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Interest on loan given to & received from 100% subsidiary co

Jyothis (Article) (1127 Points)

21 March 2016

A P(ltd) co has 2 100% subsidiary co., can Holding co give interest free loan & receive interet free advance from such subsidiary Company.

Is sec 185/186 applicable in case of loans & advances to & from 100% subsiadiary co.

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13 Replies

Megha Choudhary (Management Trainee) (541 Points)
Replied 21 March 2016

as per amendment in companies act 2013, a holding company shall provide a loan to its wholly owned subsidiary company and also provide a guarantee or security in respect of the any loan made to its wholly owned subsidiary company.

Clause (d) states that a holding company shall provide a guarantee or security to the banks or financial institutions in connection with the loan taken by the subsidiary company.

Provided that such loans shall be utilized by the subsidiary company for the purpose of its principal business activities; and not for any other activities.

Noted that:

Proviso of Clause (c) or (d) are not applicable if a wholly owned subsidiary company made a loan to holding company or a guarantee or security provided by the subsidiary company in respect of loans made by the banks or financial institutions to its holding company

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Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 21 March 2016

Whats ur Query ?

I didnt Get it Exactly ?

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Megha Choudhary (Management Trainee) (541 Points)
Replied 21 March 2016

no its not applicable.

read the provisions as per law

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Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 21 March 2016

Okay

but i want to ask u what the query u asked ?

if u can repeat the query ?

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Jyothis (Article) (1127 Points)
Replied 21 March 2016

1) Can holding company give interest free loan to its (100%) subsiadiary company.

2) Loan by 100% Subidiary company to its holding company-Interest free.

1 Like

Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 21 March 2016

Okay

I got n u also even got the answer

thanks for the repeatation of query.

Jyothis (Article) (1127 Points)
Replied 21 March 2016

So company can give interest free loans to its fully owned subidiary companies-

Is there any specific conditions for availing this exemption -

Other corporates have invested in share capital of holding company.

Amit Kanunga (Article Assistant and Post Gradute) (644 Points)
Replied 21 March 2016

The Company cant give the Interest free loan to its 100% subsidiary company.

Explanation is given below:

The erstwhile Section 372A of Companies Act, 1956 (‘Old Act’) provided an umbrella exemption of the applicability of the Section in case of a loan given to a wholly owned subsidiary by the holding company.Thus, allowing the holding companies to give ‘interest free loans’ to their wholly owned subsidiaries. This facilitated the subsidiaries to access funds from their well-established cash rich holding companies at virtually no cost. Section 186 of the New Act, however, does not provide that exemption. The Companies (Meetings of Board and its Powers) Rules, 2014 (‘New rules’) exempt companies from only the requirement of obtaining a special resolution prior to granting a loan to a wholly owned subsidiary.

Section 186 of the New Act makes it mandatory for the lender to charge interest at a rate higher than the prevailing yield of one year, three year, five year or ten year Government Security close to the tenor of the loan. It has now become mandatory for companies to charge interest on even loans given to their wholly owned subsidiaries. While this provides a mandatory cash repatriation strategy for some corporates, on the flip side it heavily burdens the group with the leakage on account of withholding tax on such interest payment and tax deductibility issues under the Income tax Act.

Replacing the existing loans with certain specific securities like equity or preference shares could be explored as an alternate strategy to fund the subsidiaries. Although, this may prove to be a costly affair for the corporates, considering the cost of maintaining higher authorised share capital.

Section 186(7) requires that no interest free ‘loan’ is given by a company. Does that mean that there is no requirement to have interest chargeability on ‘securities’ (which is not loan) subscribed by a holding company in another body corporate? There is no prohibition on a holding company acquiring by way of subscripttion, purchase or otherwise, the ‘securities’ (defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’), to include shares, scriptts, stocks,bonds, debentures, debenture stock or other marketable securities of a like nature, derivatives, mutual fund units, Government securities) of a body corporate.

The issue of debate that crops up is whether interest free ‘debentures’ can replace the previous interest free loans advanced by companies. That is, whether debentures are to be treated as a ‘loan’ or a ‘security’. Explanation to Section 372A of the Old Act provided that ‘loan’ includes debentures or any deposit of money made by one company with another company, not being a banking company. However, Section 186 of the New Act does not provide any such explanation or definition of the term ‘loan’.