Loan to another group company
This query is : Resolved
13 May 2016
Dear sir,
We have ABC Pvt. Ltd and having its another Group company XYZ pvt. Ltd. Director and shareholder and promoters in both company are same. XYZ pvt. Ltd currently enjoying the fund from O/D limit.
Now ABC Pvt. Ltd required the fund so my question is that can XYZ pvt Ltd. can advance loan to its group company ABC Pvt. Ltd. if no then how we can transfer the loan and if yes then please state the procedure as per co. act. 2013.
Thanking you
Nishant kakkar
M-98710-34071
E-Mail. kakkarnishant11@gmail.com
We have ABC Pvt. Ltd and having its another Group company XYZ pvt. Ltd. Director and shareholder and promoters in both company are same. XYZ pvt. Ltd currently enjoying the fund from O/D limit.
Now ABC Pvt. Ltd required the fund so my question is that can XYZ pvt Ltd. can advance loan to its group company ABC Pvt. Ltd. if no then how we can transfer the loan and if yes then please state the procedure as per co. act. 2013.
Thanking you
Nishant kakkar
M-98710-34071
E-Mail. kakkarnishant11@gmail.com
17 May 2016
can any one give any clarification on above mentioned query please ???
03 August 2024
Yes, a group company like XYZ Pvt. Ltd. can advance a loan to its sister company ABC Pvt. Ltd., even if the directors and shareholders are the same. However, certain provisions under the Companies Act, 2013, need to be adhered to. Here’s a detailed look at the procedure and compliance required for such transactions:
### **1. **Legal Framework and Compliance:**
#### **1.1. Section 185 of the Companies Act, 2013:**
- **Restriction on Loans to Directors and Related Parties:**
- **Section 185(1):** Prohibits a company from directly or indirectly advancing any loan, including any loan represented by a book debt, to its directors or any of their relatives, or to any other person in whom the director is interested.
- **Section 185(2):** Provides exceptions for loans to a company in which the director is interested if the loan is provided for the purpose of its business.
#### **1.2. Section 186 of the Companies Act, 2013:**
- **Loans and Investments:**
- **Section 186(1):** Prohibits a company from giving loans, guarantees, or providing securities to any person or body corporate, other than in the ordinary course of business, without the approval of the Board of Directors and, in certain cases, shareholder approval.
- **Section 186(2):** Requires the approval of the Board of Directors and, in some cases, shareholders' approval (special resolution) if the amount of the loan or guarantee exceeds the prescribed limits.
### **2. **Procedure for Loan Transfer:**
#### **2.1. **Approval by the Board:**
- **Board Meeting Resolution:**
- A meeting of the Board of Directors of XYZ Pvt. Ltd. must be convened to approve the loan to ABC Pvt. Ltd. The resolution should specify the amount, terms, and conditions of the loan.
#### **2.2. **Shareholder Approval:**
- **Special Resolution:**
- If the amount of the loan exceeds the limits prescribed under Section 186, a special resolution should be passed by the shareholders of XYZ Pvt. Ltd. approving the loan.
#### **2.3. **Disclosure and Reporting:**
- **Board Report:**
- The loan transaction should be disclosed in the Board's Report and Annual Return of XYZ Pvt. Ltd. as per the requirements of Section 134 and Section 92.
- **Registrar of Companies (ROC) Filing:**
- Ensure that the details of the loan and any necessary resolutions are filed with the Registrar of Companies as required.
### **3. **Considerations:**
#### **3.1. **Interest Rate:**
- Ensure that the interest rate on the loan is in line with market rates to avoid any implications of preferential treatment or hidden subsidies.
#### **3.2. **Documentation:**
- **Loan Agreement:**
- Draft a formal loan agreement outlining the terms and conditions, repayment schedule, interest rate, and other relevant details.
- **Security:**
- If applicable, consider if any security or collateral is needed and ensure that it is documented appropriately.
#### **3.3. **Tax Implications:**
- **Interest Income:**
- XYZ Pvt. Ltd. must report the interest income received from ABC Pvt. Ltd. in its financial statements.
- **Transfer Pricing:**
- If XYZ Pvt. Ltd. and ABC Pvt. Ltd. are both involved in international transactions, ensure compliance with transfer pricing regulations.
### **4. **Key Points for Compliance:**
- Ensure compliance with Sections 185 and 186 of the Companies Act, 2013.
- Obtain necessary approvals from the Board and, if required, the shareholders.
- Maintain proper documentation and disclosures.
- Consider tax implications and transfer pricing regulations.
### **Conclusion:**
XYZ Pvt. Ltd. can advance a loan to ABC Pvt. Ltd., provided that all the necessary approvals and compliance requirements under the Companies Act, 2013, are met. Ensure proper documentation and adherence to the legal framework to avoid any compliance issues.
### **1. **Legal Framework and Compliance:**
#### **1.1. Section 185 of the Companies Act, 2013:**
- **Restriction on Loans to Directors and Related Parties:**
- **Section 185(1):** Prohibits a company from directly or indirectly advancing any loan, including any loan represented by a book debt, to its directors or any of their relatives, or to any other person in whom the director is interested.
- **Section 185(2):** Provides exceptions for loans to a company in which the director is interested if the loan is provided for the purpose of its business.
#### **1.2. Section 186 of the Companies Act, 2013:**
- **Loans and Investments:**
- **Section 186(1):** Prohibits a company from giving loans, guarantees, or providing securities to any person or body corporate, other than in the ordinary course of business, without the approval of the Board of Directors and, in certain cases, shareholder approval.
- **Section 186(2):** Requires the approval of the Board of Directors and, in some cases, shareholders' approval (special resolution) if the amount of the loan or guarantee exceeds the prescribed limits.
### **2. **Procedure for Loan Transfer:**
#### **2.1. **Approval by the Board:**
- **Board Meeting Resolution:**
- A meeting of the Board of Directors of XYZ Pvt. Ltd. must be convened to approve the loan to ABC Pvt. Ltd. The resolution should specify the amount, terms, and conditions of the loan.
#### **2.2. **Shareholder Approval:**
- **Special Resolution:**
- If the amount of the loan exceeds the limits prescribed under Section 186, a special resolution should be passed by the shareholders of XYZ Pvt. Ltd. approving the loan.
#### **2.3. **Disclosure and Reporting:**
- **Board Report:**
- The loan transaction should be disclosed in the Board's Report and Annual Return of XYZ Pvt. Ltd. as per the requirements of Section 134 and Section 92.
- **Registrar of Companies (ROC) Filing:**
- Ensure that the details of the loan and any necessary resolutions are filed with the Registrar of Companies as required.
### **3. **Considerations:**
#### **3.1. **Interest Rate:**
- Ensure that the interest rate on the loan is in line with market rates to avoid any implications of preferential treatment or hidden subsidies.
#### **3.2. **Documentation:**
- **Loan Agreement:**
- Draft a formal loan agreement outlining the terms and conditions, repayment schedule, interest rate, and other relevant details.
- **Security:**
- If applicable, consider if any security or collateral is needed and ensure that it is documented appropriately.
#### **3.3. **Tax Implications:**
- **Interest Income:**
- XYZ Pvt. Ltd. must report the interest income received from ABC Pvt. Ltd. in its financial statements.
- **Transfer Pricing:**
- If XYZ Pvt. Ltd. and ABC Pvt. Ltd. are both involved in international transactions, ensure compliance with transfer pricing regulations.
### **4. **Key Points for Compliance:**
- Ensure compliance with Sections 185 and 186 of the Companies Act, 2013.
- Obtain necessary approvals from the Board and, if required, the shareholders.
- Maintain proper documentation and disclosures.
- Consider tax implications and transfer pricing regulations.
### **Conclusion:**
XYZ Pvt. Ltd. can advance a loan to ABC Pvt. Ltd., provided that all the necessary approvals and compliance requirements under the Companies Act, 2013, are met. Ensure proper documentation and adherence to the legal framework to avoid any compliance issues.
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