INTER CORPORATE LOAN, INVESTMENT ETC.

I hereby share legal provision and implication of inter- corporate loan, investment etc. as specified under section 372A of Companies Act, 1956.

hope that it will be useful.

Rajeev Nayak 

 

INTER CORPORATE LOAN,  INVESTMENT, GUARANTEE AND SECURITY [ SECTION 372A OF COMPANIES ACT, 1956]

 

 

LEGAL BACKGROUNDS

 

The whole provision of Section 372A of the Companies Act, 1956 can be Sub - Divided into 3 categories:

 

I.                  INTER -CORPORATE LOANS

II.             INTER -CORPORATE INVESTMENTS

III.          INTER -CORPORATE GUARANTEES AND SECURITIES

 

 

 

APPLICABLITY OF THE SEC. 372A

 

·         The whole provision of Sec. 372A will be applicable to a public company or a private company which is a subsidiary of public company.

·         Thus provision of Sec. 372A is not applicable to a plain private company.    

 

 

 

INTER -CORPORATE LOANS

 

Basic provision

 

·         Section 372A is applicable only to a public company or private company which is a subsidiary of a public company.

·         Section 372A imposes certain restriction on giving loans by a company to bodies corporate.

·         However, every loan to be given by a company does not fall within the ambit of this section, though it falls within the ambit of section 292(1)(e). only the loans to be given by a company to bodies corporate are covered under Section 372A.

·         A company which has made a default in the compliance of Sec. 58A is prohibited from making any inter corporate loan till the default is made good.

·         Section 372A is applicable to the indirect inter corporate loan as well. E.g. through any other person or for its benefit.

 

 

 

MEANING OF LOAN:

 

1.      The term ‘LOAN’ is not defined. In ordinary terms loan means the act of lending on the condition of being returned, especially a sum of money lent at interest. But in case of interest free loan payment of interest is not the criteria.

2.      But every loan given by a company which falls within the ambit of Sec. 372A must bear a interest rate not lower than prevailing bank rate.[Sec. 372A(3)]

3.      As per explanation of Section 372A loan includes the deposit of money by one company with another. Thus lending money by a company another in the form of Inter Corporate Deposit or any other form will require the compliance of Sec. 372A besides that of Sec. 292.

4.      As per the explanation to Sec. 372A loan includes Debentures. Thus one company buying debentures of another company will require the compliance of this section as well as Sec. 292.

  

 

LOANS AND COMPANIES OUTSIDE THE PURVIEW OF SECTION 372A

 

·         According to sec. 372A of the companies Act, so far as loan are concerned, applies to every company  subject to the following exemption:

Ø       A banking company in the ordinary course of business;

Ø       An insurance company in the ordinary course of business;

Ø       A housing finance company in the ordinary course of business;

Ø       A company established with the object of financing industrial enterprises;

Ø       A company established with the object of providing infrastructure facilities;

Ø       Investment company;

Ø       A plain private company which is not the subsidiary of public company.

Ø       A holding company to its wholly owned subsidiary company.

·         Any loan given by the holding company to its 100% subsidiary company is exempted and thus this exemption is not available in case of normal subsidiary.

·         A question arises that whether the exemption given under 372A(8) would be available in case of a subsidiary (C) which is 100% subsidiary of company (B) and company B is itself  subsidiary of company A, If company A wants to give a loan to C.

·         As per Sec. 4 of the Act Company C is treated as 100% subsidiary of company A and therefore exemption can be availed if loan is given by the company A to company C.

 

MEANING OF FREE RESERVE 

 

As per the explanation to Sec. 372A free reserve means which as per the latest audited balance sheet are free for distributable as dividend and shall also include the balance held in securities Premium Account but does not include Share application money.

 

II.        INTER -CORPORATE INVESTMENTS

 

   BASIC PROVISON

·         Acquisition by way of subscripttion, purchase or otherwise of securities of any other body corporate falls within the ambit of Sec. 372A. 

·         It may be noted that the term securities is used in the section in contrast of the term Shares which find place in the erstwhile sec. 370. The term ‘securities’ is much wider term than term ‘Shares’. Sec. 2(h) of Securities Contract (Regulation) Act, 1956 gives very wide definition of term securities and it includes shares, debentures, bonds, stock, debenture stock, derivatives, Government Securities  etc.

·         Thus scope of Sec. 372A has enlarged to cover investment in debentures, bonds or other marketable securities of like nature of body corporate.

·         Investment made in the Government securities and in the unit of mutual fund (which generally speaking, are set up as Trust Bodies) though covered in the definition of Securities fall outside the ambit of Sec. 372A because same are not issued  by the bodies corporate as defined in the Sec.2(7). However mutual fund issued by the body corporate falls within the ambit of Sec. 372A.

·         Investment made in the unit of Unit Trust of India (set up as body corporate) and also in ADR, GDR issued by the foreign companies falls within the ambit of this section.

·         Share Application money paid on application of shares in other company will not come within the purview of this section in the absence of allotment of securities.      

 

 

INVESTMENT/COMPANIES WHICH ARE NOT WITHIN THE PREVIEW OF SEEC.372A.

    

·         Provision relating to the Inter Corporate Investment shall apply to all the public company. But it does not apply to investment made by the following:

Ø       A banking company in the ordinary course of business;

Ø       An insurance company in the ordinary course of business;

Ø       A housing finance company in the ordinary course of business;

Ø       A company established with the object of financing industrial enterprises;

Ø       A company established with the object of providing infrastructure facilities;

Ø       Investment company;

Ø       A plain private company which is not the subsidiary of public company.

Ø       Investment in shares allotted in pursuance of Sec. 81(1)(a) i.e. Right Shares.

Ø       A holding company in its wholly owned subsidiary company.

 

·         Sec. 372A is not applicable investment company i.e. a company whose principal business is the acquisition of shares, stock, debentures or other securities.

·         MCA has the opinion that the words whose principle business is acquisition of shares means the company concerned is expected to hold the shares etc. acquired by it. Merely by including in the MOA investment business as the main object, the company would not be qualified to be regarded as an investment company. It must be actually carrying on the business of investment as principal activity.

·         The exemption is available for only the investment company. A company doing manufacturing activity and also authorized by the MOA to do the investment business and show the investment as stock in trade the exemption from Sec. 372A will not be available to the company [MCA Circular].

·         Continuation of the investment made by the exempted companies after the cessation of exemption would not require the compliance of sec. 372A. Thus investment made during the period when the company was exempt from the provision of sec. 372A and remained outstanding after the cessation of exemption would not come within the ambit of Sec. 372A. MCA Circular].

·         The exempted investments are excluded from the calculation in considering the limits prescribed in 372A.

 

 

 

III. INTER -CORPORATE GUARANTEES AND SECURITIES

 

·         Besides inter- corporate loans and investment sec.372A also apply to inter- corporate guarantees and securities i.e guarantees provided and securities given by the company in connection with the loan given :-

Ø       By any person to any body  corporate; or

Ø       Any body corporate to any person.

 

·         For the purpose of 372A guarantees at least one party i.e lender or borrower must be body corporate otherwise 372A will not apply.

·         For the purpose of Sec. 372A inter corporate guarantee or securities should be in connection with the loan. In respect of other type of guarantee like performance guarantee Sec. 372A will not be applicable.

·         In respect to corporate guarantee and security provided  a company has to comply the provision of this section and also take care of the provision of Sec. 295(1)(d)/(e)., if and when applicable.        

 

 

EXEMPTION IN CASE OF INTER CORPORATE GUARANTEE OR SECURITY

 

·         The provision of Sec. 372A in respect of inter- corporate guarantee and security shall not be applicable in case of any guarantee given or any security provided by a holding company in respect of loan made to its 100 % subsidiary company.

·         It should be noted that exemption is given only in case of 100% subsidiary company. In case of normal subsidiary company exemption will not be applicable.

·         Further exemption is given in respect of guarantee given or security provided in respect of loan given to its 100% subsidiary company. In reverse transaction i.e. guarantee given in respect of loan made by its 100% subsidiary company to any other person including body corporate, exemption will not be applicable.    

 

 

 

 

COMMON PROVISION FOR INTER CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

 

 

APPROVAL OF BOARD FOR MAKING THE INTER- CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

 

·         Every loan, investment, guarantee and security falling within the purview of Section 372A must be sanctioned by a resolution of BODs passed at its meeting with the consent of all the directors present at the meeting.

·         Resolution passed by Resolution by Circulation is not permitted under Section 372A. 

·         The BODs can at any time make loan or investment to any other bodies corporate or give guarantee or provide any security in connection with loan made to or given by any other bodies corporate without the approval of shareholders up to the amount, which is the higher of the following two i.e.

Ø       60% of paid-up capital and free reserves; or

Ø       100% of the free reserves of the company.

·         If the BODs want to cross the limit as given above then it has to take the Prior approval of Shareholders by way of Special Resolution (SR).

·         These limits shall be calculated with reference to the latest audited balance sheet of the company. Both equity and preference share capital shall be taken into account.

·          As per the explanation to Sec. 372A free reserve means those reserves which, as per the latest audited balance sheet of the company are free for Distribution as dividend and also include balance to the credit of securities premium account but shall not include share application money.

 

SHAREHOLDERS APPROVAL FOR MAKING THE INTER- CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

 

If the BODs propose to make a loan or investment to any other bodies corporate or give guarantee or provide any security in connection with loan made to or given by any other bodies corporate in excess of the limit mentioned (i.e. 60% or 100%), it must first obtain approval of the shareholders by a Special Resolution (SR) passed at a general meeting.

·         In case of listed company such SR shall be passed through postal ballot as per the provision of Sec. 192A.

·         However in case of shareholders approval by SR is for crossing the limit because of Inter - Corporate Investment, postal ballot method is not compulsory. The reason being that in Postal Ballot Rules, 2001 requirement of passing SR by postal ballot is not compulsory in case of Inter Corporate Investment.. But the company may voluntarily go for the Postal Ballot       

·         There is no limit on the amount up to which Board can give the loans with the approval of the shareholders by way of SR, beyond the limit of 60% or 100%.

·         However, a specific SR must be passed for every Inter Corporate Loan in excess of the limit. Blanket permission to the Board to make the loan or investment up to the specified limit from time to time can not be passed.  

·         The MCA has advised the companies are expected to obtain the approval for making the investments into securities or grant of loan to other companies of amounts which are linked with the company’s available financial resources and the resolution for investment much beyond the net worth should not be passed by the companies. [MCA Clarification].

 

GIVING GUARANTEE WITHOUT PRIOR SPECIAL RESOLUTION [PROVISO OF SEC. 372A(1)]

 

·         The BODs of a company may give corporate guarantee without previously authorized by the SR even if it is required on crossing the limit in the exceptional circumstances if following conditions is satisfied:

Ø             A resolution is passed by the BODs authorizing to give guarantee unanimously.

Ø             There exists exceptional circumstances which prevent the company for taking previous authorization of Shareholders by SR.

Ø             The resolution of BODs is confirmed by the shareholders by way of SR

v      Within 12 months of passing Board resolution ;or

v      AGM held immediately after the passing of Board resolution.

Whichever is earlier.

 

 

APPROVALS OF PUBLIC FINANCIAL INSTITUTIONS (PFIs) FOR INTER- CORPORATE LOAN [Section 372A(2)] 

 

·         Every Inter - Corporate loan, investment, guarantee and security falling within the preview of Section 372A requires the approval of PFIs as referred to in Section 4A from which company has taken any tern loan and such loan is subsisting.

·          This approval will be required irrespective of the fact that whether under the loan agreement it is required or not.

·         The approval may be general approval and it need not be specific in each case of inter corporate loan. A  PFI may give approval subject to the certain limit and such conditions as it may think fit.

·         However as per the proviso of Sec. 372A(2) Prior approval  of PFI is not required if following two conditions is satisfied:

Ø       The total amount of inter corporate investment, loans, guarantees and securities is less than 60% of paid up capital and free reserves; and

Ø       There is no default (at the time of making investment, loan etc.) in payment of installment of the term loan or interest thereon as per the terms thereof.

 

 

NOTICE OF MEETING WHERE SR IS PROPOSED TO BE PASSED CONTAINS CERTAIN INFORMATION [3^RD PROVISO OF 372(1)]

 

·         The notice of the meeting where SR is proposed to be passed contain specifically the following:

Ø       Particulars of the body corporate in which investment is proposed tp be made or loan to guarantee or security is to be given.

Ø       Specific limit of such loan, investment, guarantee or security.

Ø       The purpose of the loan, investment, guarantee or security.

Ø       Specific source of funding.

Ø       Any other important details.

 

 

 

 

PROHIBITON ON MAKING INTER CORPORATE LOAN, INVESTMENT, GUARANTEE, SECURITY IN CASE OF DEFAULT OF SEC. 58A RELATING TO PUBLIC DEPOSIT [SEC.372A(4)]

 

·         A company is prohibited from making inter corporate loan, investment, guarantee, security in case it has defaulted in complying with any provision of Sec. 58A, till the default continue.

·         However it should be noted that the prohibition does not extend to default in complying with the provision of sec. 58AA inserted in 2000, relating to Small depositors.

 

REGISTER OF LOANS, INVETMENT ETC.  AND INSPECTION OF SUCHREGISTER [SEC. 372A(5) & (6)]

 

·         Sec. 372A(5) of the Act provides for maintenance of specific register of inter corporate loan, investment etc. and it shall contain the following particulars:

Ø       Name of the body corporate;

Ø       Amount, term and purpose of loan etc.;

Ø       The date on which inter corporate loan or investment is made or guarantee is given or security is provided;

 

·         These particulars are required to be entered in the register date wise and chronologically within 7 days of making the loan or investment or giving pf guarantee or providing the security.

·         As per Sec. 372A (6), the register is required to be kept at the registered office of the company and it shall remain open for inspection for any member free of cost. Extract may be taken there from or certified copy may be issued on the payment of Re. 1 for every 100 words and fraction part thereof. 

 

 

COMPLIANCE OF GUIDELINES ISSUED BY CG [SEC.372A(7)]

 

·         CG has been empowered to prescribe the guidelines for the purpose of this section. Thus companies are required to comply with such guidelines also, as and when they may be prescribed, in addition to the compliance of the provisions of this section.

·         CG has not prescribed such guidelines till date.

 

APPLICABILITY OF SEC. 372A TO COMPANIES NOT HAVING SHARE CAPITAL

 

·         Sec. 372 is also applicable to Sec. 25 companies or a company limited by guarantee not having share capital. In these type of companies prescribed limit (60% / 100%) have to be computed in relation to the free reserve alone. [MCA Circular]

 

 

PENALTY FOR DEFAULT [SEC.372A (9) & (10)]

 

·         PENALTY FOR DEFAULT IN SEC. 372A(5) – If there is any default in the compliance with the provision of sec. 372A(5) relating to the maintenance of register, the company and every officer in default shall be punishable with fine up to Rs. 5000 and Rs. 500 per day after the first day in case of continuity default.

·         PENALTY FOR DEFAULT UNDER SEC. 372A OTHER THAN SUB SECTION (5) – If there is general default in the compliance with the requirement of sec. 372A other than sub - section (5) the company and every officer in default shall be punishable by way of imprisonment up to 2 years or with fine up to Rs. 50,000.

·         However penalty by way of imprisonment shall not be imposed when the loan or the guarantee / security provided in connection with a loan has been paid in full, and if repaid in part, such penalty is allowed to be reduced proportionately.

·         The offences under this section are compoundable under sec.621A.

 

 

TRANSACTION VIOLATING THE SECTION VOID

 

·         According to the clarification issued by MCA a transaction which is forbidden in public interest could not be made lawful by paying a penalty for it.

·         Thus any loan or investment made or guarantee given or security provided which is in violation of the provision of sec. 372A is void and effective.