Section 378ZL of Companies Act 2013: Investment in Other Companies and Formation of Subsidiaries
Section 378ZL forms part of Chapter XXIA of the Companies Act, 2013 dealing with Producer Companies. It regulates investment of general reserves, acquisition of shares in another Producer Company, formation of subsidiaries and joint ventures, investment limits, disposal of investments, and maintenance of an investment register.
Meaning and scope of Section 378ZL
A Producer Company is a body corporate having objects or activities specified in Section 378B and registered as a Producer Company under the Companies Act, 2013. Section 378ZL provides the legal framework within which such a company may deploy its reserves and make strategic investments while keeping those investments consistent with its statutory objects.
Section 378ZL - statutory provisions explained
Sub-section (1): Investment of general reserves
The general reserves of a Producer Company must be invested with the object of securing the highest available returns through approved securities, fixed deposits, units, Government or co-operative or scheduled bank bonds, or another prescribed mode.
Rule 5 of the Producer Companies Rules, 2021 supplements this provision by specifying permitted avenues for investment of general reserves. These include specified approved securities and deposits, certain co-operative and scheduled banks, securities referred to in Section 20 of the Indian Trusts Act, 1882, certain shares or securities of co-operative bodies, and specified public financial institutions.
Sub-section (2): Shares of another Producer Company
A Producer Company may acquire shares of another Producer Company when the acquisition is for promotion of its objects.
Sub-section (3): Subsidiary, joint venture or other arrangement
A Producer Company may subscribe to the share capital of, or enter into an agreement or arrangement with, a body corporate, including through a subsidiary company or joint venture, for promoting its objects. A special resolution is required.
A special resolution is a resolution satisfying the requirements of Section 114(2) of the Companies Act, 2013, including the prescribed voting threshold and notice requirements.
Sub-section (4): Thirty percent investment ceiling
A Producer Company, alone or together with its subsidiaries, may invest by subscription, purchase or otherwise in shares of another company, subject to the statutory ceiling of thirty percent of the aggregate of its paid-up capital and free reserves, except for the categories addressed in sub-sections (2) and (3).
The proviso permits investment beyond this limit when a special resolution is passed in general meeting and prior approval of the Central Government is obtained.
Sub-section (5): Investment must match Producer Company objects
Every investment must be consistent with the objects of the Producer Company. The investment power under Section 378ZL is therefore linked to the purposes for which the Producer Company exists.
Sub-section (6): Disposal of investments
The Board may dispose of investments covered by sub-sections (3) and (4), but only with previous approval of the Members by special resolution.
Sub-sections (7) and (8): Investment register and inspection
The Producer Company must maintain a register containing particulars of its investments, including the company name, number and value of shares, acquisition date, and the manner and price of subsequent disposal. The register must be kept at the registered office and be open to inspection by a Member, who may take extracts from it.
Key compliance points
- Check that the proposed investment is consistent with the Producer Company's objects.
- For a subsidiary, joint venture or qualifying body corporate arrangement, obtain the special resolution required by Section 378ZL(3).
- Apply the thirty percent ceiling under Section 378ZL(4) where applicable.
- For investment beyond the statutory ceiling, obtain both a special resolution and prior Central Government approval.
- Obtain previous Member approval by special resolution before disposal of investments falling under sub-sections (3) and (4).
- Maintain the statutory investment register at the registered office and make it available for Member inspection.
Official legal resources
For the authoritative and updated law, refer to the Ministry of Corporate Affairs - Companies Act, 2013, the Companies (Amendment) Act, 2020, the Producer Companies Rules, 2021, and India Code.