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.
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.
