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Intercorporate Loan by Private Company

CS Pooja (Company Secretary) (305 Points)

19 April 2011

Dear All,

Please clarify following:

If a Private company wishes to provide loan to a sister company for purchasing machinery or land or for any other reason then which procedure needs to be followed?

Regards,

Pooja

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22 Replies

Shipra Singh (CS) (31 Points)
Replied 19 April 2011

in case of pvt co. loan given to sister concern will be shown in Related Party transactions in B/S as it is a private co so Section 372A is not aplicable. also see the status of interested directors in Board meeting or else get resolution passed in General meeting.

Originally posted by : CS Pooja
	Dear All, Please clarify following: If a Private company wishes to provide loan to a sister company for purchasing machinery or land or for any other reason then which procedure needs to be followed? Regards, Pooja

Shipra Singh (CS) (31 Points)
Replied 19 April 2011

related party transactionr are shown in notes to accounts.

Pothuganty sudheer (Consultant, C.A, C.S) (411 Points)
Replied 19 April 2011

Shipra ji.

If iam not mistaken, pooja ji has asked if pvt company extends loan to its sister concern not

otherwise.

Section 372A procedure is not applicable for a loan extended by Pvt co unless it is a subsidary of Public

company ( By virtue of 372A(8) ).

So if the sister concern is Holding company of this Pvt Company then 372A is applicable.

Otherwise the procedure is not applicbale and outside purview of Section 372A.

This is my opinion.

Expert opinions are welcome. Correct me if iam not right.

CA. Praveen Gupta (CA ) (346 Points)
Replied 19 April 2011

Read Sec 295/299/300 of companies act 1956

CS Shivi Reddy (COMPANY SECRETARY) (175 Points)
Replied 19 April 2011

Pothuganty Sudheer is correct.

Section 372A is not applicable to pvt. co.Since as per Pooja's Query the Company extending loan is a pvt. Co. this ssection is not applicable..until and unless the pvt. co. extending loan is a subsidiary of a public co. as per section 372A (8)(a)(iii), of the co. act 1956.

As per my opinion, only a Board Resolution will do, and the directors who are directly or indirectly interested in the transaction sholud disclose the nature of their interest.

If i am wrong plz correct me. and any opinion is always welcome.

Regards

Shivi Reddy

sivaram (Asst Mgr-Taxation) (6918 Points)
Replied 20 April 2011

Sec372A is not applicable to Private Company

Jayashree S Iyer (Company Secretary) (3224 Points)
Replied 20 April 2011

Restrictions on loan a director or to a company in which such director is a director or member (it's presumed that the sister company is having common director) as specified in Section 295 of the Companies Act, 1956 is not applicable to private companies. Similarly restrictions on investments as specified in Section 372A is also not applicable to a private company unless it is a subsidiary of a public company.

So a private company can grant loan to its sister concern by passing a Board Resolution. However disclosure of interest is required to be made by interested directors under Section 299 of the Companies Act, 1956 if the directors shareholding in the borrowing company exceeds 2% of the paid up capital. Necessary entires in the register of contracts in which directors are interested is also to be made as required under section 301 of the Companies Act, 1956.

pooja (article) (38 Points)
Replied 20 April 2011

Section 372A Is not applicable in case of Private company unless such private co. is the subsidiary of a public holding co. So Only board resolution is required to be passed in such case & also Provisions Of section 295,299 & 301 Shall Apply.

CA Ishaan (Chartered Accountant) (453 Points)
Replied 20 April 2011

Hello,

Having regard to the query and the various opinions devolved by the other members therewith, the following points need to be urged. If you have any further queries, you may contact me on ifaimad @ gmail.com

Legality:

1. Section 372A(8) very clearly elucidates that a Pvt Ltd company is not covered by Section 372A.

2. 372A talks about applicability in case of Pvt Ltd which is a subsidiary of Public Ltd. Hence if the Holding company is not Public Ltd, then there is no scope for Section 372A to become operative

3. Section 3 of The Companies Act, 1956 restrains a Pvt. Ltd co. from accepting deposits from any persons other than shareholders, directors and their relatives. However, the definition of ‘deposits’ u/s. 58A read with Rule 2 of The Companies (Acceptance of Deposits Rule), 1975 specifically excludes inter-corporate loans.

Based on the above two points, it can be concluded that a Pvt Ltd co. is not statutorily barred from indulging in inter-corporate transactions

Procedures:

Generally sister companies have common directors.
Hence provisions relating to compliance in that regard need to be followed.
Section 300(1) of The Companies Act, 1956 mandates that in case of directors who are interested in case of a particular contract/arrangement in which he is directly/indirectly interested, then he is not eligible to participate in the discussion or vote in that regards in BOD meetings. However, Section 300(2) exempts a Pvt Ltd co which is neither a subsidiary or Holding company of a Public Ltd co from Section 300(1). Hence it does not apply in your case.
By virtue of Section 295(1)(c), a company cannot lend to a Pvt ltd co if there are common directors or if the director of the lending company is member of that pvt ltd co. However, according to Section 295(2)(a)(i), Section 295(1) is only applicable to pvt ltd co which is a subsidiary of a Public Ltd co.
According to Section 299(6), only if the directors’ shareholding in the borrowing company exceeds 2% of the paid up capital, then the directors should disclose their interest according to the prescribed procedure in Section 299. No distinction has been made in Section 299 between Public and Pvt Ltd Co and hence it can be concluded that Section 299 would be operational in your case. Accordingly common/ interested directors need to give a general notice to the BOD that they are interested/ concerned in a particular contract or arrangement. This would be sufficient disclosure. Such notice, however, would expire at the end of the Financial Year and would need to be renewed, one FY at a time, in the last month of the FY in which it is due to expire. Additionally, no such general notice or renewal would be of effect and consequence if it is not given at a BOD meeting or if the concerned director does not take reasonable steps to have it brought up and read at the BOD meeting. Contravention of Section 299 is punishable with a fine of Rs. 50,000. Additionally, Section, 299(5) also states that if there are other laws which restrict such contracts/arrangements, then those laws would have an over-riding effect.
Particulars of such contract /arrangement needs to be kept according in the manner prescribed u/s. 301
It can be derived from Section 299, that a BOD resolution would suffice. Additionally, according to Section 292, BOD resolution is needed to make loans and also to take loans.

1 Like

CS Pooja (Company Secretary) (305 Points)
Replied 20 April 2011

Thank you very much for detail reply.

is there any restriction of amount of loan and purpose of loan to sister company.

Also clarify there are common directors then Disclosure of Interest is to be given by Loan Accepting co or loan giving co? If transaction occurs at the middle of the year then when disclosure is to be given?

Can we obtain blanket permission of Board for giving loan to particular sister company then give a loan in phases?

Regards,

Pooja

CA Ishaan (Chartered Accountant) (453 Points)
Replied 20 April 2011

Hello,

The Companies Act, 1956 does not prescribe any limit or restriction as to amount or purpose for which such laons are to be used. However, the Statutory Auditor may report any mis-utilisation of such funds either under CARo 2003 or other enactments. CARO 2003 requires the auditor to report on the Register maintained under Section 301 and if it is complete in all respects. In this regards, it is also pertinent to note that Directors need to file Form No 24 AA relating to Disclosure of Interest.

CARO 2003 requires auditors to report on end-use of term loans. This means that auditor has to report on whether loans have been utilised for purpose for which they were taken. Hence it can be concluded that CARO 2003 does not restrict the purposes for which loans were taken, but only asks the auditor to report on if the loan was not utilised for the purpose for which it was taken.

CARO 2003 also asks the auditor to report on whether contracts/arrangements were made at prevailing market prices if they are above Rs 5 lakhs. In light of above, your company should decide the terms of contract

Disclosure, as contemplated u/s. 299, is to be made by the director as soon as such 'interest' arises. Going by the spirit of Section 299, such disclosure has to come before the contract/arrangement is approved or else penalties would be leviable. Furthermore, BOD approval by circulation is specifically prohibited, hence a BOD meeting has to happen and conditions laid down in Section 299 need to be completed before the arrangement can be proceeded with.

As far as blanket permissions go, since no limit on amount etc have been prescribed, it can be concluded that the BOD can pass a resolution approving the loan to a particular concern and the terms and conditions and provide for loan on istallment basis. However, the BOD cannot pass a blanket resolution to cover all sister concerns since the particulars of common directors may change and it would create unneccessary difficulties for compliance with Section 299.

According to Section 292, BOD resolution is needed to passed by both the loan-giving and loan-taking companies. Additionally, Section 299 has to be complied by with both companies.

CS Pooja (Company Secretary) (305 Points)
Replied 20 April 2011

Can you please elaborate the method of disclosure of Interest. Can it be given in the Board Meeting to pass resolution for providing loan?

So According to you Pvt CO can provide loan to sister company with interest with Board Resolution.

Regards,

Pooja

Shipra Singh (CS) (31 Points)
Replied 20 April 2011

Yes, Mr. Sudheer Ji, i hv said the same thing that Sec 372A is nt applicable in this case.

CA Ishaan (Chartered Accountant) (453 Points)
Replied 21 April 2011

Hello,

The common directors have to file Form 24AA with the BOD. This is known as general notice. They can file the form once a year and renew it in the last month of each FY, instead of giving fresh notice every time they become directors in other companies. 24AA basically is a list of all ccompanies in which the direector is interested. Once this formality is done with, it is deemed that BOD has been served with a sufficient notice and the BOD can enter into any contract/arrangement with the companies mentioned in 24AA at any time during that year in which the notice is effective. This saves the time-consuming process of convening BOD meeting and serving piecemeals notices every time such a contract/arrangement is considered. It is basically like a return which can be filed once and then the directors can go to sleep.

Hence, If 24AA is filed in March 2010 (to renew the notice for FY 2010-11) and then the director of A Pvt. Ltd becomes a director in B Pvt Ltd. in June 2010, he can wait until March 2011 to file the next 24AA. However if the BOD of A Ltd is considering entering into a contract/arrangement with B Pvt Ltd in Sept 2010, then the director cannot wait till March 2011 since that would consitute a violation of Section 299. The director should give general notice to the BOD of both companies before the contract/arrangment is approved by both companies.