SECTION 372A OF THE COMPANIES ACT, 1956:

Inter-corporate loans, guarantee, deposits and investments

When a Company invest in the shares of other company, they give loan to other company and some time issues guarantee on their behalf, other than its ordinary course of business. At the time of doing so the company’s management need to check the compliances of provisions of section 292, 58A and 372A of the companies act, 1956.

To make it EASIER to understand lets first list out the transactions on which section 372A will not be applicable.

# Under section 372A(8), following transactions are exempted from the provisions of section 372A:

a)                  to any loan made, any guarantee given or any security provided or any investment made by:

(i)a banking company, or an insurance company, or housing finance company in the ordinary course of its business

(ii)a company whose principle business is the acquisition of shares, stocks, debentures or other securities,

(iii) a private company which is not a subsidiary of any public company.

b) To investment made in shares pursuant to sec. 81(1) (a) – Rights shares.

e) To any loan made by holding company to it’s wholly owned subsidiary
f) To any guarantee / security by holding company, in connection with loan made to it’s wholly owned subsidiary company
g) To acquisition by a holding company, by way of subscription, purchases or otherwise, the securities of its wholly owned subsidiary.

# If the transaction is not one of the transactions mentioned above, then the limit of loan/guarantee/deposit etc. needs to be checked. The amount of loan/guarantee/deposit etc. exceeds:

(i)                 60% of paid-up capital + free reserves

or

(ii)               100% of free reserves

Whichever is more,

For giving any such loan/guarantee/deposit etc. the company needs to take prior approval of shareholders by passing a special resolution. The explanatory statement shall mention the specific amount, purpose, name of body corporate, term of loan/guarantee/deposit etc.

In case of urgent necessity, where taking prior approval of shareholders possibly can be taken, board may grant such loan/guarantee/deposit etc. by passing a board resolution with the consent of all the directors present at the meeting, provided that the transaction shall be approved by the shareholders in the general meeting within 12 months of passing of the board resolution of annual general meeting whichever is earlier.

If the amount does not exceeds the limits specified above such a loan/guarantee/deposit etc. can be granted by approval of board of the company.

# Any such loan/guarantee/deposit etc. shall be given at an interest rate equal or more of the prevailing bank rate.

# All the transaction of loan/guarantee/deposit etc. shall be entered in the statutory register within 7 days of making of such loan/guarantee/deposit etc.

Explanations:

(i)                 Loan: includes debentures or any deposit of money made by one company with another company, not being banking company

(ii)               “free reserves”: means those reserves which, as per the latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit to the security premium account but shall not include share application money

# In case of default in compliance of the provisions of this section every officer of the company who is in default shall be punishable with imprisonment which may extend to 2 years or with fine which may extend to 50,000 rupees.