Companies Act Section 187

Companies Act, Section 187: Investments of Company to be Held in Its Own Name

Section 187 of the Companies Act, 2013 lays down the fundamental principle that all investments made by a company must be held in its own name, ensuring transparency, accountability, and legal clarity with respect to the ownership and control of the company’s investment assets. However, this general rule is accompanied by certain exceptions to accommodate practical business needs and legal requirements. The section also imposes penalties for non-compliance and mandates the maintenance of records in specific cases.

1. General Requirement to Hold Investments in the Company’s Own Name

According to Section 187(1), every investment made by a company in any form whether it be property, securities, or other assets must be held in the name of the company itself. This applies both to new investments and existing holdings.

Objective: This requirement is primarily aimed at preventing misuse or misappropriation of company-owned assets and to provide a clear legal title of ownership.

Exception- Shares Held in Subsidiary Company

The only exception explicitly stated in this subsection is that a company may hold shares in its subsidiary company in the name of nominees, if necessary, to comply with the legal minimum number of members required in the subsidiary company.
This is a technical compliance provision that ensures a wholly owned subsidiary maintains its corporate form under Indian law, which may require a minimum number of shareholders.

2. Exceptions to the Requirement of Holding Investments in the Company’s Name

Section 187(2) outlines certain practical and permissible scenarios where a company may temporarily or conditionally hold its investments in names other than its own. These exceptions are not considered violations of the general rule:

(a) Deposits with Company’s Bankers for Collection of Dividends or Interest

A company may deposit shares or securities with its bankers solely for the purpose of collecting dividends or interest payable on those instruments. This does not constitute a transfer of ownership but is a logistical arrangement for ease of collection.

(b) Temporary Transfer to Banks for the Purpose of Facilitation of Transfer

A company may deposit with, or transfer to, the State Bank of India or a scheduled bank, any shares or securities if such action is needed to facilitate the transfer of those instruments. This is allowed only when the company’s own bankers are involved and is meant to ease the process of transferring ownership.

Important Condition: If no transfer takes place within six months from the date the shares or securities were transferred or first held in the bank’s name, the company must promptly:

Have the shares or securities re-transferred to itself, or
Hold them again in its own name, as soon as practicable after the six-month period expires.
This safeguard ensures that the deviation from holding investments in the company’s own name is only temporary.

(c) Holding Shares or Securities as Security for Loans or Obligations

The company may deposit or transfer shares or securities to any person by way of security, either:

For the repayment of a loan advanced to the company, or
For the performance of any contractual obligation the company has undertaken.
Such arrangements are commonplace in financing transactions where collateral is required by the lender or obligor.

(d) Holding Securities Through a Depository

When investments are held in dematerialised form, the company may hold such securities in the name of the depository as the registered owner, while it remains the beneficial owner.
This is consistent with the Depositories Act, 1996, and facilitates the electronic handling of securities.

3. Maintenance of Register in Case of Depository Holdings

Where securities are not held in the company’s own name pursuant to clause (d) of subsection (2) that is, when held through a depository the company is required under Section 187(3) to:

Maintain a register containing the prescribed particulars of such investments not held in its own name.
Ensure that the register is open to inspection, during business hours, by:
Any member of the company, or
Any debenture-holder of the company,
The inspection must be free of charge, but may be subject to reasonable restrictions as may be imposed by the company’s articles of association or general meeting resolution.
This provision enhances transparency while recognising practical modern investment practices.

4. Penalty for Non-Compliance

According to Section 187(4), if a company fails to comply with the requirements of this section, the following penalties apply:

The company shall be liable to a penalty of ?5,00,000 (five lakh rupees).
Every officer of the company who is in default shall be liable to a penalty of ?50,000 (fifty thousand rupees).
These penalties are civil in nature and are intended to ensure strict adherence to the principles of legal ownership and accountability.