A company can give loans and guarantees, acquire securities or make investments in another company or body corporate with the consent of the board or shareholders. Such loans given by a company to other companies or body corporates are known as inter-corporate loans. When a company invests in another company, it is known as inter-corporate investment.
Section 186 of the Companies Act, 2013 (‘Act’) regulates inter-corporate loans and investments. A company can give loans and guarantees, acquire securities or make investments only according to the provisions laid down in Section 186 of the Act.
Inter-Corporate Loans and Investments Under Companies Act, 2013
Section 186(2) of the Act states how a company can give loans and guarantees to other companies and body corporates. It states a company can directly or indirectly:
- Give loan to any other body corporate.
- Provide security or give a guarantee in connection with a loan given to any other body corporate.
- Acquire securities of other body corporates by way of purchase, subscription or otherwise.
However, a company can give loans, guarantee and acquire securities of up to 60% of its paid-up share capital, securities premium account and free reserves or 100% its securities premium account and free reserves, whichever is more.
Section 186(1) of the Act provides that a company can make investments only through more than two layers of investment companies, except for the following:
- For acquiring any other company incorporated outside India when such other company has investment subsidiaries beyond two layers according to the laws of such country.
- Subsidiary company from obtaining any investment subsidiary for meeting the requirements under law or under a regulation or rule framed under the law for the time being in force.
Exceptions to Inter-Corporate Loans
The provisions of inter-corporate loans provided under the Act will not apply to the following:
- A banking company, housing finance company or an insurance company in its normal business operations.
- A company established to provide infrastructure facilities or finance industrial enterprises.
- A registered Non-Banking Finance Company (NBFC) concentrates primarily on acquiring securities.
Restrictions on Inter-Corporate Loans
Section 186(2) of the Act limits the loans, guarantees or securities given by a company to another body corporate. It provides that a company cannot give loans, guarantees or securities more than the prescribed limit, i.e. 60% of its paid-up share capital, securities premium account and free reserves or 100% of its free reserves and securities premium account, whichever is more.
However, a company can give loans, guarantees and securities or make investments above the prescribed limit when it is previously authorised by a special resolution passed in a general meeting.
A company can also give loans and guarantees to its wholly-owned subsidiary company, or joint venture and acquisition of securities can be made by the holding company of its wholly-owned subsidiary above the prescribed limit.
A company registered under Section 12 of the Securities and Exchange Board of India Act, 1992 (SEBI) and covered under such class of companies can take inter-corporate loans or deposits above the prescribed limit.
A company that has defaulted the repayment of any accepted deposits or in payment of interests cannot give a loan, guarantee or security or make an acquisition till such default is subsisting.
Rate of Interest on Inter-Corporate Loans
A company cannot give an inter-corporate loan at a rate of interest lower than the prevailing yield of one, three, five or ten years of government security closest to the loan term.
Disclosure to be Made for Issuance of Inter-Corporate Loan
The company should disclose the following to its members in the financial statement:
- Full particulars of the loans granted.
- Full particulars of the investments made.
- Full particulars of the guarantee or security provided.
- Purpose for which the loan, guarantee or security is proposed to be utilised by the recipient of the loan, guarantee or security.
Procedure to Issue Inter-Corporate Loans
The company giving inter-corporate loans should follow the below procedure:
- Conduct a Board of Directors meeting after providing notices and proposals for giving an inter-corporate loan, guarantee or security within the prescribed limit provided under Section 186(2) of the Act.
- Pass a resolution in the meeting of the Board of Directors with the consent of all the directors present at the meeting for giving the inter-corporate loan, guarantee or security.
- The Board of Directors needs to check whether the company has an existing loan from a public financial institution. If there is an existing loan from a public financial institution, the prior approval of that public financial institution is needed to grant a subsequent loan to other companies.
- However, the prior approval of the public financial institution is not required when the grant of the aggregate loan, guarantee, investment, and security is within the prescribed limit provided under Section 186(2) of the Act, and there is no default in the repayment of the interest or loan to the public financial institution.
- The Board of Directors has to authorise one director or any other person to apply for the approval of the inter-corporate loan to be granted to other body corporates after deciding the fund and quantum of the loan.
- When the company grants loans, guarantee or securities above the prescribed limit provided under Section 186(2) of the Act, the Board of Directors need to conduct a general meeting with the shareholders after providing proper notices and pass a special resolution in the general meeting for granting such inter-corporate loan, guarantee or security.
- File the copy of the special resolution in Form MGT-14 with the required documents and pay the fee as prescribed under Companies Rules,2014 with the Registrar of Companies within 30 days of passing the resolution.
- Maintain the registers in the Form MBP-2 after providing the loan, guarantee, security or making an acquisition.
- Make entries in the register regarding the grant of each loan, guarantee, security or making an acquisition.
- The company must keep the register at its registered office, and it must be open to inspection. The company members can take extracts and copies from the register upon payment of the prescribed fees.
- The company must disclose particulars of the granted loans, guarantees, securities or investments made in the financial statements and the purpose for which such loan, guarantee or security is proposed to be used by the recipient of such loan, guarantee or security.
- Scrutinise the company’s repayment history about the repayment of deposits or interest.
Penalty for Contravention of Companies Act, 2013
The company will have to pay a penalty of not less than Rs.25,000 that may exceed up to Rs.5 lakhs for the contravention of the provisions of Section 186 of the Act. Every director of the company in default is punishable with imprisonment for a term that may exceed up to 2 years and a penalty not less than Rs.25,000 that may extend up to Rs.1 lakh for the contravention of the provisions Section 186 of the Act.
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