Company law

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Mojeedra Satish S

Mojeedra Satish S (Querist)
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30 July 2013 Explain sec 208 interest paid out of capital

Ajay Mishra

Ajay Mishra (Expert)
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30 July 2013
Payment of interest out of capital and interest to be added to capital cost:

Section 208 state that where a company has issued shares for the purpose of raising money for meeting the cost of construction of any work or building, or for the provision of any plant which cannot be made profitable for a lengthy period, the company may, with the prior approval of the Central Government, pay interest on the paid-up value of shares so issued subject to the following conditions:—
(i) No such payment shall be made unless it is authorised by the articles or by a special resolution passed by the members in a general meeting.
(ii) The company shall obtain the previous approval of the Central Government.
(iii) The rate of interest shall, in no case, exceed 4% p.a. or such rate as the Central Government may, by notification in the Official Gazette, declare.
(iv) The payment of interest shall be for such period as may be sanctioned by the Central Government and that period shall in no case exceed beyond the close of the half-year after the half-year during which the work or building has been completed or the plant provided.
(v) The payment of interest shall not operate as a reduction of the share capital.
(vi) The amount of interest paid will be added to the cost of construction or plant and capitalised accordingly.

Although there have been several applications to the government for approval of payment of interest out of capital, so far the government had not agreed to any such proposal, except in the case of M/s. New Tirupur Area Development Corporation Limited for payment of interest not exceeding 10% per annum (subject to certain conditions) on share capital.

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