Thursday, March 12, 2015

Inter-corporate Loans and Investments, Loans to employees

Companies Act 2013

section 186 of Companies Act 2013 governs loans, investments and guarantees by a company. Section 186 provides that a company may give loans or provide security/guarantee up to 60% of its (paid up capital + free reserves + securities premium) or 100% of (free reserves + securities premium), whichever is higher. For transactions exceeding these limits, approval of members is required to be sought by way of a special resolution.

on 10th March 2015, Ministry of Corporate Affairs clarified that loans and/or advances made by the companies to their employees, other than the Managing or Whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013, if it is in accordance with the condition of services to all employees and are also in accordance with the remuneration policy, in cases where such policy is required to be formulated. Due to this clarification now a Company is not required to maintain a register of loans given to its employees in the format MBP2 and does not disclose the details of loans given to its employees in the Directors report as specified u/s 186(9)

Companies Act 1956
The new provisions of section 372A (1956) is applicable only to Public Limited Companies and provide for a combined limit of sixty percent of the paid up share capital and free reserves (which term includes reserves free for distribution as dividend including the amount in the securities premium account) or one hundred percent of free reserves whichever is higher, for grant of loan (which term includes debentures) to any other body corporate, giving of any guarantee or provision of security in respect of a loan to or by any body corporate and acquisition of securities (which term includes shares, debentures, bonds and other marketable securities, etc.) of any other body corporate by way of subscription, purchase or otherwise. These powers are given to the board of a company by the statute .The scope of section 372A is much larger than the erstwhile section 372. Needless to say that there must a basic provision in the memorandum/articles of a company authorizing the board to make inter-corporate loans and investments.However, in exceptional circumstances, the board may provide guarantee without the previous authorization of shareholders. The Board needs to take approval of shareholders in the immediately succeeding meeting of members.

Conditions

  1. No loan, provision of guarantee or security or investment can be made unless the resolution sanctioning the same is passed at a meeting of the board with the consent of all the directors present at the meeting and with the prior approval of the public financial institution where any term loan is subsisting. However, prior approval of the financial institution is not required, if the aggregate of the investments made, loan granted, guarantees given or security provided together with the proposals in this regard does not exceed 60% of the limit referred to above, provided there is no default in repayment of loan or interest thereon.
  2. No loan can be given to any body corporate at a rate of interest lower than the prevailing bank rate.
  3. If a company has defaulted in the matter of public deposits under section 58A of the Act, such a company is prohibited from availing of the provision in section 372A of the Act. This is a temporary restriction, as the prohibition does not apply when the default under section 58A is made good.
EXCEPTIONS

The regulatory provisions of section 372A are not applicable in the following cases : -

  1. to any loan made, any guarantee given or any security provided or any investment made by a banking or insurance company or a housing finance company in the ordinary course of their business or to a company established with the object of financing industrial enterprises or of providing infrastructural facilities;
  2. to a company whose principal business is the acquisition of shares, stock, debentures or other securities;
  3. to a private company unless it is a subsidiary of a public company;
  4. to any investment made in rights issue;
  5. to any loan made, any guarantee given or security provided to or acquisition of shares by a holding company in its wholly owned subsidiary.