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Funding from company to company

CS Divesh Goyal 
on 23 July 2016

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BACKGROUND:

If Promoters are starting a business (Company) or trying to grow an existing business (Company), all certainly will need money. This money can come from various sources.

Source of Funding:

Roughly speaking, Investments break down into two different forms: Debt and Equity.

Debt Funding: Debt means money borrowed from lenders by the company and it pay the interest on that investment. Companies are required to repay the money with interest over time. Debt include debentures, loans and borrowing etc.

Capital Funding: Company can take on an equity investment - in which Company can sell a portion of the Company to an investor in return for cash or something else of value. Equity funding includes shares (Equity/Preference Shares).

Let’s first Discuss on the basis of Lender Company

INVESTMENT:

a. As per Rule 2 sub rule 1 clause (c) sub clause (vi) of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received by Company from any other Company.

b. As per Section 186(2) company can directly or indirectly

(a) Give any loan to any person or other body corporate;

(b) Give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) Acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, upto 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

WAYS OF FUNDING:

a) LOAN TO OTHER COMPANY (INTER CORPORATE LOAN)

Sections Involved:

  • Section 185: Restriction on Loan to Director or other persons include in Director.
  • Section 186: Company can directly or indirectly (a) give any loan to any person or other body corporate.
  • Section 187: Investment of the Company to be held in its own name.
  • Section 188(g) : No Company shall enter into any contract or arrangement with a related party with respect to- underwriting the subscription of any securities, of the Company
  • Section 117(3) (a): Every special resolution and resolution passed under Section 179 required to file in e-form MGT-14.
  • Section 179(3): The Board of directors of the Company can investments the fund of Company.

Rules Involved:

  • Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014.(185)
  • Refer rules 11, 12 and 13 of the Companies (Meetings of Board and its powers) Rules, 2014. (186)
  • Rule 14 of the Companies (Meetings of Board and its Powers) Rules, 2014. (187)
  • Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014. (188)
  • Rule 24 of the Companies (Management and Administration) Rules, 2014. [117(3)]

Circular/Notification Involved:

Circular No.

Particulars

[1]General Circular No. 03/2014, dated 14-2-2014 (185)(188)

This circular was applicable upto the date Section 186 was not notified.

[2]Circular 04/2015 dated 10th March, 2015 (185/186)

It is clarified in this circular that loans and/or advances made by the Companies to their employees, other than the managing or whole time directors (which is governed by section 185) are not governed by the requirements of section 186 of the Companies Act, 2013. This clarification will, however, be applicable if such loans/ advances to employees are in accordance with the conditions of services applicable to employees and are also in accordance with the remuneration policy, in case where such policy is required to be formulated

[3]Circular 15/2014 dated 9th June, 2014  (186)

It is hereby clarified that registers maintained by Companies pursuant to sub-section (5) of Section 372A of Companies Act, 1956 may continue as per requirements under these provisions and the new format prescribed vide form MBP2 shall be used for particulars entered in such registers on and from 1.4.2014.

[4]General Circular 06/2015 dated 9th April, 2015 (186)

It is hereby clarified that in cases where the effective yield (effective rate of return) on tax free bonds is greater than the prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan, there is no violation of sub-section (7) of section 186 of the Companies Act, 2013.

[5]General Circular No. 30/2014 dated 17-07-2014 (188)

Clarification on Second proviso of 188(1): It is clarified that ‘related party’ referred to in the second proviso has to be construed with reference only to the contract or arrangement for which the said special resolution is being passed. Thus, the term ‘related party’ in the above context refer only to such related party as may be related party in the context of the Contract or arrangement for which the said special resolution is being passed.

G[6]eneral Circular No. 28/2014 dated 9-7-2014 (117)

All cases except change of name, change of object, resolution for further issue of capital and conversion of companies will be STP mode.

 [7]Notification no. G.S.R. 464(E) dated 5th June 2015

[8]Notification no. G.S.R. 465(E) dated 5th June, 2015

[9]Notification no. G.S.R. 463(E) dated 5th June, 2015

Word ‘resolution’ substituted for words ‘special resolution’ by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E)

Word ‘resolution’ substituted for words ‘special resolution’ by the Companies (Amendment) Act, 2015 (21 of 2015), notified on 26th May, 2015, with effect from 29th May 2015 vide notification S.O. 1440(E).

Resolution Involved:

For the giving of Loans by the Private Limited Company a “[10]Board Resolution” shall be passed in the Board Meeting of the Company. Except investment within the ceiling given under Section 186. If limit exceed then Special Resolution required to be pass.

Board Meeting can be held through video conferencing also.

  • b) Investment in Equity Shares
  • c)  Investment in Preference Shares
  • d) Investment in Debenture

Process of Funding from the point of view of the Lender of Money:

Investment in form of “loan”

I.  Whether Company is allowed to invest money in other Company?

As per Rule 2 sub rule 1 clause (c) sub clause (vi) of the Companies (Acceptance of Deposits) Rules, 2014, Deposit doesn’t include any amount received by Company from any other Company.

Therefore, Company can invest in other Company by any way (Capital or Loan).

II. Whether Loan by a Company to another Company restricted anywhere in the Companies Act, 2013?

Yes, Loan by a Company to its Directors or any other person interested in directors is restricted under Companies Act, 2013.

  • [1] http://www.mca.gov.in/Ministry/pdf/General_Circular_3_2014.pdf
  • [2] http://www.mca.gov.in/Ministry/pdf/Circular_04_10032015.pdf
  • [3] http://www.mca.gov.in/Ministry/pdf/General_Circular_15_2014.pdf
  • [4] http://www.mca.gov.in/Ministry/pdf/General_Circular_06_2015.pdf
  • [5] http://www.mca.gov.in/Ministry/pdf/Circular_No_30_17072014.pdf
  • [6] http://www.mca.gov.in/Ministry/pdf/General_Circular_28_2014.pdf
  • [7] http://www.mca.gov.in/Ministry/pdf/Exemptions_to_private_companies_05062015.pdf
  • [8] http://www.mca.gov.in/Ministry/pdf/Exemptions_to_nidhis_companies_05062015.pdf
  • [9] http://www.mca.gov.in/Ministry/pdf/Exemptions_to_govt_companies_05062015.pdf
  • [10] Board resolution can’t be passed by Circular Resolution in case of acceptance of loan.

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