Cash Reserve Ratio (CRR) Third Quarter Review of Monetary Policy 2011-12 ( January 24, 2012)

The RBI announces a reduction on the cash reserve ratio (CRR) of scheduled banks by 50 basis points from 6.0 per cent to 5.5 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning January 28, 2012.

Cash Reserve Ratio (CRR):

Banks in India are required to hold a certain proportion of their deposits in the form of cash.  In normal practise banks  don’t hold these as cash with themselves, but deposit it with the Reserve Bank of India (RBI) / currency chests, which is considered as  equivalent to holding cash with RBI. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the Cash Reserve Ratio (CRR). 

Impact of reduction in CRR on the Economy:

-          CRR is an instrument in the hands of the RBI to control liquidity in the banking system.

-          When the CRR is reduced the banks can meet the demand liabilities very easily and the outflow of money increases by way of providing loans to customers and it in turn increases the liquidity in the markets.

-          With regard to the stock markets, with more money available in the market to invest in the securities,  the prices of the securities would increase.

-          The bond markets would improve as the banks would be able to provide the bonds with better interest rates, competing with the other players in the market.

-          The corporates would be able to find more funds from the banks which would  help them in their expansion plans.

In short it increases the liquidity in the market to a large extent.

PROVISIONS UNDER THE COMPANIES ACT, 1956 FOR PAYMENT OF DIVIDEND

Payment of Dividend comes under section 205 of The Companies Act, 1956.

Gist of Section 205

1. Company can declare and pay dividend for any financial year only out of following two sources

• Out of profits of the Company for that year.
• Out of profits of the Company for any previous financial years.

2. Calculation of available profit for the payment of dividend

Available profit for payment of dividend means Current profit. Current profit means profit after tax arrived after making following provisions

·         for depreciation in respect of each item of depreciable asset for such an amount as is arrived by dividing 95% of the original cost thereof to the Company by the specified period in respect of such asset as mention in section 350 and schedule XIV. Schedule XIV specify minimum rate of depreciation for different class of assets (subsection 2 of Section 205).

·         Transferring to the reserve of the Company of such percentage of profits for that year not exceeding ten percent as may be prescribed

Transfer of profit to Reserve Fund is governed by Companies (Transfer of Profit to Reserves) Rules, 1975 as per this rule No dividend shall be declared or paid by a Company for any financial year out of the profits of the Company for that year arrived after providing for depreciation in accordance with the provision of subsection 2 of section 205 (as mentioned above) except after the transfer to the reserves of the Company of percentage of its profits for that year as specified below:-

=) where the dividend proposed exceeds 10% but not 12.5% of the paid up capital the amount to be transferred to the reserves shall not be less than 2.5% of the current profits.

=) where the dividend proposed exceeds 12.5% but does not exceed 15% of the paid up capital, the amount to be transferred to the reserves shall not be less than 5% of the current profits;

=) where the dividend proposed exceeds 15% but does not exceed 20% of the paid up capital the amount to be transferred to the reserve shall not be less than 7.5% of the current profits

=) where the dividend proposed exceeds 20% of the paid up capital, the amount to be transferred to reserve shall not be less than 10% of the current profits  

3. Consequences of non-Compliance.

If a company fails to comply with any of the provisions of contained in these rules,the company and every officer of the Company in default shall be punishable with fine which may extend to five hundred rupees and where the contravention is a continuing one with a further fine which may extend to fifty rupees for every day ,after the first day, during which such contravention continues .

4. Important Departments clarification regarding transfer to Reserve :

·         No amounts is required to be transferred to reserve if dividend is less than 10% .

·         The amount to be transferred to the General Reserve would be worked out in respect of the profits of the year in question and without bringing in the profits of the past year.

·         Reserve referred in this section means free reserve.

·         Rules regarding provision of depreciation and reserve is applicable only for equity dividend and also to the portion of dividend to participating preference shares over and above the fixed rate of preference dividend

 

5. Important Departments clarification regarding depreciation provision :

·         The rates contained in schedule XIV should be viewed as the minimum rates and therefore a Company shall not be permitted to charge depreciation at rates lower than those specified in the schedule in relation to assets purchased after the date of applicability of the schedule. However, if on the basis of bona-fide technological evaluation, higher rates of depreciation are justified, they may be provided with proper disclosure by way of note forming part of annual accounts.

SECRETARIAL POINTS FOR DIVIDEND DECLARATION

·       Check whether dividend/interim dividend was declared out of profits arrived after providing for depreciation.

·       In case no depreciation was provided ensure that approval was obtained from the Company Law Board before declaring the dividend/ interim dividend [205(1)(c)]

·        Check whether the depreciation was provided in accordance with the methods specified in Section 205(2)

·        Ensure that the minimum prescribed amount had been transferred to  reserve according to the Companies (transfer of Profits to Reserves ) Rules, 1975,

·        Conditions governed to transfer of higher percentage to reserve have been complied with.

·         Ensure that the Board resolution recommending dividend or declaring interim dividend was passed.

·         Ensure that register of members was closed as per provision of the section 154.

·         Ensure that final dividend was declared only In the Annual General Meeting.

·        Ensure that the amount of dividend including interim dividend has been deposited in a separate bank account within 5 days from the date of declaration of such dividend

·        Ensure that the provision of sections 205, 205A, 205C, 206A and 207 has been complied with in case of interim dividend also.  

·         Ensure that the dividend /Interim dividend has been paid in the prescribed manner.

·        Ensure that corporate dividend tax has been deposited within 14 days of the declaration of dividend /interim dividend.

·        Ensure that dividend /interim dividend has been paid within 30 days to the registered holders or to their orders (section 207)

·        Ensure that procedure prescribed by Reserve Bank of India for payment of dividend to non-resident shareholder has been complied with before dividend was remitted to them.

·        Intimation sent to stock Exchange, in case of listed Company.

·        If there were any complaints regarding non-payment or delay in payment of dividend ,ensure whether corrective action taken?

Is Fixed Deposit with Bank an Investment under the Companies Act 1956

Let’s analyse if fixed deposit with bank is considered to be an investment under the companies act 1956 or not in different phases:

Phase 1:

In the Companies Act, Section 292, states certain powers of the Board that is required to be exercised at the Board meeting only. On an in depth analysis of the same, we can say 

 The power to invest the funds of the company (Sec 292 (1)(d))

Is to be exercised only at the board meeting.

Phase 2:

Let us analyse if fixed deposit forms part of investment. Investment normally means:

-         laying out of money in such a manner that it would produce some revenue.

-         It can be said that mere deposit of money is not considered to be an investment and

-         It must be possible to earn an income for a reasonable length of time. (Hence purchase of property for some purpose other than the receipt of income is not an investment)

Conclusion:

On analyzing the above it can be said that placement of surplus of funds by a company in the fixed deposit with the banks to earn interest income thereon constitutes investment for the purpose of section 292(1)(d) of the Companies Act.

Board approval is required to be obtained in the Board meeting.

Study on Section 146 of the Companies Act 1956

Study on Section 146 of the Companies Act, 1956 (Registered Office)

Every company registered under the Companies Act, 1956 be it public or private, is required to have a registered office. 

A. Section 146 of the Companies Act 1956 is considered while deciding the territorial jurisdiction of the Courts or not?

On analyzing section 146 (Registered Office of the Company) of the Companies Act 1956 as stated below the following conclusions can be drawn:

-         The section primarily speaks about the formation of the registered office alone.

-         The section does not speak about the territorial jurisdiction.

-    Hence during the time of disputes while analyzing the territorial jurisdictions the following  sections are considered:

Nature of dispute	Section to be considered
Dispute arises at the registered office of the company	Section 10 of the Companies Act 1956.
Dispute arises in any other place other than the registered office of the company	Section 10 of the Companies Act 1956 or Section 20 of the Civil Procedure Code 1908

Case study:

Areva T&D; India Ltd. vs Power Grid Corp. Of India Ltd. on 13 June, 2008

(Punjab – Haryana High Court)

B. When the company functions from an address other than the address mentioned as registered office in the annual report, is there violation of section 146 of the Companies Act 1956 if : 

On reading section 146 of the Companies Act 1956 the following conclusion is drawn:

-       Mere mention of an address as the office of the company in the annual report shall not make   it as the registered office of the company if it is different from the one available in the ROC records.

-  Any difference in the address of the registered office communicated to the ROC and mentioned in the return, report, certificate, balance-sheet, prospectus, statement or other document as required by or for the purposes of any of the provisions of this Act, then it amounts to violation of section 146 and provisions of Section 628 (Penalty for false statement) of the companies act may be attracted.

-     For the purpose of analyzing the officer in default under section 146 of the Companies Act 1856, Section 5 of the Companies Act 1956 is considered.

Case Study: 

Vijay Kumar Gupta And Ors. vs Registrar Of Companies And Ors. on 4 March, 2003

(Himachal Pradesh High Court)

Section 5 of the Companies Act (Officer in Default) states as follows:

For the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any punishment or penalty, whether by way of imprisonment, fine or otherwise, the expression "officer who is in default" means all the following officers of the company, namely:-

(a) the managing director or managing directors;

(b) the whole-time director or whole-time directors;

(c) the manager;

(d) the secretary;

(e) any person in accordance with whose directions or instructions the Board of directors of the company is accustomed to act;

(f) any person charged by the Board with the responsibility of complying with that provision:

Provided that the person so charged has given his consent in this behalf to the Board;

(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or directors who may be specified by the Board in this behalf or where no director is so specified, all the directors:

Provided that where the Board exercises any power under clause (f) or clause (g), it shall, within thirty days of the exercise of such powers, file with the Registrar a return in the prescribed form.

Section 146 of the Companies Act (Registered Office of the Company) states as follows:

(1) A company shall, as from the day on which it begins to carry on business, or as from the thirtieth day after the date of its incorporation whichever is earlier, have a registered office to which all communications and notices may be addressed.

(2) Notice of the situation of the registered office, and of every change therein, shall be given within thirty days in Form 18 after the date of the incorporation of the company or after the date of the change, as the case may be, to the Registrar who shall record the same:

Provided that except on the authority of a special resolution passed by the company, the registered office of the company shall not be removed:-

(a) in the case of an existing company, outside the local limits of any city, town or village where such office is situated at the commencement of this Act, or where it may be situated later by virtue of a special resolution passed by the company; and

(b) in the case of any other company, outside the local limits of any city, town or village where such office is first situated, or where it may be situated later by virtue of a special resolution passed by the company.

(3) The inclusion in the annual return of a company of a statement as to the address of its registered office shall not be taken to satisfy the obligation imposed by sub-section (2).

(4) If default is made in complying with the requirements of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues.

Depreciation allowable on Goodwill or not?

Yes, depreciation is allowable on goodwill:

No, depreciation is not allowable on goodwill:

- In the case of B. Raveendran Pillai, the Kerala High Court has held that even on good will the depreciation is allowable Franchise rights are considered as goodwill: - Yes, in Hindustan Coca Cola Beverages Pvt. Ltd, the view of the AO is considered and the franchise rights was considered as goodwill and decided that depreciation is allowable even on goodwill. Such view was affirmed by the Delhi High Court

-   JAIPUR, DEC 21, 2011: When an assessee purchases a running business in a slump sale with huge liabilities, the goodwill acquired in such a deal is of no value, and hence no depreciation is allowable on the same. -   Facts of the case: Assessee Company, engaged in the manufacturing of Aerated water, filed its return of income claiming depreciation on the franchise rights. The AO was of the view that the franchise rights were not entitled for depreciation. The AO further alleged that the assessee had not filed any documentary evidence in relation to the claim of depreciation. Before CIT(A) it was explained that the assessee had taken over the business as a slump sale, and the brand owner had given his assent to the assessee in writing for continuing the business of manufacturing Aerated water. CIT(A) allowed the appeal of the assessee. Before the ITAT the DR argued that the franchise rights were akin to goodwill and hence the depreciation was not allowable. - For the purpose of charging depreciation, the word goodwill is not mentioned along with the other intangible assets under Section 32 (1)(ii) of the Income Tax Act 1961.

Conclusion:

Point to be noticed, to decide if depreciation is allowable on goodwill or not: - the base point still remains if the Goodwill is purchased or not. When purchased, depreciation is allowable.