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.

(c) 2015, Shreerang Ketkar, All rights reserved.

Depreciation - Companies Act 2013

Companies Act 2013 [Act] has introduced the concept of useful life and depreciation will be calculated based on the useful life of any asset. Section 123 of the act specifies that depreciation shall be provided in accordance with the provisions of Schedule II. 

Part C of Schedule II has provided useful life of 15 categories of tangible assets. The useful life mentioned under it is different than that of The Companies Act, 1956. Because of this change companies have to expedite the amortisation of asset at higher rate in order to comply with the useful life specified under the Act. No separate rates are prescribed for extra shift depreciation in Schedule II.

The Schedule XIV to the Companies Act, 1956 prescribes the rates of Straight Line Method [SLM] and Written Down Value[WDV] at which depreciation on various assets need to be provided. In Schedule II to the Act, only useful life is provided, therefore appropriate rate of depreciation as per the appropriate method used by it either SLM or WDV needs to be calculate separately.

In Companies Act, 2013 it is clarified that residual value of the asset can not exceed 5% of original cost of the asset. companies are now required to adopt what is known as the ‘component approach’ to compute depreciation on fixed assets. An assets needs to be split in to its components and based on the useful life of each component the depreciation % will be identified.

Appointment of Managing Director

Appointment of Managing Director

1. Every Public company having a paid up share capital of Rs. 5.00 crores or more must appoint a Whole time director or Managing Director. 
2. A managing Director must essentially be a Director of the Company. In case the proposed MD is not a Director he must be appointed as Additional Director.
3. Being an Additional director he will assume the office of Director till the next AGM, wherein he has to be reappointed.
4. Managing director can be appointed for the period of 5 years. [Sec. 317]
5. A copy of Board resolution appointing MD should be filed with the ROC within 30 days. [Sec. 192 (1)]
6. Section 269 applies to every Public Company and Pvt. Co. which is a subsidiary of Pub. Co.
7. After appointment of MD form 25-C should be to be filed as specified u/s 269(2) within 90 days of appointment.
8. In case of omission of filing such form the appointment does not become void.
9. Schedule XIII specifically provides that appointment of MD should be approved by shareholders in General meeting.
10. Approval of Central Govt. is necessary in case the appointment is not according to Sch. XIII. An application in form 25A has to be submitted within 90 days of such appointment. U/s 269(6), even in case Central Govt. rejects the appointment, the individual can continue occupying the position by payment of Fine / Penalty.
11. The above-mentioned provisions do not apply to Pvt. Company.
12. There is no restriction on Remuneration payable to MD of a Pvt. Company.
13. Restrictions on Appointment: An individual cannot be managing director or manager of more than two companies, public or private, where out of two companies at least one is a public company or private company, which is a subsidiary of a public company. An individual may hold the office of managing director or manager in any number of private companies, which are not subsidiaries of public company. But if the office is held in a public company or a private company which is subsidiary of a public company, the same individual can not, in addition thereto, hold the office of managing director in more than one company whether such company is a public company or private company which is subsidiary of public company or any private company. (Section 316) 
14. Terms of Office: The term of office of a managing director must not exceed 5 years at a time. The term, however, may be extended for further period not exceeding 5 years at a time. (Section 317) 
15. It is important to note that the person ceases to be managing director with a censure of directorship on account of his retirement by rotation at the Annual General Meeting. But if such a person is re-elected as director at the AGM and thereby he continues as the director of the company, he shall continue as a managing director also for the period for which he is so elected by the AGM and for the unexpired period of present term of appointment as managing director.
16. Disqualifications for appointment: A managing director must be a director and therefore, all the disqualifications rendering impossibilities for the appointment of a person as director (Section 274) will apply in the case of appointment of a managing director. Section 267 specifically provide that company must appoint or continue the appointment of a person as managing or whole time director who is: 
1. An undischarged insolvent or has at any time been adjudged insolvent; 
2. Suspends or has at any time suspended payment to his creditor or has made a composition with them or 
3. Has at any time been convicted of an offence involving moral turpitude. Meaning of the term moral turpitude: According to American encyclopedia of Law, it comprises anything contrary to justice, honesty, and principle of good morals, an act of baseness, vileness or depravity in the private and social duties, which a man owes to his fellowmen or society in general. The term also comprises anything contrary to the accepted and customary rule of right and duty between humans. 
17. u/s 117(3) of the Companies Act 2013 any resolution of the Board of Directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a Managing Director needs to be re filed with ROC within 30 days of passing the same.