Inter-Corporate Loans And Investments

INTRODUCTION

Under the Companies Act, 2013 Inter-Corporate Loans and Investment plays a very vital role for the growth of industries as there is result in the flow of funds for the group companies or other companies who are in the need of funds.[1] The Companies Act, 1956 Section 372 -A[2] deals with the Inter-Corporate Loan and Investment. For giving up free hand to the industries, a drastic change was made in 1998 which resulted into the merging of Section 370 and Section 372 into a new Section 372-A which enables more flexibility and dispensing of approval of the central government.[3]

Section 186 of the Companies Act 2013 deals with the loans and investment and corresponds with the section 372-A of the Companies Act 1956. The Companies Act 2013 states that “companies can make investments only through two layers of investment companies subject to exceptions which includes company incorporated outside India. There are no such restrictions which are currently imposed under the 1956 Act”.[4]

It should be noted that the examinations which were available under the provisions of section 372-A of the Companies Act, 1956 to the private companies are no longer available under the Companies Act 2013.[5]

SECTION 372-A OF THE COMPANIES ACT 1956

This is the most important sections which are used in every company of the ordinary course of its business. Every company must make a plan so that they can invest in such a way which should turn out to be a productive and within the legal framework of section 372-A.

Section 372-A applies to the Public Limited Companies.

There are several permissions and restrictions which are imposed under the section-

  1. Applicability – this section is only applicable to the public limited companies. This section does not apply to the private limited companies.
  2. Transactions – There are the following types of transactions which take place under Section 372-A-

– “loans given to another body corporate (Loans include ICDs and debentures)”.[6]

– “Guarantees given by the company as a backup for any loan given by any other person to any other body corporate”.[7]

–“Investment in shares of another body corporate by way of subscription or by purchase of shares”.[8]

  1. Approval

For passing resolution there should be consent of all the directors who are present in the board for the approval of inter corporate loans investment. The limits must be specified under the resolution.[9]

  1. Limits

The inter corporate loans and Investments must be exercised by the board of directors up to 60% of paid up capital and free reserves of the company

Free reserves under the Section are there is a reserve free for the distribution as the dividends and share premium but exclude the share application money. If there is any loan or investment which exceeds the limit which are permissible for the board then there should be approval of shareholders under which special resolution has to be obtained.[10]

  1. Guarantees in Emergency

If there is agency and the guarantee exceeds the limit then search approval must be justified and there should be approval of shareholders which has to be obtained within the 12 months from the date of the board of meeting. This relaxation is only to facilitate the business transaction in the interest of the company

  1. Other Restrictions

The loans cannot be made at a rate which is below the prevailing Bank lending rate. If there is any default which is committed under Section 58 then the company should be private it from giving ICDS[11] and investment or guarantees.

  1. Register of Inter-Corporate Loans and Investments

There should be a register which has to be maintained showing the details of investment which were made during the year with the name of the body corporate date and the amount of loan or investment or guarantee.

  1. Exemption

The restriction which are present under Section 372-A of the Companies Act, 1956 are not applicable to the loans and investments which are made by banking company or Housing Finance Company.

These restrictions are not applicable also for the company which are established to obtain the financial industrial enterprise for providing infrastructural facilities are the companies whose principal business is the acquisition of shares stocks and debentures other securities. These restrictions are also not applicable for the private companies unless and until it is a subsidiary of public limited company.[12] These restrictions are also not applicable for the company who is investment has been made and the right shares allotted in the pursuance of Section 81 (1).

PROVISIONS OF SECTION 186

Under the provision of Section 186 (1) of the Companies Act 2013 the company can only make an investment through or not more than 2 layers of investment companies. The meaning of the word layer has been stated under Section 2 (87) (d)[13] of the Companies Act, 2013 which acts as a relation to hold a company under the subsidiary or the subsidiaries “Investment Company means a Company whose principal business is the acquisition of shares, debentures or other securities”. The provisions of the Section 186 (1) of the Companies Act, 2013 will not include the following cases.[14]

If a company has acquired any company which is incorporated outside India and such company has investment subsidiaries which are beyond two layers as per the laws of such country. “A subsidiary company from having any investment subsidiary for the purposes of meeting the requirement under any law/ rule/ regulation framed under any law for the time being in force”.[15]

[1] Admin, The Companies Act, 2013- Provisions relating to loans and investments, (2014), http://taxguru.in/company-law/companies-act-2013-provisions-relating-loans-investments.html (last visited Apr 20, 2017).

[2] The Companies Act, 1956 Section 372 -A  states that a company, whether by itself or together with its subsidiaries (hereafter in this section and section 373 referred as the investing company), shall not be entitled to acquire, by way of subscription, purchase or otherwise (whether by itself, or by any individual or association of individuals in trust for it or for its benefit or on its account) the shares of any other body corporate except to the extent, and except in accordance with the restrictions and conditions, specified in this section.] 1 The Board of directors of the investing company shall be entitled to invest in any shares of any other body corporate up to such percentage of the subscribed equity share capital, or the aggregate of the paid- up equity and preference share capital, of such other body corporate, whichever is less, as may be prescribed:] Provided that the aggregate of the investments so made by the Board in all other bodies corporate shall not exceed 1 such percentage of the aggregate of the subscribed capital and free reserves of the investing company, as may be prescribed:] Provided further that the aggregate of the investments made in all other bodies corporate in the same group shall not exceed 1 such percentage of the aggregate of the subscribed capital and free reserves of the investing company as may be prescribed.

[3] Inter-Corporate Loans, Investments, Guarantees and Security, (2014), https://www.icsi.edu/docs/webmodules/Publications/Lesson%2016%20(ACLP).pdf (last visited Apr 20, 2017).

[4] BORROW, LEND OR INVEST: BEWARE OF COMPANIES ACT 2013, (2014), http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/borrow-lend-or-invest-beware-of-companies-act-2013.html?no_cache=1 (last visited Apr 20, 2017).

[5] Section 372A – Inter-corporate loans and investments, http://www.ourprofessionalteam.com/index.php?option=com_content&view=article&id=1442&catid=19&Itemid=0 (last visited Apr 20, 2017).

[6] Id.

[7] Id.

[8] Supra note 2.

[9] Loan and investment by company, , http://xbrltool.mca.gov.in/SearchableActs/Section186.htm (last visited Apr 20, 2017).

[10] Explain the provisions relating to INTER CORPORATE LOANS AND INVESTMENTS, , http://www.allinterview.com/showanswers/89777/explain-the-provisions-relating-to-inter-corporate-loans-and-investments.html (last visited Apr 20, 2017).

[11] Integrated Child Development Services.

[12] Companies Act 2013 Loans and investments, , http://www.ey.com/in/en/issues/governance-and-reporting/ey-compass-on-companies-act-2013/ey-cfo-companies-act-2013-loans-and-investments (last visited Apr 20, 2017).

[13] “layer” in relation to a holding company means its subsidiary or

Subsidiaries.

[14] The dilemma of mandatory interest on inter corporate loans, , http://www.moneycontrol.com/news/business/personal-finance-business/the-dilemmamandatory-interestinter-corporate-loans-1511957.html (last visited Apr 20, 2017).

[15] G S Rao, the Companies Act, 2013- Provisions relating to loans and investments (2014), http://taxguru.in/company-law/companies-act-2013-provisions-relating-loans-investments.html (last visited Apr 20, 2017).

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