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CMA Intermediate · Business Laws and Ethics · Company Types, Promotion, Formation and Related Procedures

A Producer Company has paid-up capital of Rs 6 crore and free reserves of Rs 4 crore. Acting alone, it wishes to invest in shares of a company that is not a Producer Company. Under section 378ZL(4), what is the position?

The ceiling is thirty per cent of paid-up capital plus free reserves, which is Rs 3 crore on Rs 10 crore. Investing more requires a special resolution in general meeting together with prior approval of the Central Government.

  1. AIt can invest up to Rs 3 crore without any further approval; exceeding that needs a special resolution and prior Central Government approvalCorrect
  2. BIt can invest up to Rs 3 crore, and any excess needs only an ordinary resolution
  3. CIt can invest up to Rs 6 crore as the limit is based on paid-up capital alone
  4. DIt cannot invest in any other company

Explanation

The limit is thirty per cent of the aggregate of paid-up capital and free reserves: 30% of Rs 10 crore is Rs 3 crore. The proviso allows more only by special resolution in general meeting with prior Central Government approval. Using paid-up capital alone gives Rs 1.8 crore, not Rs 6 crore, and an ordinary resolution is insufficient.

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