Solar Diversification Without an Objects Amendment at Sundaram Agro Mills
Sundaram Agro Mills Limited was incorporated in 2016. Its Memorandum's main objects are "to manufacture, mill, process and sell rice, wheat flour and other cereal-based food products". The ancillary objects include a power "to invest and deal with the moneys of the company not immediately required in such investments as the Board may decide". The company holds surplus land at its Karnal plant. Encouraged by a 25-year power purchase agreement, the Board has approved a ₹12 crore investment to build a 4 MW solar plant on that land and sell electricity to the State grid. Separately, on 4 July 2024, the Board sanctioned an ₹8 crore unsecured loan at 8% interest to its wholly owned subsidiary, which runs a trucking business. The promoter family holds 62% of the shares. A 12% institutional shareholder has written alleging that both decisions are outside the company's objects and that it will move the NCLT. The company has never raised money from the public through a prospectus. The Board refuses to convene any general meeting to amend the objects before the ₹12 crore is committed.
1. Advise the Board whether the 4 MW solar power project can be undertaken now, and what the company must do if it wishes to proceed.
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The test. An act is intra vires only if it falls within the objects stated in the Memorandum or is incidental or consequential to them. "Use of surplus land" is a means of deploying an asset; it is not itself an object. Generating and selling electricity to the grid is an independent business, not something germane to milling rice and wheat.
Conclusion on the project. Proceeding now would be an ultra vires act. Its consequences are not merely procedural:
- The transaction is void and the company cannot enforce the PPA; the counterparty cannot sue on it either.
- The act cannot be ratified, even by a unanimous shareholder resolution - a company cannot do by consent what its Memorandum forbids.
- Members may restrain the company by suit, and the directors who commit the funds are personally accountable to make good the loss.
Correct route. The objects clause must first be altered by special resolution under Section 13(1), and Form MGT-14 filed with the Registrar within 30 days under Section 117(1). The alteration takes effect on registration, and only then does the solar project become intra vires. The Section 13(8) newspaper and creditor-notice requirement is not attracted here because no money was raised from the public and remains unutilised. Any amount already spent on the project before registration was spent at the directors' risk and cannot be validated retrospectively.
2. Examine whether the ₹8 crore loan to the wholly owned trucking subsidiary is within the company's objects and within the statutory lending limits.
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Objects. The ancillary clause permits dealing with moneys "not immediately required". A holding company lending genuinely surplus funds to its own subsidiary is ordinarily treated as a mode of deploying funds and is intra vires where the clause is wide enough, as this one is. The analysis would change if the loan were in substance the company's entry into the transport business, which the objects do not cover: the substance of the transaction, not its label, decides.
Section 186 ceiling. The Board must compute the limit before sanctioning the loan: 60% of paid-up share capital plus free reserves plus securities premium, or 100% of free reserves plus securities premium, whichever is higher. If the aggregate of loans, guarantees, securities and acquisitions of securities already made plus this ₹8 crore crosses that figure, a prior special resolution of members is required. Guarantees and securities given must be counted along with loans, a point companies routinely miss.
Rate of interest. Section 186(3) ordinarily bars lending below the yield on the Government security closest to the tenor of the loan, but the proviso exempts a loan to a wholly owned subsidiary, so the concessional 8% is permissible.
Action. Pass a Board resolution recording the computation of the Section 186 limit and the subsidiary's status; if the limit is crossed, do not disburse until the special resolution is passed and filed.