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Problem in relation to sec 293 comp act.

mayank agarwal (CA fianlist BCOM(H) CS student )   (577 Points)

13 April 2012  

Hello friends .

 

please let me know while calculating total of paid up capital & free reserves for the purpose of calculation of maximum of loan that can be taken without consent of shareholder , shall we consider net profits calculated as per sec 249 & 350 (for the current year )  ?  will we treat current year profit & loss balance as a free reserve or not ?

 

this query is asked in respect of a exam problem in the nov 2004 . (on the page 1.50 page of munish bhandari sir's handbook )

 

looking forward for your reply .

 

regards

 


 9 Replies

CA Revati Galgali (B.com ACA DipIFR(ACCA) CS(Exe))   (1049 Points)
Replied 13 April 2012



oopss..i misunderstood..sorry :(

$ Pillu $ (**Love - Live**) (467 Points)
Replied 13 April 2012

Originally posted by : REVATI GALGALI

I hope you are refering to Inter corporate Loans

Meaning of free reserves in context of Sec 372A : Reserves which are free for the distribution of dividend.

Sec premium is included in the free reserves,

share application money is not to be included in the free reserves

Free reserves and the Paid up capital for the purpose of Sec 372 A is to be calculated as per the last audited balance sheet, so obviously the current year profit is not to be included in the free reserves. 

I hope it is clear now :)

@ Revati Galgali.....

He was not referring to intercorporate loans. If am not wrong he was referring to Sec.293..which deals with maximum permissible borrowings by board without the approval of shareholders. whereas Sec372A deals with intercorporate loans and investments.

@ Mayank Agarwal......

As sec 293...borrowal of money (already borrowed + proposed borrowing) shall not exceed the total of paid up capital and free reserves....

i think u got confused in that particular question becuase the netprofit for the current year profit was shown separately.......

All i would like to say is...when u calculate paid up capital and free reserves..strictly look at the balancesheet........( since the current year profit must have been appropriated either in the form of transfer to general reserve/capital redemption reserve). sos no need to simultaneously look at the current year profit separately.....

In the question they have given/shown separately......(it may be useful to calculate the limits of conributions to charitable funds)

2 Like

Ankur Garg (Company Secretary and Compliance Officer)   (114664 Points)
Replied 13 April 2012

MEANING OF FREE RESERVES:      

 

Kindly appreciate law is silent regarding definition of Free Reserves in the Section 293(1)(d). It only says that free reserves means reserves not set apart for any specific purposes.

 

As per general understanding in the absence of definition of free reserve Section 293(1)(d) the term free reserve means to include both capital and revenue reserves.   

 

The term reserves are used in the different Section, like Sec. 205(2A) requires the transfer to reserve a portion of profit while declaring the dividend. The free reserves in this sub-section means revenue reserves and not the capital reserves.

 

The expression ‘free reserves’ also defined in Sec. 372A which means reserves, which as per latest audited balance sheet of the company, are free for distribution  as dividend and include the security premium account but shall not include share application money.

 

On the basis of general interpretation the following reserves will be treated as free reserve:------

 

a.      General reserve.

b.      Balance held in the Security Premium Account.

c.      Capital and Debenture Redemption Reserve.

d.      The amount of surplus shown in the Profit & Loss Account and carried forward under the heading “Reserve and Surplus” in the Balance Sheet.

e.      Any other reserve shown or appeared in the Balance Sheet and created by the appropriation of profits.

 

But does not include the following:

 

a.     Capital Reserve.

b.     Revaluation Reserve.

c.     Any reserve created for the repayment of any future liability.

 

Though it is not specifically provided that arriving at the aggregate of free reserves, the amount of accumulated loss, balance deferred revenue expenditure should be deducted, it should be deducted in the arriving the amount of free reserve for the purpose of Sec. 293(1)(d).

 

Regards

2 Like

$ Pillu $ (**Love - Live**) (467 Points)
Replied 13 April 2012

Originally posted by : Ankur Garg

MEANING OF FREE RESERVES:      

 

Kindly appreciate law is silent regarding definition of Free Reserves in the Section 293(1)(d). It only says that free reserves means reserves not set apart for any specific purposes.

 

As per general understanding in the absence of definition of free reserve Section 293(1)(d) the term free reserve means to include both capital and revenue reserves.   

 

The term reserves are used in the different Section, like Sec. 205(2A) requires the transfer to reserve a portion of profit while declaring the dividend. The free reserves in this sub-section means revenue reserves and not the capital reserves.

 

The expression ‘free reserves’ also defined in Sec. 372A which means reserves, which as per latest audited balance sheet of the company, are free for distribution  as dividend and include the security premium account but shall not include share application money.

 

On the basis of general interpretation the following reserves will be treated as free reserve:------

 

a.      General reserve.

b.      Balance held in the Security Premium Account.

c.      Capital and Debenture Redemption Reserve.

d.      The amount of surplus shown in the Profit & Loss Account and carried forward under the heading “Reserve and Surplus” in the Balance Sheet.

e.      Any other reserve shown or appeared in the Balance Sheet and created by the appropriation of profits.

 

But does not include the following:

 

a.     Capital Reserve.

b.     Revaluation Reserve.

c.     Any reserve created for the repayment of any future liability.

 

Though it is not specifically provided that arriving at the aggregate of free reserves, the amount of accumulated loss, balance deferred revenue expenditure should be deducted, it should be deducted in the arriving the amount of free reserve for the purpose of Sec. 293(1)(d).

 

Regards

Debenture redemption reserve is not a free reserve since it is made for the specific purpose of redemption of debentures.

Source - CA munish Bhandari

1 Like

Ankur Garg (Company Secretary and Compliance Officer)   (114664 Points)
Replied 13 April 2012

Originally posted by : $ Pillu $
Debenture redemption reserve is not a free reserve since it is made for the specific purpose of redemption of debentures.

Source - CA munish Bhandari


Totally agree with your opinion Sir...It is a mistake on my part.

thanks for correcting me at the right time...

1 Like

CA Revati Galgali (B.com ACA DipIFR(ACCA) CS(Exe))   (1049 Points)
Replied 13 April 2012

Originally posted by : Ankur Garg




Originally posted by : $ Pillu $





Debenture redemption reserve is not a free reserve since it is made for the specific purpose of redemption of debentures.

Source - CA munish Bhandari







Totally agree with your opinion Sir...It is a mistake on my part.

thanks for correcting me at the right time...

Thanks Ankur Sir, for the information in the first place :)

$ Pillu $ (**Love - Live**) (467 Points)
Replied 13 April 2012

@ ankur sir,,,

 

Sir please dont refer me as sir.....am not to that level...............

Just posted what i learned.....

 

1 Like

mayank agarwal (CA fianlist BCOM(H) CS student )   (577 Points)
Replied 14 April 2012

Originally posted by : $ Pillu $




Originally posted by : REVATI GALGALI






I hope you are refering to Inter corporate Loans

Meaning of free reserves in context of Sec 372A : Reserves which are free for the distribution of dividend.

Sec premium is included in the free reserves,

share application money is not to be included in the free reserves

Free reserves and the Paid up capital for the purpose of Sec 372 A is to be calculated as per the last audited balance sheet, so obviously the current year profit is not to be included in the free reserves. 

I hope it is clear now :)






@ Revati Galgali.....

He was not referring to intercorporate loans. If am not wrong he was referring to Sec.293..which deals with maximum permissible borrowings by board without the approval of shareholders. whereas Sec372A deals with intercorporate loans and investments.

@ Mayank Agarwal......

As sec 293...borrowal of money (already borrowed + proposed borrowing) shall not exceed the total of paid up capital and free reserves....

i think u got confused in that particular question becuase the netprofit for the current year profit was shown separately.......

All i would like to say is...when u calculate paid up capital and free reserves..strictly look at the balancesheet........( since the current year profit must have been appropriated either in the form of transfer to general reserve/capital redemption reserve). sos no need to simultaneously look at the current year profit separately.....

In the question they have given/shown separately......(it may be useful to calculate the limits of conributions to charitable funds)

Thank you so much pillu , you have solved my problem . yes i was puzzled with those P/L A/C items . I will not consider them while calculating borrowing limits . thanks once again .

LAKSHAY KHANNA (COMPANY SECRETARY) (163 Points)
Replied 31 October 2014

Dear Ankur Sir

What if the Company does not have any free reserves and only has "Surplus in statement of profit and loss" and that to negative.

by means of an example, suppose a company has a paid up capital of Rs. 4.41 Crores as on March 31,2014 and the reserves and surplus has a balance of Rs(39835900). The Company has borrowed Rs. 8064520 during the year and intends to borrow Rs. 22lacs more. 

I seek your opinion on whether the board resolution would suffice being the borroings under limit or no.

Thank You in advance

 


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