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Inter-Corporate Loan and Investment

Inter-Corporate Loan and Investment

Inter-Corporate Loan and Investment

A company is entitled to provide another company or body corporate with loans, investment, guarantee and securities, either with the consent of the board or that of the shareholders. This article covers the various provisions of Section 186 of Companies Act, 2013 which deals with inter-corporate loan and investment.

Ceiling on Inter-Corporate Loan and Investment

All companies have a restriction and ceiling on the maximum amount of inter-corporate loan and investment. A company should not provide loans or guarantee or purchase securities of any other body corporate exceeding 60% of its paid-up share capital, free reserves and security premium account or 100% of its free reserves and security premium account, whichever is more.

If the aggregate of inter-corporate loan, investment, guarantee and securities in connection with a loan already made and proposed to be made together is not above the specified limit, inter-corporate loan and investment can be processed by passing board resolution with consent of all directors present at the board meeting. If the same is beyond the specified limit, a prior special resolution must be passed and prior approval of the financial institution should be obtained, the latter if term loan is subsisting.

Restriction on Loan & Guarantee

A company is prohibited from making any inter-corporate loan, guarantee and security if it has defaulted in payment of interest. Such prohibition will be effective until the default is completely addressed by the company. Also, a company is not permitted to make any investment through two layers of investment companies, barring a few exceptions.

Rate of Interest

Loans should not be provided at a rate of interest lower than the prevailing yield of one year, three years, five years or ten years Government Security closest to the tenor of the loan. This isn’t applicable in circumstances where the loan is provided for industrial research and development projects, in which 26% or more of the paid-up capital is held by Government.

Disclosure

The company must disclose the following particulars to its shareholders in the financial statements if any inter-corporate loan or investment is made:

  • Amount of loans provided, the investment made/guarantee given/security provided.
  • Purpose of providing the same.
  • The proposed usage of the same by the recipient.

Non-applicability of Section 186

Some type of companies is in the business of providing loans and making an investment. Hence, Section 186 will not be applicable to any loans or guarantee given by:

  • A banking company, the insurance company or a housing finance company in its normal business operations.
  • A company framed with the purpose of financing industrial enterprises or providing infrastructure facilities.
  • A registered non-banking finance company which concentrates primarily on the acquisition of securities.
  • An organization that purchases the rights of shares.
  • A company whose primary business involves the acquisition of shares.
  • Government companies that operate defence production.
  • Unlisted companies which are legally authorized by the Ministry or Department of the State or Central Government.

Procedure

The below procedure to be followed by the company while giving loan to any other body corporate, providing security or guarantee in connection with a loan or acquisition by means of subscription, purchase the securities of any body corporate.

Step 1: A company can offer any loan or provide any guarantee or security and acquire securities of Body corporate through the Board resolution that is up to 60% of its paid-up capital, security premium account and free reserves or 100% of its free reserves and security premium whichever is more.

Step 2: Upon the above conditions and requirements of the company meeting of Board of Directors is to be convened after providing notice and proposals for granting a loan or providing guarantee or giving security etc. are to be discussed.

Step 3: No investment would be made or loan or guarantee or security provided by the company unless the resolution sanctioning is passed at a meeting of the Board with the consent of all the directors those who are present at the meeting.

Step 4: It is to be checked whether there is an existing loan from any public financial institution if so, the prior approval of that public financial institution is also required for any subsequent loan from any other source. However, prior approval of the Public Financial Institution would not be needed where the aggregate loan, investment, guarantee and security that is proposed within the limits as mentioned under section 186(2) and there is no default in the repayment of loan or interest thereon to the Public Financials Institution.

Step 5: After deciding the source of fund and quantum of requirement, the Board will authorize one of the directors or any other person to apply for the public financial institutions for the approval.

Step 6: Arrange to convene a general meeting with the shareholders after providing a proper notice and to pass the special resolution therein, where the granting of any loan or guarantee or providing any security or the acquisition that exceeds the limits specified that is 60% of its paid-up capital, security premium account and free reserves or 100% of its reserves and security premium whichever is more.

Step 7: File the copy of the special resolution in Form MGT-14 along with the fee as provided in Companies Rules, 2014 with the Registrar within 30 days of passing the resolution.

Step 8: All necessary documents are required to be attached as per the requirements of the form.

Step 9: The registers are to be maintained in the Form MBP-2 by every company providing the loan or giving guarantee or granting security or making an acquisition would, from the date of its registration and the documents of loan and guarantee, securities are given and acquisition are to be entered therein.

Step 10: Entries in the register would be made with respect of each such transaction of getting such a loan or providing guarantee or giving security or making an acquisition.

Step 11: It is to be ensured that no loan would be given at a rate of interest lower than the current yield of one year, three years, five years or ten years of the Government security closest to the tenor of the loan.

Step 12: The company must disclose financial statement the full particulars of the loans given to the members, the investment made or guarantee provided or security is given and the purpose for which the loan or guarantee or security that is proposed to be utilized by the recipient of the loan or guarantee or security.

Step 13: Scrutinize the repayment history of the company with regards to repayment of any deposits or interest thereon.

Note: No company which is in default in the repayment of any deposits or in payment of interest thereon would give any loan or give any guarantee or grant any security or make any investment through acquisition of any added company till such default is subsisting.

Penalty for Contravention of Section 186 

For Company: The company that contravenes the provisions under section 186 would be chargeable to a penalty that may not be less than Rs. 25000 but may exceed to Rs. 5 lakhs.

For Officers: Every director of the Company who is default would be punishable with the imprisonment for a term period that may exceed 2 years and the penalty that would not be less than Rs. 25000 but may extend to Rs. 1lakh.

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Post by Sreeram Viswanath

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