CORPORATE INVESTMENTS IN IMMOVABLE PROPERTY

[Dr. Sanjiv Agarwal]

Section 292 of the Companies Act, 1956 provides power to the company to be exercised in board meetings to invest funds. Also section 49 of the Act provides that company should hold investments in its own name. The companies would like to know about applicability of the provisions of section 49 to purchase of  immovable property in land etc as there is confusion on whether the purchase of land by the company shall be treated as investment for the purpose of section 49 of the Companies Act, 1956?

Statutory Provisions

Investments of company should be held in its own name

The provisions of section 49 provide that all investments made by a company should be registered in the company’s name ,ie, in its name The section enjoins on all companies to hold all investments in their own names and prohibits making any investment in the name of any other person. No investment made by company on its own behalf shall be made in any other name, i.e. benami. The expression “on its own behalf” is of wide amplitude. It means “in the interest of, on account of”. So, every investment in which the company has any kind of interest must be made in the company’s name. It should, further, be noted that if certain shares are held by a nominee on behalf of a company, then the nominee enjoys all rights of an owner such as right to dividends, right to vote, right to receive ‘rights’ in proportion to his investment in case of a rights issue etc., and that the investee company is restricted from taking notice of any trust which may be express, implied or constructive.

Trusts not to be entered

Section 153 of the Companies Act, 1956 provides that no notice of any trust, whether express, implied or constructive shall be registered on the register of members or of debenture holders (except in case of beneficial owners in case of shares held by a depository on behalf of beneficial owners). What the section means is that a company  shall not record in its register of members or debenture- holders anything to show that as between the members or debenture-holders whose name is entered in the register and any other person, there is any kind of relationship as trustee and beneficiary. The register is not to show and the company is not to take notice of any such relationship.

Thus, section 153 read with section 49 leads to conclusion that such provision apply to investments in securities.

            Scope of Investment

To understand the applicability of section 49 of the Companies Act, 1956, one needs to understand as to what is meant by investment.

The word ‘investment’ is neither defined nor explained. In its ordinary meaning this word has wide meaning, namely investment in any property or assets, movable and immovable as well or in securities; the investing of money or capital in order to gain profitable returns, as interest, income or appreciation in value.

In the Oxford Business Dictionary, the following meaning is given “The purchase of capital goods, such as plant and machinery in a factory in order to produce goods for future consumption. This is known as capital investment; the higher the level of capital investment in an economy, the faster it will grow. The purchase of assets, such as securities, works of art, bank and building- society deposits, etc., with a primary view to their financial return, either as income or capital gain. This form of financial investment represents a means of saving.”

Thus, the term ‘investment’ in section 49 is intended to mean any out lay of a company’s money or money’s worth, with a view of obtain profit.

However, in the context in which it is used in section 49, the scope of the word ‘investment’ would seem to confine to investment in shares, debentures and other securities. Sub-section (11) states that the word “securities” includes stock and debentures. This is an inclusive definition. The provisions of sub-sections (6) and (7) of this section support this view.

Accounting Standard

As per Section 211(3A) of the Companies Act, 1956, profit & loss account and balance sheet of a Company must comply with Accounting Standards. The accounting standards are notified by Companies (Accounting Standards) Rules, 2006. These are also applicable as per clause 50 of the listing agreement.

As per Listing Agreement Clause 41(I)(e)(i),in case of companies having subsidiaries, the company may submit quarterly  and year to date consolidated financial results in addition of quarterly and year to date standalone financial results to stock exchange. Simultaneously, as per Clause 50, company shall comply with accounting standards. As per The Companies Act, 1956 Section 211(3A) the Profit & Loss account and Balance Sheet of the companies should be prepared according to accounting Standards.  

AS 13 (Accounting Standard on ‘Accounting for Investments’) has defined investment to mean –

a)      an asset,

b)      held by an enterprise,

c)      for earning income by way of dividend / interest / rentals, or

d)      for capital appreciation, or

e)      for other benefits to the investing enterprise.

Thus, any investment which does not fulfill the aforementioned conditions cannot be called investment.

According to AS-13, an investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.

Enterprises hold investments for diverse reasons. For some enterprises, investment activity is significant element of operations, and assessment of the performance of the enterprise may largely, or solely, depend on the reported results of this activity.

An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operation of, the investing enterprise. An enterprise holding investment properties should account for them as long-term investments. 

Conclusion

The provisions of section 49 in relation to investments of company to be held in its own name, prima-facie apply to investments made by the company in securities which includes stocks and debentures (by virtue of sub section 11 of section 49). Also ‘the term securities’  is defined in section 2(45AA) to mean the same as is defined in section 2(h) of the Securities Contracts (Regulation) Act,1956.

Accordingly, securities include all types of securities including shares, bonds, debentures, derivatives, units etc. but not immovable property. The various sub-sections of section 49 only provide for in relation to investment in securities only.

Also, going by the definition of investment in AS 13, and the intention of the companies to use such property in the operation / business of the company, it can be opined that the provisions of section 49 of the Companies Act, 1956 may not apply to such investment being made by the companies.                     

 

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