Inter-Corporate Loans and Investments by Snigdha Mohapatra at LexCliq

Section 186 of the Companies Act, 2013 provides for ‘Loans and Investments by a Company’ which corresponds with Section 372-A of the Companies Act, 1956. A company is entitled to provide another company with loans, investment, securities, and guarantees. The same can be done either with the consent of the board or that of the shareholders.

Register of investments-loans

Section 186(9) of the Act provides that the company has to keep and maintain a register including particulars about investments, loans, securities and guarantees as per the prescribed manner. The register should be maintained in the manner prescribed. The particulars are as follows:

  1. The name of the company.
  2. The date on which the loan or investment is made.
  3. The date on which security or guarantee has been provided against the loan or investment.
  4. The amount, purpose and terms of the loans, investment, securities, and guarantees.

The particulars should be entered in the register in chronological order within seven days of the making of the loans or investments.

Section 186 (10) of the Act provides that the register should be kept at the registered office of the company. The same should be open to inspection by members of such offices. They can also take extracts and demand copies of the same on the payment of a prescribed fee.

Rule-making power

The Central Government has the power to regulate the provisions of the mentioned Section in a prescribed manner. It is provided under sub-section 12 of the Act.

Exceptions

Section 186 doesn’t apply to certain transactions. Thus, this Section would not be applicable to any loans or guarantees given by:

  1. A banking company, an insurance company or a housing finance company for transactions made in the ordinary course of business.
  2. A company framed with the sole purpose of financing industrial enterprises or for providing infrastructure facilities.
  3. An organization that purchases the rights of shares.
  4. A company whose primary business is the acquisition of shares.
  5. A registered non-banking finance company that primarily focuses on the acquisition of securities.
  6. Unlisted companies are legally authorized by the Ministry or Department of the State or Central Government.
  7. A government company that operates defence production. [10]

Penalty provisions

There are majorly two types of default and are treated differently. One is the violation of the main provision and the second is the default in maintaining the register. A very light penalty is provided in the matter of the register.

If a company contravenes or violates the provisions of the given Section, the company shall be punished with a fine of a minimum of twenty-five thousand rupees, which can be extended to five lakh rupees. The officers of the company who are in default will also be punished with imprisonment for a term of a maximum of two years along with a minimum fine of twenty thousand rupees, which can be extended to one lakh rupees.

Loans

For the purpose of the given Section ‘loan’ includes debentures or any other deposits of money made by one company with another company. Here, the depositee company should not be a banking company.

In case of default in payment of interest, the company is prohibited from making any inter-corporate loan, guarantee or security. Such prohibition remains effective until it is addressed by the company.

Free reserves

Free reserves refer to those reserves which are free for distribution as a dividend, as per the latest audited balance sheet of the company. It also includes the amount of the premium received on the issue of securities but doesn’t include the share application money.

Companies Act, 2013 has introduced major changes in the governance of companies. The concept of loan and investment by companies has also gone a change in the process. The provisions for investment by companies are contained in Section 186 of the Act under Chapter XII (Meetings of the Board and its Powers) read with the Companies (Meetings of the Board and its Powers) Rules, 2014.

Investment made through layers

A company shall make an investment through not more than two layers of investment companies. There was no such provision in Section 372A of the Companies Act, 1956. In relation to a holding company, ‘layer’ means its subsidiary or subsidiaries.

Non-Applicability

However, the above provisions shall not affect:

(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.

Restrictions on Inter-Corporate Loans

No company shall directly or indirectly give any loan to any person or other body Corporate; give any guarantee or provide security in connection with a loan to any other body corporate or person; and 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.

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