Inter corporate loans

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vijay kumar (Querist)
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16 June 2014 Dear Expert,

Please advise, whehter wholding company can finance its subsidiary company by virute of its agreement drafted prior to notification of sec 186 of comapnaies act 2013 in the form of inter corporate loan/a dvance ?
or is there any other means of financing the subsidiary other than share application money?

Ankur Garg

Ankur Garg (Expert)
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16 June 2014 Loan from holding to subsidiary is allowed now through rules.

In your query section 185 loan to director is also very imp. Check the applicability of section 185. Further you can continue your transaction if the date of agreement is before the date of applicability of section 185 and 186.

Most of the companies following the same path to continue their old transaction.

Thanks

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vijay kumar

vijay kumar (Querist)
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16 June 2014 Dear Ankur,

Thank you for your immediate reply and understanding my intention.

As you pointed out, my intention is to verify the applicablity of sec 185 nd Sec 186 of CA 2013 in case of common directors? and is there any way out to escape from applicability of sec 185, Since some experts are saying usage of " save otherwise provided " at the begining of sec 185??
Assuming of date of agreement is after the date of applicability of sec 185 nd sec 186...

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vijay kumar

vijay kumar (Querist)
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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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01 August 2024 **1. Applicability of Sections 185 and 186 of the Companies Act, 2013:**

**Section 185** of the Companies Act, 2013 restricts loans to directors and their relatives. **Section 186** governs loans and investments by a company and includes provisions on loans to subsidiaries and other companies.

**1. Financing a Subsidiary by a Holding Company:**

- **Pre-Notification Agreements:**
If an agreement was drafted before the notification of Section 186, it might have different implications. However, the applicability of Section 186 is not generally retroactive. The current provisions under Section 186 apply to transactions occurring after its notification date.

- **Inter-Corporate Loans:**
Section 186 governs the conditions under which a company can give loans or provide guarantees and security to other companies. This includes loans to subsidiaries. Loans to subsidiaries are generally allowed but must comply with the conditions specified under Section 186. This includes ensuring that the loan amount and conditions are within the limits set by the Act and are disclosed in the financial statements.

- **Share Application Money:**
Financing through share application money is an alternative to inter-corporate loans. This method involves the holding company subscribing to additional shares of the subsidiary, thereby increasing its equity stake in the subsidiary.

**2. Applicability of Sections 185 and 186 with Common Directors:**

- **Section 185:**
Section 185 restricts loans to directors and their relatives. If there are common directors between the holding and subsidiary companies, it is crucial to ensure that any loans or advances do not violate these provisions. This is to avoid potential conflicts of interest or personal benefits that may arise from such loans.

- **Section 186:**
This section deals with the general powers of companies to lend and invest. If a holding company finances a subsidiary, it must comply with the provisions of Section 186, including obtaining necessary approvals and adhering to prescribed limits.

**3. Applicability and Workarounds:**

- **"Save Otherwise Provided":**
The phrase "save as otherwise provided" in Section 185 allows for exceptions if there are specific provisions or exceptions in other parts of the Act or other laws. However, it is crucial to closely examine these provisions to ensure compliance.

- **Avoiding Applicability of Section 185:**
If Section 185 applies due to common directorship, it is essential to ensure that any loans or advances are appropriately documented and disclosed, and that they comply with the provisions of the Act. To mitigate applicability, companies can:
- Ensure that any loan or advance is provided in accordance with the provisions of Section 186.
- Avoid providing loans or advances to directors or their relatives unless specifically permitted under the Act.
- Consider alternative financing options that do not involve direct loans to directors or their relatives.

**Summary:**

1. **Financing a Subsidiary:**
- Loans from holding company to subsidiary must comply with Section 186.
- Share application money is an alternative.

2. **Common Directors:**
- Ensure compliance with Section 185 for loans to directors or their relatives.
- Comply with Section 186 for loans and advances to subsidiaries.

3. **Workarounds:**
- Review specific provisions under "save as otherwise provided" in Section 185.
- Ensure proper documentation and adherence to regulatory limits.

Always consult a legal expert or company secretary to ensure full compliance with the Companies Act, 2013, and to address specific concerns related to inter-corporate transactions and common directorships.