INSIGHT INTO GRANTING OF LOANS/ GUARANTEES/ SECURITIES TO RELATED ENTITIES AFTER 11TH SEPTEMBER 2013:
The Companies Act, 2013 was passed by Lok Sabha in August, 2013 and 98 Sections were made applicable from 12.09.2013. This Act poses certain critical challenges before the Companies in their daily functioning. One among them is granting of loans/ securities/ guarantees to related entities and companies.
The objective of this note is to provide insight of Section 185 of Companies Act, 2013 & Section 372A of Companies Act, 1956 and precautions to be taken by the companies.
Transactions covered – Section 185 & Section 372A:
I. Direct or indirect loans or advances to related entities (Section 185 of Companies Act, 2013)
II. Inter-corporate investment or loans or securities or guarantees (Section 372A of Companies Act, 1956)
Parties covered:
Under section 185
1. Directors of the Company/ its holding Company/(ies) where the Company is a drop down subsidiary
2. Relatives of any such Director
3. Partners of any such Director
4. Firm where any such Director or relative is a partners
5. A private Company where any such Directors is a director
6. A private Company where any such Directors is a members
7. Bodies corporates where such Director together or individually control 25% or more voting power
8. Bodies corporate whose Managing Director/ Manager/ Board of Directors are accustomed to act as per directions given by the Directors of the Company of lending company
Under section 372A
1. Any body corporate
2. Granting of guarantee or security to any person who has given loan to a body corporate
3. Granting of guarantee or security to body corporate to secure the loan granted to any other person
Thus, both related and unrelated entities are covered in the Section 372A. It applies to all the parties.
Restrictions:
Vide Section 185- Applicable to all Companies
There is total prohibition on direct or indirect:
1. granting loans including those represented by book debts or
2. advances or
3. giving of any guarantee or
4. providing of any security
to the parties covered under Section 185 as mentioned above.
Vide Section 372A- Applicable to Public company including subsidiary of Public Company
1. Making loans to body corporate
2. Giving guarantee/ providing security for:
a. Loans by any person to body corporate
b. Loans to any person by body corporate
3. Acquiring securities of other body corporate
Where the amount involved in the following transactions taken together exceeds 60% of paidup share capital and free reserves OR 100% of free reserves whichever is higher, sanction of Shareholders by way of special resolution is required. Below such limit, unanimous Board approval would be required.
Other conditions provided in the section (rate of interest for loan not lower than the Bank rate, no default in repayment of loan instalments/interest to Public Financial Institutions, no default in repayment/ interest payment of deposits accepted under Section 58A) to be complied with.
Exemptions:
Under Section 185
1. Any loan to Managing Director or Whole-time Director (Executive Director) given:
a. As a part of conditions of service extended to all employees or
b. Under a scheme approved by members by Special Resolution.
2. Company providing loans, guarantees or securities as the ordinary course of its business at a rate not less than the Bank rate.
3. Loans/ guarantees/ securities to a public company in which director is a member holding less than 25% of voting power.
4. Loans/ guarantees/ securities to a private company in which relative of a director is a director or member.
5. Loans/ guarantees/ securities to any group company or holding or subsidiary company not having common directors or directors as members.
Under Section 372A
1. Loans, advances, securities by Private Companies
2. Acquisition of shares offered as Rights issue
3. Loan by holding company to wholly owned subsidiary
4. Guarantee/security by holding company to wholly owned subsidiary
5. Acquisition of shares of wholly owned subsidiary by holding company
6. Loans/ securities/ guarantees/ investment by a banking company/ insurance company/ housing finance company in the ordinary course of its business
7. Loans/ securities/ guarantees/ investment by a company having acquisition of securities as its principal business.
Compliance & filing:
Section 180
The borrower company has to pass a special resolution to borrow money under section 180 of the Companies Act, 2013 (applicable from 12th September 2013) if the total borrowing after the said loan goes beyond paid-up share capital and free reserves.
The said special resolution shall be delivered to the Registrar by filing Form 23 as prescribed under Companies Act, 1956.
Section 292
A lender company shall pass a Board Resolution to advance a loan as necessitated by Section 292 of the Companies Act, 1956.
Section 372A
Prior Board approval is required to be obtained by the lending company. Prior shareholders’ approval by way of special resolution is required to be obtained when exceeding the limit prescribed under Section 372A.
The said special resolution shall be delivered to the Registrar by filing Form 23 as prescribed under Companies Act, 1956.
Additionally, a Register showing all the particulars of investment made under Section 372A is to be maintained at the registered office.
Contravention & penalties:
Section 180
As the Section does not provide any specific penalty for contravention, as per Section 450, the Company and every officer involved shall be subjected to a fine upto Rs. 10,000/- and in case the offence continues, additional fine of up to Rs. 1,000/-.
Section 185
The Company will be subjected to a fine of minimum of Rs. 5 Lacs which may extend to Rs. 25 Lacs. The Director shall be subjected to the same fine and he may additionally face imprisonment up to 6 months.
Section 372A
Company which has contravened Section 372A will be subjected to a fine up to Rs. 50 thousand and every office who is in default will be subjected to the same fine and may additionally face imprisonment up to 6 months.
The defaulting parties shall be jointly and severally liable for repayment of the debt.
Areas requiring immediate attention:
The above provisions require immediate action on certain matters. The impact areas are outlined below:
1. Benefit to Director can be given only in the form of remuneration or professional fees fixed in advance at the beginning of the year.
2. No loans or advances can be given to Directors/ other entities like sole proprietary concerns or partnership firms of Directors/ other Companies having common Directors.
3. Special care should be taken where Directors are given money on their Current Accounts.
4. Loans, advances in any form with group entities (Book debt, meeting obligations/liabilities of other group entities etc.) shall be avoided.
5. Provisions of Deemed Dividend as contained in Section 2(22)(e) of Income Tax Act, 1961 is also to be checked while granting loans to shareholders holding more than 10% of voting power.
The Section 186 corresponding to Section 372A in the Companies Act, 2013 is not yet notified and Ministry of Corporate Affairs has clarified vide a circular that Section 372A shall remain in force till Section 186 is notified. Thus, the exemptions under Section 372A could be still availed. However, in view of stricter provisions in section 185, care is required to be taken before availing exemptions under section 372A.
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