An Overview of Inter-Corporate Loans and Investments

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Inter Corporate Loans and Investments According to Companies Act 2013

This post has been written by Vanshika Darbari, a third year student of Maharaja Agrasen Institute of Management Studies, GGSIPU.

The power to invest the funds of the company is the prerogative of the Board of Directors. This power is derived by the board under Section 179 of the Companies Act, 2013. However, the act contains provisions for restrictions on investments that a company can make and loans it can provide. Moreover, giving corporate guarantee is also as good as giving a loan, because the person to whom guarantee or security is given can decide to enforce the guarantee or security in certain conditions and in such a situation, the company will have to pay the amount. Thus apart from loan and investment, restrictions are also placed on the guarantees which the company can give or security it can provide for loan.

The Companies Act, 2013 has considerably modified the provision in respect to giving loans, making investments, giving guarantee or providing security or acquiring securities of any other body corporate from time to time. As of now, an overall limit of 60% of paid-up share capital plus free reserves and securities premium account or 100% of free reserves and securities premium account, whichever is more, has been fixed.

The provisions relating to inter-corporate loans and investments are mentioned under Section 186 of the Act. 

Not more than two layers of investment companies

As per Section 186(1), a company shall unless otherwise prescribe, make investment through not more than two layers of investment companies.However, the aforesaid provisions shall not effect –

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

Limits for loans, guarantee, security and investment

Section 186(2) restricts the company directly or indirectly to:

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more unless the same is previously authorized by a special resolution passed in a general meeting.{Section 186(3)}

Disclosure in financial interest

Section 186(4) provides that the company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

Prior Approvals 

The company shall not make any investment or loan or security unless the resolution sanctioning it is passed in a meeting  of the board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting is obtained.{186(5)}

However, the prior approval of financial institutions is not required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

Rate of interest

According to section 186(7), the loans given shall carry the rate of interest not lower the prevailing yield of one year, three year, five year government security closest to the tenor of the loan.

However such condition is not applicable on the companies who 26% or moe of the paid-up share capital is held by the  Central Government or one or more State Governments or both, and such loan is in respect of funding Industrial Research and Development projects in furtherance of objects as stated in the memorandum of association of the company.

Default with respect to repayment of deposits 

Section 186(8) specifies that the company which has made default in repayment of deposits after the commencement of Companies Act, 2013 or in payment of interest thereon, shall not give any loan or give any guarantee, or provide security or make an acquisition till such default subsists.

Maintenance of registers 

Section 186(9) and 186(10) related to the provisions relating to maintenance of registers by the company in relation to the loans, guarantee or security provided by them.

The register shall be kept at the registered office of the company and :-

(a) shall be open to inspection at such office; and

(b) extracts may be taken therefrom by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

Exemptions 

Sub-section 11 of section 186 provides that nothing contained in this section, except sub-section (1), shall apply—

(a) to a loan made, guarantee given or security provided by a banking company

or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

(b) to any investment – 

  • made by any investment company;
  • made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;
  • made in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of the Reserve Bank of India Act, 1934 and principal business in acquisition of securities.

Penalty for contravention of section 186

In case the company contravenes the provisions of this section, the company shall be liable for punishment under section 186(13). The company will be punishable for fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company shall be punishable with the imprisonment for the term which may extend to two years and with fine which shall not be less than twenty five thousand rupees but which may extend one lakh rupees.

REFERENCES

[1] https://www.mca.gov.in/SearchableActs/Section186.htm

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