Does investing in Mutual Fund come under the ambit of Section 372A?
Nithya Jayakumar
mohan arumugam
Hi,
No, Mutual Funds won’t fall under Section 372A of the Companies Act. Most of the MFs are Trust. Since Trusts are not covered in ‘Body Corporate’ definition given in the Companies Act, MFs won’t fall.
Companies Act only covers ‘Securities of the Body Corporate‘.
But investment in UTI will be covered in 372A. Because, as per UTI Act, UTI is a Body Corporate.
Regards,
CS.A.Mohan
Chennai.
09940630641
--- On Thu, 31/7/08, Nithya Jayakumar <nithyaj...@gmail.com> wrote:
Nithya Jayakumar
Hello!
Thanks for the reply. I would like to point out a contradiction here as far as investment in mutual funds by a company is concerned.
1. Section 372A speaks about investing in 'securities' of bodies corporate.
2. Section 2(45AA) defines securities as securities as defined in Section 2(h) Securities Contract (Regulation) Act. The said definition includes mutual funds.
Going by this, we might conclude that investment in mutual funds is covered by Section 372A.
However, the question is, 'Is mutual fund a body corporate under Section 2(7) of the Companies Act, 1956? What if mutual fund is formed as a trust? And further, if I invest in mutual fund formed as a trust, can it in turn invest in shares of another company? Law does not permit trust to be a shareholder.
Regards,
J. Nithya
Kasturi Sastry
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Hi Nithya,
Regarding the captioned subject, i found an article in a leading news paper dated Feb 06, 2003 and thought of sharing with you.
Regards,
Kasturi S
Financial Daily from THE HINDU group of publications Thursday, Feb 06, 2003 |
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Opinion - Accountancy A thoughtless clarification N. R. Moorthy
ON A reference made by the Association of Mutual Funds of India (AMFI) the Finance Ministry has issued a clarification suggesting that units issued by the UTI and other mutual funds are covered within the existing definition of `securities' under Section 2(h) of the Securities Contracts (Regulation) Act, 1956. Section 2(h) of the SCRA defines `securities' to include "(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivatives; (ib) units or any other instruments issued by any collective investment scheme to the investors in such schemes; (ii) government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities." The view taken by the mutual funds industry is that hitherto the units issued by a mutual fund do not constitute securities as the transaction of the units are treated as a primary, not secondary, market transaction. The scope of the definition of securities was widened by the Securities Laws (Amendment) Act, 1999 which came into effect from February 22, 2000, to include derivatives and units or any other instruments issued by any collective investment scheme (CIS) to investors in such schemes. The intention of widening the scope was to include the units issued by any CIS. Therefore, units of the UTI are not embraced by the definition. If the legislature's intention were to treat the units issued by the UTI and other mutual funds on parity with the instruments referred to in the section, a specific provision to that effect could have been inserted. Even when the law was being amended, the units issued by CISs were brought under the definition of securities. It is incorrect to interpret Section 2(h) the way the Finance Ministry has done. Units can, at best, come under this hat only if they are regarded as "marketable securities". It will be preposterous to consider, or even suggest, that units issued by mutual funds are "marketable securities" for the simple reason that they are not freely traded on the bourses or on trading windows. Whenever an investor wants to sell units, they are repurchased by the issuer mutual fund. And when they are resold, fresh securities are issued. They cannot be transferred by endorsement. If the clarification issued by the Finance Ministry is followed, it would have serious implications and ramification under various provisions of the Companies Act, particularly Section 372A. Implications Sections 370 and 372 of the Companies Act were originally introduced to control inter-corporate investments and loans and, thereby, avoid monopolistic growth, as is apparent from the definition of `bodies under the same management'. As a regulatory measure, a cap on investment and loans were provided on the respective provision equated with the paid-up capital and free reserves of the investing/lending company. Insofar as Section 372 was concerned, the regulatory provision, as a natural corollary, was related to the investment made by the investing company in the shares of the investee company so as to regulate the control of one another through the exercise of voting rights. Sections 370 and 372 were merged and an additional Section 372A was introduced in the Act w.e.f. from August 31, 1998. In doing so, the term `share' has been replaced by `securities', which has created a lot of mischief. In the clarification issued by the Finance Ministry, interpreting the term security to include units issued by the UTI and other mutual funds has added to the confusion. The fact that these regulatory provisions were introduced in the Act to embrace investment in shares is amply clear from a plain reading of Section 372, which is still part of the Act though inoperative now. Further, in support of this view, it is also important to refer to Circular 8(15)-CL-VI/ 64 issued by Department of Company Affairs. It reads thus: "The Board has been advised that the units issued by the Unit Trust of India under Section 21 of the Unit Trust of India Act, 1963 are not shares as understood in company law and, hence, the investments made by a company in the purchase of units by the Unit Trust does not attract the provisions of Section 372 of the Companies Act, 1956." There is also the view that subscription or purchase of public sector bonds cannot be hit by Section 372 (now 372A). Having done so, it is not possible to resile from the earlier stand. In such a situation, even the bonds issued by public sector undertakings will come under the overall ceiling. Predicament Although investments that have already been made by the company prior to the date of clarification cannot be affected, it will hamper future investments where companies have reached an optimum level. This will, on the one hand, cripple growth and, on the other, leave the companies with little or perhaps no option to park their surplus funds. — parking them in bank deposits is unproductive. Had the Finance Ministry taken cognisance, or rather appreciated, the after-effects of such a decision, much of the confusion could have been avoided. For the purpose of Section 372A, the term security shall only have the meaning as given under Section 2(h). Units of mutual funds cannot be unilaterally brought under the ambit of `securities'. Similar implications emerge under income-tax law too. |
PROMAC ENGINEERING INDUSTRIES LIMITED,
Alahalli, Anjanapura post, Off Kanakapura Road,
Bangalore - 560 062.
Ph: 080-26330372.