. Is this possible without being a NBFC ?

Jayashree, Santosh

I had a look at Sec 372A. But things are not very clear. Can you highlight anything there relating to my question ?

Sunder- under sec 45I (a) , (c) read with (f) of the RBI Act- both financial institution and NBFC are covered and financial institution (clause c) includes any instituion which carried on as its business or part of its business acquision of shares , stocks, bonds, deb, etc.

So as per yr comments- if it is a part of yr business (i.e. trading), it will come under NBFC. The onus is on u to prove that trading is not our business to get the exemption from NBFC rules and compliances.

there is no definition/ crieteria of business and as per me-if the income from trading is insignificant in comparison to the income from yr main business- u can argue that its not our business.

Sunder

In your case you can make investment up to a limit which is the higher of the following two just by passing a Board Resolution beyond which you have to get shareholders special resolution in general meeting:

1)     60% of the paid up capital and free reserves or

2)     100% of the free reserves

The above limit will also include loans made, Guarantee provided in connection with a loans made to any other body corporate etc…

Yes, it is possible with out being a NBFC.

Syam-

"Yes, it is possible with out being a NBFC".- Can u pl justify

R u in the opinion that Companies Act overrides RBI Act ?

A Company is not going to become a NBFC just by  carrying on any of the activities listed under clause (ii) of section 45 I (c) of RBI Act particularly where a company carries on multiple businesses, both financial and non-financial, in varied proportion. In such case the question of ‘principal business’ assumes importance.

RBI has been given a numerical dimension for determining "principal business". If the financial assets of a company are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income, then the company will be an NBFC. So until then the investments will be exclusively governed by Section 372A of the Companies Act, 1956.

Any other views please……

Syam,

In summary, as long as I maintain the limit of 50% for the income generated, I can continue investment without being a NBFC. Correct me if I am wrong.

Now consider following special cases,

What happens in case of knowledge based business where there is not much of plant & machinery so to say ?

What happens if in a particular year, due to business climate, income from main business is less than that from investment ?

Please refer the word ‘and ’between  income/assets criteria that is, both the tests are required to be satisfied simultaneously as the determinant factor for principal business of a company.

Secondly there are various judicial pronouncements which say “principal business” is not something that can be quantified in absolute terms with reference to the figures stated in the financial statement of a company. Firstly it is the intention of the party to carry on a business activity as its primary activity. The criteria above applies where the business profile have undergone a change over a period of time.