Hai all!
As per the Explanation to Section 372A, loan includes debentures or any deposit of money.
I have a doubt whether a loan given by a Holding co. to its Subsidiary(not wholly owned) should be taken, in the following case:
the Holding Co. makes the payment in respect of the Subsidiaries expenses and Debits to "Expenses Recoverable from (co name)" grouped under Loans and Advances.
Please post your views...........
Yogesh Shah
(Managing Corporate Finance)
(1051 Points)
Replied 27 May 2010
Hi Priyadarshini,
Lets first check whether such subsidiary is covered u/s. 372A or not ….
I would like to mention that Sec. 372A covers wholly owned subsidiary company. In your case, it is partly owned subsidiary company & hence it will not be excluded from purview of sec. 372A
Secondly, Loan u/s. 372A includes amount lent for INTEREST. In your case, Holding co. has made expenses on behalf of its Subsidiary. In my opinion, for that better term would be ‘Advances’ and not a loan. Plus, such a advance is generally interest free. Hence, this transaction is out of sec. 372A.
[ In my opinion, if such advance is with interest then my aforesaid answer would change and I would say that advance shall be covered u/s. 372A. ]
I am eagerly awaiting for views of other fellows. If I am wrong, kindly let me know.
Hai Yogesh....
Thanks for the reply.
Please notice that as per expln to Sec 372A Loan includes any deposit of money.
The section provides that interest should not be less than RBI rate.It covers NIL interest as well
So charging interest is not a criteria for the transaction to be covered u/s 372A
a transaction will be taken as loan u/s 372A regardless whether interest is charged or not
and if less interest is charged it is a violation.
Note:
My question is only regarding Subsidiary Cos in which the holding is <100%
Looking for further views..........
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 29 May 2010
You are absolutely right the term Loan u/s 372A includes debentures or any deposit of money made by one company to another. Minimum rate of interest should be the prevailing bank rate : i.e the rate at which the RBI lends money to commercial banks as per the Act. According to me you cannot provide interest free u/s 372A. The rate of interest u/s 49 of RBI Act is also a mandatory provision U/s 372A.
So interest free loans cannot be provided u/s 372A.
How ever any loan made, security or guarantee given by a holding company to its wholly owned subsidiary is not applicable u/S 372 A.
Hope everything is clear
Rasesh
(CS CWA MBA (Fin) B.Com LL.B (Spl))
(6501 Points)
Replied 30 May 2010
If there are business transactions between the two companies then only the holding company may show it as advances. Otherwise, if seems to be running loan account and should be disclosed accordingly. Sec 372A limits would definitely be attracted.
Hai Jitesh
So what do you say...
The said transaction is covered under 372A or not?
No interest is charged on it.
If the trscn is covered under Sec 372A and they have not charged interest it is a violation of the Act.
So we have to first decide whether the said trnscn is covered u/s 372A or not
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 02 June 2010
As the transaction is between a holding company and not a wholly owned subsidiary, Sec 372A will attract and you have to provide minimum rate of interest as per Sec 49 of RBI Act. If the transaction is between wholly owned subsidiary then it would have exempted.
But in your case you have to comply with all provisions of Sec 372A. and you have to update the same in your statutory register.
Non compliance of this will attract penalty and imprisonment.
This is my understanding, if any other suggestion is there please reply as this section has a wider scope than any other section in companies act.
Regards
CS Jithesh
Company Secretary
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 02 June 2010
That you can check in the RBI website as I don't know the exact rate. You can check the bank rate
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 02 June 2010
You can charge the interest rate as on 31.03.09 as the loan is providing after that date
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 03 June 2010
CS Jithesh (ACS,)
(COMPANY SECRETARY )
(485 Points)
Replied 03 June 2010
You can provide the bank rate as 6. %
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