The scope and nature of business of any company are governed by the Companies Act. This act governs the movement of business and gives them some power and benefit, and also places some restriction over its working so that it could not go beyond its limit that could turn it detrimental to the society and the public at large. According to this act there was a provision in it where it was stated that companies could not invest in bonds of tax-free nature when the rate of interest of return is lower than the bank rate prevailing at that moment. But this provision was supposed to be considered as a dubious one as there was no clear clarification as to which rate of interest they are talking about.
The government of India has recently come up with a circular where it specifically stated the clarification which would clear the doubts of many people regarding the rate of interest. According to the clarification the government stated that one could invest in tax free bond only if the effective rate of interest is more than the prevailing bank rate of the country. This was supposed to be cheerful news for many companies as they were interested in investing in tax free bonds but due to uncertainty over the application of the provision they were not interested in taking any risk.
The interest rate of such tax free bonds varies from 6.75% to as high as 7.50% but these are still very low rates when compared to others. But many of us forget to take into account the tax free nature of the bond that will lead to a higher rate of effective rate of interest. The government clarification also stated that bonds with an effective rate of interest higher than bank rate prevailing in the country can be invested in by companies. Hence there would be no violation of section 372 (A) of the Companies Act, 1956 as stated in the circular as published on 14th March. The circular too was effective from the date on which it was published.
The move was adopted in the sight over a very poor response towards purchasing of tax free bonds by companies. The clarification will seek to bring in more investment in such type of bonds and hence will increase the inflow. The government has proposed to issue and raise an amount to the tune of Rs. 50000 crore through such tax free bonds. The government has also planned to sell majority of such bonds to the retail investors. It has also placed a maximum limit of buying such bonds which are a maximum of 10% of the total amount of tax free bonds to be raised which happens to be 50 billion rupees. Therefore seeing the current poor response of such tax free bonds the government had to come up with circular and make everyone aware of the real facts related to the provision that caused confusion in the minds of companies.