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Section 372A Made Easy

Prasanth Nair V 
on 18 March 2010

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372A of the Companies Act in a Simple Format

 

 

Section 372A of the Companies Act makes u aware of the provisions regarding Intercorporate Loans and Investments. This section also covers the guarantees and securities pledged for the grant of Loans between corporates.

 

The following points needs to be considered in this Section;

 

1.        Introduction

 

·        This Section came into force because of the scrapping of sections 370 and 372, which was relating to intercorporate loans and Guarantees Respectively.

·        This Section prescribes certain limits upon which certain restrictions are placed by the act for intercorporate transactions.

 

2.    Coverage

 

·        This section covers

A.     Loans given by one Corporate to another company.

B.     Guarantees and Securities in respect of a loan to a person, who gives loan to a Corporate.

C.     Acquiring by subscription or otherwise, Securities of a company by Other Company.

 

 

3.       Limits

 

        Higher of

·        60% of Paid up Capital + Free Reserves.

·        100% of Free Reserves of the Company.

                           (whichever is higher)

 

 

{Free Reserves means Reserves Available for Distribution as Dividend as per        

  latest Audited Balance Sheet of the Company. (Ex. Share Application money is  

  Not considered, but Securities Premium is Considered)}

 

 

4.      Requirements

                          If the Loans, Guarantees and Investments made so far

                                               Plus Proposed to be made:

 

·        Are within Limits- Only pass a Board Resolution with UNANIMOUS Consent of

            the Board.  (UNANIMOUS Consent = Consent of all Directors present).

 

·        Exceeds Limits- Board Resolution with UNANIMOUS Consent + Prior Special

            Resolution in a General Meeting.

 

Note: In both the above cases, Consent of the Public Financial Institutions are   

          required, in case any Term Loan is Subsisting between them.

 

5.      Exceptions from the Limits and Requirements

 

           A Holding Company giving Loans, Guarantee, Security or making Investments in Its    

          Wholly Owned Subsidiary need not satisfy the above criteria.

 

6.      Rate of Interest

 

              The Rate of Interest Charged on the Loans should not be less than the Bank Rate 

              prescribed by the RBI from time to time.

 

7.      Default of Section 58A by the Company.

 

             In Case the Company has made any default of section 58A, i.e. Acceptance of 

            deposits by a corporate, then further loans cannot be made by the company, which is   

            restricted by this section.

 

8.      Exceptions of this Section

 

·        Banking Companies, Insurance Companies, Housing Finance Companies,  

                Infrastructural and Industrial Companies.

·        Right Shares Acquired by a Body Corporate.

·        Investment Companies.

·        Private Companies, which is not a subsidiary of a Public Company.

 

9.      Maintainence of Register

 

             Maintain a resister, containing details of all the Loans, Guarantees, Securities and 

             Investments made by the company, and update it regularly whenever a new loan is  

             made. This Register is open to members for inspection on payment of a nominal fee.

 

10.  Penal Provisions

             Penalty for Violation of any provisions in this section will attract Imprisonment and  

             Fine for the Company and the Defaulting Members of the Companies.

 

 

                                       




Category Corporate Law
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