Chapter 5
Investments, Contracts & Dividends
5.1: XY Limited
XY Limited (XYL) has recently commenced business. The company has
appointed various distributors for the supply of its products. The distributors
have placed amounts ranging between Rs. 2 - 5 million with XYL as security
deposits. Briefly describe the relevant provisions of the Companies Act 2017,
which XYL would have to comply with.
Sol: No companyor any of its officers or agents shall receive or utilize any
money received as security or deposit, except in accordance with a contract
in writing. The amount of security deposit shall be kept by XY Limited in a
scheduled bank.
5.2 Investments not held in company’s name
In the light of the Companies Act, 2017 describe the circumstances under
which Investments by a company may not be made and held by it in its own
name.
Sol: 1- The Company may hold shares in its subsidiary in the name of
nominee appointed by the company if it is necessary to do so, to ensure that
number of members do not become less than statutory limit.
2- Where the company has right to appoint or get elected any person as a
director of any other company and a nominee of a company in exercise of
such right has been so appointed or elected, the shares in such other
company of an amount not exceeding the nominal value of the qualification
shares which are required to be held by a director thereof, may be registered
or held by such company jointly in its own name and in name of such person
or nominee, or in name of such person or nominee alone.
3-A company can deposit, hold, register or transfer shares or securities in
name of central depository.
5.3 Western Cement Limited (WCL)
Western Cement Limited (WCL) has recently formed a provident fund for the
benefit of its employees. In view of the provisions contained in the
Companies Act, 2017 you are required to advise (i) the directors of WCL and
(ii) the trustees of Provident Fund about their responsibilities with respect to
the amount to be contributed to the fund and investment thereof.
Sol: Responsibilities of Directors:
All money or securities deposited in respect of these funds shal be kept or
deposted by directors within 15 days from the date of deposit in a special
bank account or in National Saving Schemes and no potion thereof shall be
utilized by company except for the breach of contract and after notice to the
employee concern.
Responsibilities of Trustees:
All money contributed to such fund or received or accruing by way of interest
and profit shall either be:
Deposited in a :
National saving scheme
In a special account opened by company in scheduled bank
Be invested in :
Govt Securities
Bond, redeemable capital, debt securities or instruments issued by a
statutory body…..
5.4 RK Limited
RK Limited (RKL), a listed company, holds 6.3 million ordinary shares of TK
(Private) Limited (TKPL) whose paid-up capital consists of 10 million ordinary
shares of Rs. 10 each. The remaining shares are held by Mr. Adnan and his
family. The Board of TKPL consists of eight directors of which five directors
represent RKL while the remaining three directors, including the chief
executive, are representatives of Mr. Adnan and his family. RKL is presently
considering the proposals to pledge TKPL’s inventories as security against a
loan to be obtained by an associated company of TKPL. Comment on the
above proposal in the light of provisions contained in the Companies Act
2017.
Sol:
TKPL shall not make any invetsments in any of its associated undertaking or
associated companies except under the authority of special resolution which
shall indicate the nature, period, amount of investment and terms and
conditions attached thereto. As RKL holds 63% shares so this resolution can
only be passed if Adnan and his family also agrees to do so.
The term ‘investment’ shall include equity, loans, advances,
guarantees, by whatever name called, except for the amount due as
normal trade credit.
5.5 Moon Limited
The shareholders of Moon Limited approved through special resolution in the
annual general meeting for the year ended 31 October 2017, an investment
of Rs. 500 million in a project of its associated undertaking, Stars Limited Rs.
400 million have so far been invested on the project. The project has been
delayed and is not expected to be completed before the next annual general
meeting which would be held on 28 December 2018. Required: Under the
provisions of Companies (Investment in Associated Companies or Associated
Undertakings) Regulations, 2017 discuss the responsibilities of Moon Limited
regarding disclosure of information to the members in respect of the above.
Sol: ML shall disclose following information annexed to the notice of general
meeting called for considering investment decisions:
1-Total investment approved i.e 500 million
2-amount of investment made uptodate i.e 400 million
3-reasons from deviation from approved timeline of investment, where
investment decision was to be implemented in specified time.
4-material change in financial statements of associated company or
associated undertaking since date of the resolution passed for approval of
investment.
(3) Latest annual audited financial statements of the Associated company.
5.6 XLM Limited
XLM Limited (XLM) is desirous of providing a loan of Rs. 300 million at a
mark-up of KIBOR plus 2% per annum to WL Limited (WLL), an associated
company, to support its proposed mega project. During a recent meeting,
WLL has offered that instead of charging fixed mark-up, XLM may opt for
sharing the project’s profit or loss in the ratio of 50:50 over the period of the
loan. The project is expected to commence operations from the fourth month
of loan disbursement. Profit from the first year of operations is estimated at
Rs. 40 million and the same is expected to grow by 10% per annum.
Required: In the light of Companies (Investment in Associated Companies or
Associated Undertakings) Regulations, 2017: (a) Identify the information
which is specifically required to be disclosed in the statement annexed to the
notice of the general meeting at the time of obtaining initial approval in the
context that WLL’s project has not commenced operations. (b) Discuss
whether XLM can accept WLL’s offer.
Sol: a- 1- Description of the project and its history since conceptualization.
2-Starting Date & expected date of completion of work.
3-Time by which such project will become commercially viable.
4- Expected time by which project will start paying return.
5-Funds invested or to be invested by the promotors, sponsores, associated
company distinguishing between cash and non cash items.
b- This offer can be accepted if the rate of return of XLM is not lower than the
borrowing cost of XLM or rate of return earned by Islamic Banks in Pakistan.
Q 5.12 Shiraz Limited:
total investment at the time of making investment in bonds, redeemable
capital, debt securities or instruments issued by a statutory body or listed
debt securities, shall not exceed thirty per cent of the size of the Fund or
Trust ie 500 mill*30%= 150 mill
The Fund has already made investment in listed securities equal to 44 % of
the size of fund.
The additional 20 million in debt securities will increase th investment by
20% to 24 % which is allowed.
40 million increase in investment in shares will increase the investment by
32 % which is not allowed. The fund can make investment in BTL upto 30
million only.
Total investment in debt securities issued by a statotury body or listed
company or its associated as the case may be shall not exceed 10% of the
investment limit i.e 15 million.
Thus we can only invest 15 million in FL.
Further total investment in debt securities shall not exceed 10% of the
investment limit i.e
Total investment in listed equity shares shall ot exceed10% of the investment
limit i.e 150 million or 5 % of outstanding share capital whichever is lower.
Here 10%*150 million = 15 million or 5% of investee i.e 30
million ,whichever is lower therefore investment in BTL is allowed upto 15
million.