Companies Act 2013 is bundled with many path breaking provisions for private limited entities. Among those most vivacious provisions are restriction on granting of loans to directors or their related parties and group companies through section 185 & 186. First time in the history restrictions were placed on fund transfers between related entities and hence industry started facing lot of difficulties.
The first cut of Section 185 creates a frustration in the mind of promoters and professionals, since it was a total prohibition on granting of loans or giving guarantees or providing securities. Section 186 was more liberal and providing some leg space for companies to grant loans etc to their unrelated entities. It was further supported by exemption embedded under sub section (11)
However after a demand from Industry government thought fit to introduced some leverage to the companies holding specific relationship with each other. Companies (Meeting of Boards and Its Powers) Rules 2014 presented exemptions by recognizing Holding & subsidiary relationships among the companies.
It would be interesting to note here the changes which were made in the concept of Holding and Subsidiary. It now recognizes only Indian Companies as Holding Companies. On the other hand it recognizes Companies as well as bodies corporate as Subsidiary of Indian Company.
Rule 10 of the Meeting of Board Rules provides exemption from complying with the requirements of S 185 in respect of Holding Company granting loan or giving guarantee or providing security to its Wholly Owned Subsidiary (WOS).
Sub Rule (2) provides exemption from complying with the requirements of S 185 in respect of Holding Company giving guarantee or providing security to its Subsidiary.
Rule 11 grants partial exemption to Holding Company from obtaining approval of Shareholders by way of special resolution under section 186 (3) for providing loans or giving guarantees or providing securities to its WOS or JV company or for acquisition of shares in existing WOS.
While dealing with these exemptions a question is usually asked as to whether such Holding & Subsidiary can continue to have common directors? The answer to this is BIG Yes. We know that holding subsidiary relationship can be created through holding capital or through controlling the composition of the Board. However in order to create a WOS, holding entire share capital is the only route. Careful reading of this revels that Holding & Subsidiary can enjoy the exemptions under rules even if they have common directors since exemption insulate the companies from applicability of entire section 185.
However for granting loans to non WOS ( not exempted), there is a need to remove the control of holding on the composition of the Board of Subsidiary. If that is done then both entities won’t fall in the list of persons provided in Section185.
Inspite of this Industry Continues to face difficulties on account of granting of genuine interest free loans to employees or granting of loans by unregistered NBFC’s (Core Investment Company) to group companies.
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