LOAN AND INVESTMENT BY
COMPANY
The Companies Act 2013 came up
with new restrictions which provides that intercorporate investment should not to
be made beyond two layers.
Layer in relation to holding company means its
subsidiary or subsidiaries as per the provision of section 2(87) of the
Companies Act, 2013 (for brevity referred as “the Act”)
Section 179 of the Act gives
special right to the Board of Directors of the Company to invest the funds of
the company, a part from loan and investment giving guarantee or security is
equally treated as loan, because to whom such guarantee is given can enforce
the guarantee or security in certain condition and it will be the company who
will have to bear the amount.
Section 186 generally restricts
the Company with respect to making Loan, providing Guarantee or Security or
making an Investment (L/G/S/I) in excess of certain limit as provided.
CONSEQUENCES FOR NON - COMPLIANCE
If a company contravenes the provision of this section, the company shall be punishable with the fine which shall not be less than 25,000 but which may extend to 5 lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to 2 years and with the fine which shall not be less than 25,000 but which may extend to 1 lakh.
GENERAL PROVISION
Section 186(1) of Act provides
without prejudice to the provisions contained in this Act, a company shall unless
otherwise prescribed, make investment through not more than two layers of
investment companies:
Provided that the provisions of
this sub-section 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
Section 186(2) of the Act
provides no company shall directly or indirectly-
(a) give
any loan to any person (excluding an individual who is in employment of the
company) or other body corporate;
(b) give
any guarantee or provide security in connection with a loan to any other body
corporate or person; and
(c) acquire
by way of subscription, purchase or otherwise, the security of any body
corporate
exceeding 60% of
its paid up share capital, free reserve and securities premium account or 100%
of its free reserves and securities premium account, whichever is more.
MEANING OF PERSON
As per Section 2(42) of the
General Clauses Act, 1897 “person” shall include any company or association or
body of individuals, whether incorporated or not.
PROCEDURE FOR
MAKING INTER CORPORATE LOANS AND INVESTMENT
Step 1 - Approval of
Board
Section 186(5) of the Act provides that no investment shall
be made or loan or guarantee or security given by the company unless the
resolution sanctioning is passed at a meeting of the Board with the consent of
all the directors present at the meeting and the prior approval of the public
financial institutions concerned where any term loan is subsisting, is
obtained:
Provided that prior approval of a public financial
institution shall not be required where the aggregate of the loans and
investment so far made, the amount for which guarantee or security so far
provided to or in all other bodies corporate, along with investment, loans,
guarantee or security proposed to be made or given does not exceed the limit as
specified in sub-section (2), and there is no default in repayment of loan
instalments or payment of interest thereon as per the terms and conditions of
such loan to the public financial institution.
Author's Opinion -
(i) The
approval of Board must be obtained prior to making any intercorporate loan,
investment, guarantee or security.
(ii) The
approval of Board must be obtained by passing a unanimous resolution. (All
directors present in the meeting must vote in favour)
(iii) Such
resolution shall be passed in Board Meeting only and not by Resolution by
Circulation as provided in Section 175 of Act.
Step 2 – Approval of Shareholders
Section 186(3) of the Act
provides, where the aggregate of the loans and investment so far made, the
amount for which guarantee or security so far provided to or in all other
bodies corporate along with the investment, loan, guarantee or security
proposed to be made or given by the Board, exceed the limits specified under
subsection (2) as discussed above, no investment or loan shall be made or
guarantee shall be given or security shall be provided unless previously
authorised by a special resolution passed in a general meeting.
Author's Opinion – Company can exceed
the limit as stated under 186(2) of the Act by passing the special resolution
in general meeting.
Provided further that the Company
shall disclose the details of such loans or guarantee or security or acquisition
in the financial statement as provided under sub-section (4).
Section 186(4) of the Act
provides that the company shall disclose to the members in the financial
statement the full particulars of the loans given, investment made or guarantee
given or security provided and the purpose for which the loan or guarantee or
security is proposed to be utilized by the recipient of the loan or guarantee
or security.
The company should also ensure
that a resolution passed at general meeting as discussed above shall specify
the total amount up to which the Board of Directors are authorized to give such
loan or guarantee, or to provide such security or make such acquisition;
Provided that Company shall
disclose to the members full particulars in a manner same as given under the
provision of section 186(4)
Step 3 – Approval of Public Financial Institution
1. If the threshold exceeds - If the
inter-corporate loans or investment is beyond the limit of 60% or 100% as the
case may be.
2. If
the threshold doesn't exceed - If
the inter-corporate loans or investment is upto 60% or 100% as the case may be,
but there is default made by Company in repayment of installments or payment of
interest thereon.
The approval of PFI
is required in both the cases.
INTEREST RATE
As per Section 186(7) of the Act,
no loan shall be given under this section at a rate of interest lower than the
prevailing yield of one year, three year, five year or ten year Government
Security closest to the tenor of the loan.
PROHIBITED COMPANIES
Section 186(8) of the Act,
provides that no company which is in default in the repayment of any deposits
accepted before or after the commencement of this Act or in repayment of
interest thereon, shall give any loan or give any guarantee or provide any
security or make an acquisition till such default is subsisting.
REQUIREMENT TO MAINTAIN REGISTER
Every company giving loan or
giving guarantee or providing security or making an acquisition under this
section shall, from the date of its incorporation, maintain a register in the
Form MBP-2 and enter therein separately, the particulars of loans and
guarantees given, securities provided and acquisitions made.
Entries in the register shall be
made chronologically in respect of each such transactions within 7 days of
making such loan or giving guarantee or providing security or making
acquisition.
The register shall be preserved
permanently at the registered office of the company and shall be kept in the
custody of Company Secretary of the Company or any other person authorised by
Board for this purpose.
INSPECTION OF THE REGISTER
The register shall be open for
inspection at such office and extracts may be taken therefrom by any member,
and copies thereof may be furnished to any member of the Company on payment of
such fees as may be prescribed.
EXEMPTION TO CERTAIN CLASS OF COMPANES
Section 186(11) of the Act
provides that nothing contained in this section except sub-section (1), shall
apply-
(a) to
any loans made or any guarantee given or any security provided or any investment made by –
(i)
a banking company
(ii)
an insurance company
(iii)
a housing finance company
(iv) a
company established with the objective of and engaged in the business of
financing industrial enterprise or
providing infrastructural facilities
(b) To
any investment –
(i)
made by a non-banking financial company (NBFC)
registered with RBI and whose principal
business is acquisition of securities;
Provided that exemption to NBFC
shall be in respect of its investment and lending activities;
(ii)
made by a company whose principal business is
the acquisition of securities;
(iii)
made in shares allotted in pursuance of 62(1)(a)
(iv) made
by a banking company or an insurance company or a housing finance company
making acquisition of securities in the ordinary course of its business.
(Inserted by the Companies Amendment Act, 2017)
Author's Research -
(i)
The requirement of seeking member’s approval by
means of special resolution shall not apply in case of government companies
engaged in defence production or other unlisted government companies which
seeks prior approval of their administrative Ministry or Department for the
proposed transactions.
(ii)
The provision of interest as specified in 186(7)
of the Act shall not apply to a company in which 26% or more of the PSC is held
by the Central Government or one or more State Governments or both, in respect
of loans provided by such company for funding Industrial Research and
Development projects in furtherance objects as stated in its MOA.
ABOUT THE AUTHOR
AAKARSHIT JAI
Contact - LinkedIn
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