Inter Company Loans

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Kinjal Thakkar (Querist)
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09 March 2009 Is there any kind of restrictions for a Private company to accept or grant inter company loans. What if there is director shareholding in both lending and borrowing company

Manmohan ACA, CS

Manmohan ACA, CS (Expert)
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10 March 2009 INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)

Overall ceiling limits: No company shall directly or indirectly make
(i) make any loan to any other body corporate;
(ii) give any guarantee or provide security in connection with a loan made by any
other person to, or to any other person by, any body corporate; and
(iii) acquire by way of subscription, purchase or otherwise the securities of any
other body corporate, exceeding 60% of its paid-up share capital and free
reserves or 100% of its free-reserves whichever is more. [sub-section (1)]
note:
• “Loan” includes debentures, or any deposit of money made by one company
with another company, not being a banking company.
• “Free Reserves” means those reserves which, as per latest audited balance
sheet of the company, are free for distribution as dividend and shall include
balance to the credit of the securities premium account but shall not include
share application money.
• Loans, Investments and guarantees in excess of prescribed limits: Where the
aggregate of the loans and investments so far made, the amounts 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,
exceeds the aforesaid limits, 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.

However, the Board may give guarantee, without being previously authorised by a
special resolution if:
1. a resolution is passed in the meeting of the board authorising to give guarantee
in accordance with the provisions of this section;
2. there exists exceptional circumstances which prevent the company from
obtaining previous authorisation by a special resolution passed in a general
meeting for giving a guarantee;
3. the resolution of the Board under (1) as above is confirmed within twelve
months, in a general meeting of the company or the annual general meeting
held immediately after passing of the Board resolution, whichever is earlier.

Note: Matter to be specified in special resolution: The notice of special resolution shall
indicate clearly the specific limits, the particulars of the body corporate in which the
investment is proposed to be made or loan or security or guarantee to be given, the
purpose of the investment, loan or security or guarantee, specific sources of funding
and such other details.
Directors – Powers, Managerial Remuneration in context of section 372A
1 No loan or investment shall be made or guarantee or security given by
the company in pursuance of sub-section (1) of Section 372A unless the resolution
sanctioning it 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 institution referred
to in Section 4A where any term loan is subsisting, is obtained.
2 The prior approval of a public financial institution shall not be required where the
aggregate of the loans and investments so far made, the amounts for which guarantee
or security so far provided to or in all other bodies corporate, along with the
investments, loans guarantee or security proposed to be made or given does not
exceed the limit of sixty per cent specified in sub-section (1) as referred above, if
there is no default in repayment of loan instalment or payment of interest thereon as
per the terms and conditions of such loan to the public financial institution.
[subsection (2)].

3 Rate of interest: No loan to any body corporate shall be made at a rate of interest
lower than the prevailing bank rate, being the standard rate made public under
Section 49 of the Reserve Bank of India Act, 1934. [sub-section (3)].

4 Penalty Default under Section 58A: No company which has defaulted in complying with the
provision of Section 58A, shall directly or indirectly make any loan to any body
corporate; give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person by, any body corporate and acquire, by
subscription, purchase or otherwise the securities of any other body corporate till
such default is subsisting. [sub-section (4)]
5 Register of Investments and Loans: (i) Every company shall keep a register
showing the following particulars in respect of every investment or loan made,
guarantee given or security provided by it in relation to any body corporate under subsection
(1), namely:
— the name of the body corporate;
— the amount, terms and purpose of the investment or loan or security or
guarantee;
— the date on which the investment or loan has been made; and
— the date on which the guarantee has been given or security has been provided
in connection with a loan.
6 The particulars of investment, loan, guarantee referred to in sub-section (1) shall
be entered chronologically in the register aforesaid within seven days of the making of
such investment or loan, or the giving of such guarantee or the provision of such
security. [sub-section (5)]
Corporate and Allied Laws 3.58
7 ( The register referred to in sub-section (5) shall be kept at the registered office of
the company concerned and shall be open to inspection at such office and the
extracts may be taken therefrom and copies thereof may be required, by any member
of the company to the same extent, in the same manner, and on payment of the same
fees as in the case of the register of members of the company; and the provisions of
Section 163 shall apply accordingly. [sub-section (6)]