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Advance given intercompany

30 January 2014

Hello All,

A company wishes to give an advance to its group company.Both the companies are private companies. Is this allowed under the new Act.Will this come under intercompany loan?

Thanks in advance.

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P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 30 January 2014

1) Section 185 of Companies Act 2013 prohibits loans to specified related parties [Ref. Explanation to proviso to sub-section (1)] "save as otherwise provided in the Act" and this Section has come into force. Assuming that the borrowing company is covered under this, loan is prohibited.

2) Section 186 of the 2013 Act permits inter-corporate loans & investments subject to specified limits. However, this Section has not yet come into force. Hence loan cannot be given as of now under this Section.

3) MCA has clarified vide circular dated 19.11.2013 that Section 372A of Companies Act 1956 dealing with inter-corporate loans & investments is still in force. This Section is not applicable to a private company.

In the above background one could assume that the loan can be given as per MCA circular. It can be seen that a lot of confusion has been created by MCA by having two Acts in force simultaneously. Further, in the new Act a lot of exemptions to private companies have been withdrawn. Govt has power u/s 462 to exempt private companies from provisions of the Act. However, till date no such exemption notification has been issued and the stand of MCA on the subject is not clear. Let us hope that MCA will come out with required notifications at the earliest.