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Interest free loan

PIYUSH KUMAR CHAUDHARY (Chartered Accountant) (93 Points)

27 June 2011

Dear friends,

My query is Can a holding co. give int free loan to its subsidary co. if yes then under which section it is to be verified.

Also Its Reporting should be mentioned in the stat . audit report or not.

Thanks

Piyush

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6 Replies

praveen (Chartered Accountant) (6971 Points)
Replied 27 June 2011

It can give loan but however not advisable in case of interest free loan.

under section 227 one of the main duties of the auditor is to have a specific enquiry in to a few issues which includes 'whether the company has issued any loans prejudicial to the interest of the company".

As an auditor if you feel it is prejudicial you will have to state the same in the auditors report.

CARO also has similar provisions.

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ashish (student) (25 Points)
Replied 27 June 2011

Section 372A of the Companies Act deals with Intercorporate Loans and Investments.

The Rate of Interest Charged on the Loans should not be less than the Bank Rate

prescribed by the RBI from time to time.

A Holding Company giving Loans, Guarantee, Security or making Investments in Its

Wholly Owned Subsidiary need to satisfy the above criteria.

Aparna Raja K.C (Student) (520 Points)
Replied 27 June 2011

A holding Co. cannot give interst free loan to its wholly owned subsidiary :) Section 327A of COmpanies Act :)

Agree with ashish :)

CA Rajat Jain (CA) (1677 Points)
Replied 28 June 2011

fully agree with ashish

Mukesh Kumar Singh (CA-FINAL) (4094 Points)
Replied 28 June 2011

agree with ashish

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Arunabha Acharya (Assistant Manager - Legal & Secretarial) (76 Points)
Replied 18 June 2013

Kindly refer to Sec. 372A(8)(c) wherein loans made or guarantee given to wholly subsidiary companies is not covered by the provisions of Sec 372A.

Care has to be taken whether such transactions will be covered under Transfer Pricing provisions. Otherwise, a company can make such Interest free loans.