Inter-corporate loans
This query is : Resolved
15 February 2014
Dear all,
I work in a section 25 pvt. ltd company which has been sanctioned a loan from NSDC, where they have put in a pre-disbursement condition of infusion of promoters' contribution in the company in the form of interest free unsecured loan. Can we do so?
Also, one of our associate company to whom we provide certain services has infused the asked amount in the co., does it violate section 185 of companies act?
Kindly guide me on how to fulfil this pre-disbursement conditon..
I work in a section 25 pvt. ltd company which has been sanctioned a loan from NSDC, where they have put in a pre-disbursement condition of infusion of promoters' contribution in the company in the form of interest free unsecured loan. Can we do so?
Also, one of our associate company to whom we provide certain services has infused the asked amount in the co., does it violate section 185 of companies act?
Kindly guide me on how to fulfil this pre-disbursement conditon..
15 February 2014
1. If the director brings in his/her own money as unsecured loan in the company it is not a violation of section 185 because section speaks about 'Loan to Directors' and not 'Loan from Directors'.
2. Yes. It is a violation ,by virtue of explanation (c) to section 185(1),as far as the lending company is concerned.
2. Yes. It is a violation ,by virtue of explanation (c) to section 185(1),as far as the lending company is concerned.
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16 February 2014
thank u sir. But can you suggest other ways by which the other group co. Can bring money in the section 25co.
Also if we get approval of shareholders for a capital scheme (as specified in sec 185) by which the other co. Can give loan to the sec 25 co. Can the loan be interest free?
Also if we get approval of shareholders for a capital scheme (as specified in sec 185) by which the other co. Can give loan to the sec 25 co. Can the loan be interest free?
01 August 2024
**1. Infusion of Promoters' Contribution:**
Section 25 of the Companies Act, 1956 (now replaced by Section 8 of the Companies Act, 2013) deals with companies formed for promoting commerce, art, science, religion, charity, or any other useful object and prohibits the payment of any dividend. These companies are generally not for profit, and there are specific provisions regarding loans and financial assistance.
**Infusion of Interest-Free Unsecured Loan:**
- **Interest-Free Unsecured Loan from Promoters:**
Yes, a Section 8 company (formerly Section 25) can receive an interest-free unsecured loan from its promoters. This is a common practice where promoters are required to contribute to the company's capital structure as a precondition for receiving loans or funding from external agencies, such as NSDC. This aligns with the pre-disbursement condition set by NSDC.
- **Interest-Free Loan from Associate Company:**
The infusion of funds by an associate company, especially when it is interest-free, must be carefully considered in light of the regulatory requirements and the purpose of the funds.
**2. Compliance with Section 185 of the Companies Act, 2013:**
**Section 185** of the Companies Act, 2013 restricts loans to directors and their relatives, which is not directly related to the situation described but has implications for loans involving related parties.
- **Loans to Related Parties:**
If an associate company is providing an interest-free loan to a Section 8 company, it generally does not violate Section 185 as long as the loan is not to directors or their relatives and the transaction is not intended to benefit directors or their associates.
**3. Alternative Methods to Infuse Funds:**
- **Equity Contribution:**
The associate company could consider subscribing to equity shares of the Section 8 company, which would be in the form of a capital contribution rather than a loan. This aligns well with the objectives of a Section 8 company, which often has restrictions on paying dividends and borrowing.
- **Grants or Donations:**
The associate company could provide funds as grants or donations if the Section 8 company’s objectives align with the associate company’s interests. This would be considered as a contribution towards the charitable or non-profit objectives of the Section 8 company.
**4. Capital Scheme Approval:**
- **Shareholder Approval:**
For any arrangement involving loans or financial assistance from other companies, especially if it involves related parties or associate companies, obtaining shareholder approval might be necessary. This is particularly relevant if the arrangement involves capital contributions or financial transactions.
- **Interest-Free Loan under Capital Scheme:**
If you plan to obtain approval from shareholders for a capital scheme that allows an associate company to provide a loan to the Section 8 company, the loan can be interest-free, provided it aligns with the company's objectives and is in compliance with applicable laws and regulations.
- **Compliance and Documentation:**
Ensure proper documentation of all transactions, approvals, and compliance with legal requirements. Detailed records should be maintained to support the nature of transactions and their alignment with the company's objectives and legal requirements.
**Summary:**
1. **Infusion of Promoters' Contribution:**
- Allowed as interest-free unsecured loan.
2. **Associate Company Infusion:**
- Generally permissible if it does not involve directors or their relatives.
3. **Alternative Methods:**
- Consider equity contribution or grants/donations.
4. **Capital Scheme and Shareholder Approval:**
- Obtain necessary approvals and ensure compliance with legal requirements.
If in doubt, consult a legal expert or company secretary to ensure full compliance with regulatory requirements and the specific conditions set by funding agencies.
Section 25 of the Companies Act, 1956 (now replaced by Section 8 of the Companies Act, 2013) deals with companies formed for promoting commerce, art, science, religion, charity, or any other useful object and prohibits the payment of any dividend. These companies are generally not for profit, and there are specific provisions regarding loans and financial assistance.
**Infusion of Interest-Free Unsecured Loan:**
- **Interest-Free Unsecured Loan from Promoters:**
Yes, a Section 8 company (formerly Section 25) can receive an interest-free unsecured loan from its promoters. This is a common practice where promoters are required to contribute to the company's capital structure as a precondition for receiving loans or funding from external agencies, such as NSDC. This aligns with the pre-disbursement condition set by NSDC.
- **Interest-Free Loan from Associate Company:**
The infusion of funds by an associate company, especially when it is interest-free, must be carefully considered in light of the regulatory requirements and the purpose of the funds.
**2. Compliance with Section 185 of the Companies Act, 2013:**
**Section 185** of the Companies Act, 2013 restricts loans to directors and their relatives, which is not directly related to the situation described but has implications for loans involving related parties.
- **Loans to Related Parties:**
If an associate company is providing an interest-free loan to a Section 8 company, it generally does not violate Section 185 as long as the loan is not to directors or their relatives and the transaction is not intended to benefit directors or their associates.
**3. Alternative Methods to Infuse Funds:**
- **Equity Contribution:**
The associate company could consider subscribing to equity shares of the Section 8 company, which would be in the form of a capital contribution rather than a loan. This aligns well with the objectives of a Section 8 company, which often has restrictions on paying dividends and borrowing.
- **Grants or Donations:**
The associate company could provide funds as grants or donations if the Section 8 company’s objectives align with the associate company’s interests. This would be considered as a contribution towards the charitable or non-profit objectives of the Section 8 company.
**4. Capital Scheme Approval:**
- **Shareholder Approval:**
For any arrangement involving loans or financial assistance from other companies, especially if it involves related parties or associate companies, obtaining shareholder approval might be necessary. This is particularly relevant if the arrangement involves capital contributions or financial transactions.
- **Interest-Free Loan under Capital Scheme:**
If you plan to obtain approval from shareholders for a capital scheme that allows an associate company to provide a loan to the Section 8 company, the loan can be interest-free, provided it aligns with the company's objectives and is in compliance with applicable laws and regulations.
- **Compliance and Documentation:**
Ensure proper documentation of all transactions, approvals, and compliance with legal requirements. Detailed records should be maintained to support the nature of transactions and their alignment with the company's objectives and legal requirements.
**Summary:**
1. **Infusion of Promoters' Contribution:**
- Allowed as interest-free unsecured loan.
2. **Associate Company Infusion:**
- Generally permissible if it does not involve directors or their relatives.
3. **Alternative Methods:**
- Consider equity contribution or grants/donations.
4. **Capital Scheme and Shareholder Approval:**
- Obtain necessary approvals and ensure compliance with legal requirements.
If in doubt, consult a legal expert or company secretary to ensure full compliance with regulatory requirements and the specific conditions set by funding agencies.
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