Companies Act Section 378ZL

Companies Act, Section 378ZL: Investment in Other Companies, Formation of Subsidiaries, and Related Matters

Section 378ZL of the Companies Act, 2013 lays down the statutory provisions governing how a Producer Company may handle investments, form subsidiaries, or acquire interests in other companies or entities. This section is intended to ensure that Producer Companies utilize their funds responsibly and in a manner aligned with their core objectives. A detailed interpretation of each sub-section is provided below for a comprehensive understanding.

1. Investment of General Reserves by Producer Companies

As per sub-section (1), the general reserves of a Producer Company must be prudently invested to obtain the highest possible returns. However, such investments must be limited to approved financial instruments only. These include:

Approved securities, Fixed deposits, Units and bonds issued by the Government, Investments in co-operative banks or scheduled banks, Any other investment instruments as may be prescribed under applicable rules.
The objective is to ensure both security and profitability for the company's surplus funds without deviating from approved investment routes.

2. Acquisition of Shares in Other Producer Companies

According to sub-section (2), a Producer Company is permitted to acquire the shares of another Producer Company, but only if such an acquisition is done with the aim of promoting its own objectives. This provision enables collaboration and synergy between multiple Producer Companies operating within the same or related sectors.

3. Formation of Subsidiaries, Joint Ventures, or Agreements with Other Bodies Corporate

Sub-section (3) expands the investment scope by allowing a Producer Company to:

Subscribe to the share capital of another body corporate
Enter into any agreement or arrangement (including joint ventures or the formation of subsidiary companies)
However, such investments or arrangements must be made only to promote the Producer Company's objects. This action must be authorised through the passing of a special resolution by the members of the Producer Company.

4. Investment in Non-Producer Companies- Restrictions and Exceptions

As per sub-section (4), a Producer Company (either independently or jointly with its subsidiaries) may invest in shares of any other company (excluding another Producer Company) by subscribing, purchasing, or acquiring shares. This investment is capped at 30% of the aggregate value of:

Paid-up capital
Free reserves
However, the law allows for exceeding this threshold if the following conditions are fulfilled:

A special resolution is passed in the general meeting of the Producer Company, and prior approval is obtained from the Central Government
This clause is designed to introduce a safeguard so that significant capital deployment is subject to broader shareholder and regulatory oversight.

5. Investments Must Align with Company Objectives

Sub-section (5) reiterates that all investments made by a Producer Company irrespective of the mode, manner, or type must be consistent with the core objects of the company. This acts as a guiding principle to ensure the company remains focused on its founding purpose and mission.

6. Disposal of Investments Requires Member Approval

Under sub-section (6), the Board of Directors of a Producer Company is not empowered to dispose of investments made under sub-sections (3) and (4) on its own. Instead, it must:

Obtain prior approval of the members, and pass a special resolution authorising such a disposal
This ensures transparency and prevents unilateral divestments by the management that may adversely affect the company’s long-term strategic direction.

7. Mandatory Register of Investments

Sub-section (7) requires every Producer Company to maintain a register containing detailed records of all investments. The particulars to be recorded include:

Names of companies in which investments have been made
Number and value of shares acquired
Date of acquisition
Mode and price of acquisition
Details of any subsequent disposal, including price and manner
This register serves as a formal record to enable accountability and facilitate regulatory scrutiny or internal review.

8. Location and Accessibility of the Investment Register

Finally, sub-section (8) mandates that the register of investments must be maintained at the registered office of the Producer Company. Furthermore:

The register must be open for inspection by any Member of the company. Members are also permitted to take extracts from the register.

This ensures transparency and allows members to monitor how company funds are being deployed.