sakshi (CS) (261 Points)
19 May 2011Dear All
One of the Private Company, which is a wholly owned subsidiary of a Public Company, has given loan to its holding Public limited Company.Is section 295 applicable I feel it is not as section 295(2) of the Act says that the provisions of secction 295(1) of the Act is not applicable to loan made by a private company unless it is a subidiary of a public company.
Kindly clear my query.
Regards
Arvind Sharma
(ACA)
(1432 Points)
Replied 19 May 2011
Yaa you are right..
Section 295 attract in case of Loan to a PRIVATE company in which Director is a member holding some %age of holding (that am not remembering right now)....
Since Loan is given by Pvt Co to Holding Pub Co...., so 295 is NA...
Further check out followng link...:-
/forum/applicability-of-section-372a-297-299-300-and-301-120013.asp
Arvind Sharma
(ACA)
(1432 Points)
Replied 21 May 2011
ops...
sorry for previous reply...
Section 295 will get attract on lending by Pvt co. to its holding company (wholly owned or not)...
so in your case it will applied, and you are required to get approval of CG...
it is further clerified by MCA as below
Clarification on Loan to Public Limited Companies Under Section 295 of the Companies Act
New Delhi
May 18, 2011
The Ministry of Corporate Affairs has issued clarification on loan to Public Limited Companies under Section 295 of the Companies Act. A circular issued by the Ministry in this regard says that it has come to the notice of the Ministry that some Companies are making applications for getting prior approval of Central Government when they propose to make any loan to, or give any guarantee or provide any security in connection with a loan made by any person to a Public Limited Company of which any such Director is a Director or a member even when the proposal does not fall under Section 295 (d) and Section 295 (e) of the Companies Act 1956.
Accordingly, Companies are requested to note that when the beneficiary of the loan/guarantee/security is a Public Limited Company, approval of Central Government should be only sought if the provisions of sub-Section (d) or (e) of Section 295 of the Companies Act are attracted. The Application should also clearly bring out the facts in this regard.
[Source: PIB]
also refer following provision of Sec 295
(1) Save as otherwise provided in subsection (2) no company (hereinafter in this section referred to as "the lending company"1[without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly,] make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person to, or to any other person by,
(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;3[(2) Sub-section (1) shall not apply to-
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
(e) any body corporate, the Board of directors, managing director 2[***] or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
(a) any loan made, guarantee given or security provided-(3) Where any loan made, guarantee given or security provided by a lending company and outstanding at the commencement of this Act could not have been made, given or provided, without the previous approval of the Central Government, if this section has then been in force, the lending company shall, within six months from the commencement of this Act or such further time not exceeding six months as the Central Government may grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made, or in connection with which the guarantee was given or the security was provided, notwithstanding any agreement to the contrary.
(i) by a private company unless (ie in case of Loan by Pvt Co to its parent Public Co Sec 295(1) will apply and consequently requires CG approval) it is a subsidiary of a public company, or4[(b) any loan made by a holding company to its subsidiary company;]
(ii) by a banking company;
5[(c) any guarantee given or security provided by a holding company in respect of any loan made to its subsidiary company.]
(4) Every person who is knowing a party to any contravention of sub-section (1) or (3), including in particular any person to whom the loan is made or who has taken the loan is respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to 6[fifty thousand rupees] or with simple imprisonment for a term which may extend to six months.
Provided that where any such loan, or any loan in connection with which any such guarantee of security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section; and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be proportionately reduced.(5) All persons who are knowingly parties to any contravention of sub-section (1) or (3) shall be liable, jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given of the security provided by such company.
(6) No officer of the lending company or of the borrowing body corporate shall be punishable under sub-section (4) or shall incur the liability referred to it sub-section (5) in respect of any loan made, guarantee given or security provided 7[after the 1st day of April, 1956] in contravention of clause (d) or (e) of sub-section (1) unless at the time when the loan was made, the guarantee was given or the security was provided by the lending company, he knew or had express notice that that clause was being contravened thereby.
1. Subs. by Act 65 of 1960, sec. 102, for certain words (w.e.f. 28-12-1960).
2. The words "managing agent, secretaries and treasurers," omitted by Act 53 of 2000, sec. 142 (w.e.f. 13-12-2000).
3. Subs. by Act 65 of 1960, sec. 102, for sub-section (2) (w.e.f. 28-12-1960).
4. Subs. by Act 53 of 2000, sec. 142, for clause (b) (w.e.f. 13-12-2000).
5. Subs. by Act 53 of 2000, sec. 142, for clause (c) (w.e.f. 13-12-2000).
6. Subs. by Act 53 of 2000, sec. 142, for "five thousand rupees" (w.e.f. 13-12-2000).
7. Ins. by Act 65 of 1960, sec. 102 (w.e.f. 28-12-1960).
Varun Madaan
(trainee)
(32 Points)
Replied 21 May 2011
hii..arvind
hey could you please tell me that if a co. wants to give loan to another co.
in which the board of directors are same as in the lending co. and controls more than 25% share in voting right u/s 295 (2)d
CS Ankur Srivastava
(Company Secretary & Compliance Officer)
(17853 Points)
Replied 21 May 2011
In this case prior approval of Central Government is required because your case falls under seciton 295(1)(e).
Varun Madaan
(trainee)
(32 Points)
Replied 21 May 2011
but if the co. dont want to do so ..what will be the alternative course of action..?
Varun Madaan
(trainee)
(32 Points)
Replied 21 May 2011
i mean diluting the holding in the borrowing co. will help ..?
CS Ankur Srivastava
(Company Secretary & Compliance Officer)
(17853 Points)
Replied 21 May 2011
No it would not help because you also fall under section 295(1)(e).
Varun Madaan
(trainee)
(32 Points)
Replied 21 May 2011
hii..Ankur
The conditions are say there is a co. named xyz co. ltd.
and xyz. co. wants to give loan to another co. in which there is four directors are same as in xyz co. ltd holding the whole of voting rights(more than 25%)....so if we create say two NBFC'S and dilute the share holding in them...then will it be possible for the company to lend money without getting previous approval from central govt.?
Preety
(Company Secretary)
(96 Points)
Replied 05 September 2011
Hi friends
Can anyone pl clarify SEction 295(1)(e). I am not able to interpret it properly. What does it mean that BOD ,MD Or manager is accustomed to act in accordance with directions of Board or any Director of the lending Co.For this all the Directors of lending and Borrowing Co has to be common or it will get attracted even if there is one or two common Directors of both Cos. Pl clarify . Pl treat it as very urgent.
Thanks with Regards
Preety
G.L.Subhramanian
(PCS)
(206 Points)
Replied 05 September 2011
Hi Preety,
The Section 295 (1) (e) says:
any body corporate, the Board of directors, managing director or manager whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
Therefore even if there is one director of lending company on whom's instructions, the board of borrowing company is accustomed to act, 295 is attracted.
Regards,
Subbu
CAclubindia
