Are investments in Mutual Funds 'investments' u/s 186?
Basic provisions of Section 186:
A company cannot directly or indirectly give a loan, guarantee or provide security to any person or other body corporate or or invest in the securities of any other body corporate,, if the amount of the loan or investment exceeds 60% of the company's paid-up share capital, free reserves and securities premium account.
A company cannot directly or indirectly make a loan or investment to another body corporate if the company has defaulted in repayment of any loans or investments made by it.
A company cannot directly or indirectly make a loan or investment to another body corporate, if the company is in the course of being wound up or has been dissolved.
There are a few exceptions to these restrictions. For example, a company can make a loan or investment to another body corporate if the loan or investment is made in the ordinary course of business or if the loan or investment is made to a subsidiary company.
If a company contravenes any of the provisions of Section 186, the company and its directors may be liable to be punished with imprisonment for a term which may extend to two years or with fine which may extend to Rs. 5 lakhs or with both.
The purpose of Section 186 is to protect the interests of the shareholders of a company by preventing them from being exposed to excessive risk. The restrictions imposed by Section 186 help to ensure that companies do not make loans or investments that they cannot afford to repay.
"body corporate" or "corporation"
includes a company incorporated outside India, but does not include—
(i) a co-operative society registered under any law relating to co-operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf;
Ex: The Asian Development Bank has been recently notified by the CG excluding it from the definition of body corporate or corporation
Is ‘body corporate’ different from a ‘company’?
No. Not different but is a ‘larger’ concept as compared to a ‘Company’. Body corporate includes a Company incorporated under Companies Act, 2013 of India or any other previous Act and Companies incorporated outside India.
Its has been held that a body corporate has 5 distinct attributes:
- The entity shall be different from its members
- Perpetual succession
- It must be competent to enter into a contract
- Is capable to sue or being sued in its own name
- Can hold the property in its own name
Is ‘Trust’ a body corporate?
A trust is not a body corporate under Indian laws. This is because a trust is not a legal entity in its own right. Rather, it is a legal arrangement whereby property is held by one person (the trustee) for the benefit of another person (the beneficiary). The trustee does not own the property, but rather has a fiduciary duty to manage it for the benefit of the beneficiary.
There are a number of Indian cases that have confirmed that a trust is not a body corporate. For example, in the case of Ashoka Marketing Ltd v. Punjab National Bank, the Supreme Court of India held that "a trust is not a legal entity and is not capable of suing or being sued in its own name."
There are also a number of MCA circulars and notifications that support this view. For example, in Circular No. 8(26)/2(7)/63-PR, dated 13-03-1963, the Department of Company Affairs stated that "a trust is not a body corporate and is not covered by the definition of 'company' in Section 2(24) of the Companies Act, 1956."
In conclusion, a trust is not a body corporate under Indian laws. This is because a trust is not a legal entity in its own right. Rather, it is a legal arrangement whereby property is held by one person (the trustee) for the benefit of another person (the beneficiary).
What type of legal entity is a Mutual Fund?
A mutual fund is not a body corporate under Indian laws. It is a trust.
A mutual fund is a type of investment vehicle that pools money from investors and invests it in a variety of assets, such as stocks, bonds, and money market instruments. Mutual funds are regulated by the Securities and Exchange Board of India (SEBI).
The legal structure of a mutual fund is that of a trust. The assets of the mutual fund are held by a trustee, who is a company or individual appointed by the mutual fund's sponsor. The trustee is responsible for managing the assets of the mutual fund and for distributing the income and capital gains to the investors.
The investors in a mutual fund are the beneficiaries of the trust. They have no direct ownership of the assets of the mutual fund, but they are entitled to a share of the income and capital gains generated by the assets.
The trust structure is used for mutual funds because it provides a number of advantages, such as:
- Limited liability: The investors in a mutual fund have limited liability, which means that they are only liable for the amount of money that they have invested in the mutual fund.
- Tax benefits: Mutual funds can offer a number of tax benefits to investors, such as the long-term capital gains tax exemption.
- Professional management: The assets of a mutual fund are managed by a professional investment manager, which gives investors access to professional investment expertise.
The trust structure of mutual funds has been upheld by the courts in a number of cases. For example, in the case of Unit Trust of India v. State of Maharashtra, the Supreme Court of India held that "a mutual fund is a trust and not a company."
Conclusion:
Therefore, if a Company has parked its unused capital in Mutual Funds or has invested in Mutual Funds till such time that a viable business presents itself, then, for the purpose of calculation of limits u/s 186, these investments will not be counted.
