16 January 2014
Dear student , he provisions of the Companies Act, 1956 would need consideration when a Company makes a loan to or invests in another body corporate. The provisions of section 372A are as below:
The section applies to the following type of transactions (by say, Company A) :—
Loan by Company A to any other body corporate. "Loans" include inter-corporate deposits and debentures.
Giving by Company A of guarantee of provision of security in connection with a loan made by:—
(i) Any other person to any other body corporate of
(ii) To any other person by any other body corporate.
Acquisition by Company A, by way of subscription, purchase or otherwise the securities of any other body corporate. "Securities" for this purpose would be as defined under section 2(h) of the Securities Contracts (Regulation) Act.
The section applies to public companies only and thus not to private companies. The section also does not apply loans, etc. made by the following companies:—
Banking, insurance or housing companies, in the ordinary course of their business;
Companies established with the object of financing industrial enterprises or of providing infrastructural facilities.
Company whose principal business is the acquisition of shares, stock, debentures or other securities.
The section also does not apply to the following transactions:—
Investment in shares allotted pursuant to section 81(1)(a).
Loans by holding companies to its wholly owned subsidiary. guarantees/securities by holding companies for loans to its wholly owned subsidiary. Investments in securities by holding company of its wholly owned subsidiary.
A company make loans, etc. up to the higher of the following:—
60% of its paid-up share capital and free reserves.
100% of its free reserves.
"free reserves" for this purpose means reserves free for distribution as dividends and share premium but excluding shares application money.
For loans, etc. beyond the limit/in Sr. No. 5 above the company would need approval by way of special resolution where the prescribed disclosures should be made in respect of the proposed loan, etc.
For any loans, etc., approval shall be taken of the company at a Board meeting with the consent of all the directors present at the meeting and also the prior approval of the public financial institution whose term loan to the company is subsisting. However, where the loan, etc. is not beyond 60% of the company’s paid-up share capital and free reserves and there is no default in repayment loan or payment of interest, the prior approval of the public financial institution would not be required.
Loans shall not be made at lower than the prevailing bank rate, as defined.
Companies that have subsisting defaults of section 58A cannot make loans, etc.
The company should maintain a register of loans, etc. with prescribed details.
For contravention of provisions of this section (other than the requirements relating to maintenance of register), imprisonment or fine is provided for. However, such term of imprisonment/ amount of fine would be reduced to the extent to which the loan, investment, etc. is recovered.
CAclubindia
