Loans and investment by Companies
/ Others

Loans and investment by Companies

The power to invest the funds of the company is the privilege of the Board of Directors. This power is resulting by the Board under Section 179 of the Companies Act, 2013. However, the Companies Act, 2013 contains provisions for boundaries on investments that a company can make and loans it can provide to others.

Moreover, giving corporate guarantee or security is also good as giving a loan, because the person to whom guarantee or security is given can decide to enforce the guarantee or security in certain conditions and only in that condition the company will have to pay the amount. Thus, apart from loan and investments, restrictions are also placed on the guarantees which the company can give or security it can provide for a loan.  

Important Note
Here, ‘Person’ shall include any company, association or body of individuals, whether incorporate or not.

There is a difference between advance and loan. Loan is lending of money with absolute promise to repay whereas advances is not be adjusted against supply of goods and services. These are some examples where it is not treated as loan

  • Unpretentious trade advances provided to suppliers against orders for supply of goods
  • Advances given to employees against current month salary
  • Sales on credit basis.
  • Credit prolonged beyond normal credit period may be considered in the nature of loans and hereafter provisions of the section may get attracted to such books debts also.
  • As per SEBI regulations, most of the mutual funds are accomplished by trusts which are not body corporates. Hence investments in mutual funds are not covered under the section.

However, Unit Trust of India is exclusion since it has been established under UTI Act and it is a body corporate. 

Requirements of making inter-corporate loans and investment by companies  

Approval of Board Approval of Shareholders Approval of Public Financial
Institution

Approval of Board
The approval of the Board is required in all cases regardless of the amount of loan, investment, guarantee or security.

The authorization of the Board shall be acquired by means of a unanimous resolution passed at a Board meeting with the consent every directors present at the meeting.

Resolution by transmission or resolution of the committee of directors is not sufficient. All the directors present at meeting must vote in favour 

Approval of Shareholders:

  • When the aggregate of the loan, investment, guarantee or security previously made composed with the loan, investment, guarantee or security projected to be made exceeds the limit specified, prior approval by means of a special resolution is necessary.
  • Limit is higher of:
  • 60% of the amount (paid-up share capital + free reserves + securities premium); or
  • 100% of the amount (free reserves + securities premium).

Restriction on Inter-corporate transaction

  • provide any loan to any person or other body corporate;
  • provide any guarantee, or provide security, in connection with a loan to any other person body corporate or person; and
  • procure by way of subscription, purchase or otherwise the securities of any other body corporate;

The contents of the Special resolution shall contain the total amount up to which the Board is approved to make loans, guarantee, investment or security.

No approval by way of Special Resolution is required, where:

  • The loan is given by a company to its Wholly Owned Subsidiary or joint venture company, or
  • The guarantee is given or security is provided by a company to its Wholly Owned Subsidiary or Joint Venture Company.
  • Where the acquisition of securities of its wholly owned subsidiary is made by a holding company, by way of subscription or otherwise

Approval of Public Financial Institution:

  • The company shall obtain the prior approval of PFI from which it has taken a term loan.
  • Approval of PFI is not required if –
  • The combined of loans, guarantee, investments or security already made together with the loan, investment, guarantee or security projected to be made does not exceed the limit given.
  • There shall be no default in repayment of loan repayments or interest to PFI as per the terms and conditions of such term loan.

Non-applicability of provisions
The provisions shall not have effect in the following cases:

  • If a company procures any enterprise which is incorporated outside India and such enterprise has investment subsidiaries beyond two layers as per the laws of such country.
  • A subsidiary company from having any investment subsidiary for the purposes of meeting the obligation under any law or rule regulation edged under any law for the time being in force.
  • It shall not apply on a Specified IFSC public and private company.

Note: Section 186(2) shall not apply on Specified IFSC public and private enterprise if an entity passes a resolution either at a meeting of the Board of Directors or by circulation.

Disclosure Requirement
The company shall divulge the full details of the loans, guarantee given or security provided or investment made and the purpose for which the loan, guarantee or security is projected to be used by the recipient of the loan, guarantee or security. 

Rate of Interest
No loan shall be given at a rate of interest lower than the prevalent yield of one year, three year, five year or ten year Government Security contiguous to the tenor of the loan. 

No Loan by Defaulter Company
An enterprise, who has committed any evasion in repayment of any deposits accepted before or after the commencing of this Act or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an investments till such default is existing. 

Register of Loan
Every enterprise providing loan or providing guarantee or providing security or making an acquisition of securities shall, from the date of its incorporation, uphold a register in the Form MBP-2 and enter therein distinctly, the details of the loans and guarantees given, securities provided and acquisition made as aforesaid. The register shall be upheld either physically or in electronically. The Copies of the register may be obtained by any member on payment of prescribed fees. 

Non Applicability of provisions
The provision does not apply to the following:

  • Where any loan, guarantee has been given or any security provided or investment made in the normal course of its business by-
  • A banking company, or
  • An insurance company, or
  • A housing finance company,
  • An enterprise involved in the business of financing of companies or of providing infrastructural facilities;
  • to any acquisition:
  • de by a non-banking financial company registered in a prescribed manner and whose primary business is acquisition of securities:

Provided that exception to non-banking financial entities shall be in respect of its investment and lending activities;

  • made by a company whose principal business is the acquisition of securities;
  • of shares allotted

Penal Provisions in case of default

Liability 

Imprisonment

Fine
Company  NA Not less than Rs. 25,000 and may extend to Rs. 5,00,000
Officer of Company May extend to 2 years Not less than Rs. 25,000 and may extend to Rs. 1,00,000.

 We understand the importance of adhering to the statutory compliance regime, failing which, businesses could face serious ramifications that may impact their reputation and operations and of their stakeholders and assist our clients in preparing financial statements, bookkeeping, taxation, audit, secretarial compliances, payroll accounting, MCA filings, setting up business in India etc. If you have any questions or want to know more about loans and investment by companies, kindly contact us.