Principal Business Activities

Every company must be a business organization. Being business organization, a company has business activities. In the Companies Act, 2013 “principal business activities” is a major reporting requirement. According to Section 92(1)(a), every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding its principal business activities. Section 185 as amended has reference to principal business activities as a major condition for a loan to directors and related concerns.

Utilisation requirement for loan to directors

The Companies Amendment Act, 2015 with effect from 29th May 2015 [under the first proviso to section 185(1)] provides that the loans made:

  • by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
  • any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company

are to be utilised by the subsidiary company for its principal business activities.

This provision shall continue after enforcement of Section 61 of the Companies Amendment Act, 2017 {substituting Section 185} as Section 185(3).

According to proposed liberalized Section 185(2) yet not effective on the date of writing of this post, a company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the directors of the company is interested, subject to the condition that—

(a) a special resolution is passed by the company in general meeting; and

(b) the loans are utilised by the borrowing company for its principal business activities.

The net effect of both amendments shall be:

  • a loan, guarantee given or security provided to subsidiary companies be linked to principal business activities of subsidiary companies; and
  • a loan, guarantee given or security provided to other companies in which directors are interested to be linked to principal business activities of other companies and the special resolution by the lender.

Principal Business Activities for loan purpose

The Companies Act, 2013 does not define term “principal business activities”. The term is used in plural form denoting there may be more than one “principal business Activities”.

The Form MGT – 7, which deals with its reporting requirement reduced “principal business activities” to “business activities” while seeking data. Annexure C of the Instruction kit for Form MGT – 7 has total 100 alphanumeric Business activities codes to be used. These business activities list broad classification of business activities.

In absence of any guideline, principal business activities reported by the subsidiary companies in their last Annual Return may be taken into account. As discussed above, Form MGT – 7, with its regulatory overreach, require reporting all business activities of the companies to report all business activities. All of them cannot be called principal business activities.

However, such business activities may be new activities carried out in the current period. In that case, it should be one or more activities in accordance with main objects of the company as mentioned in the Memorandum of Association of the company. But question remains, “what a company shall report as “Principal Business Activities”?”

Principal Business Activities Defined

In other major jurisdiction, UK requires reporting of principal business activities in the annual return of companies. Section 855(3) of the (United Kingdom) Companies Act, 2006 in relation to annual return defines principal business activities as under:

“The information as to the company’s principal business activities may be given by reference to one or more categories of any prescribed system of classifying business activities.”

For the purpose, “the VAT Trade Classification” published by Her Majesty’s Stationery Office in August 1981 of the publication of that name prepared by Her Majesty’s Customs and Excise is being used there.

Purposive interpretation

Business activities of a company should be decided by the alphanumeric Business activities codes given in Annexure C of the instruction kit for Form MGT – 7. To select correct business activities GST classification applicable to activities of the company may be used.

Open question

Among all business activities reported or to be reported in annual return, only few may be called principal business activities.

Regulators may please definition principal business activities with reference to Section 185 as amended.


One response to “Principal Business Activities

  1. Pingback: Principal Business Activities | Top 100 Blog Review

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