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Loan from member - pvt co which is subsidiary of public co

Sumit Jaiswal (Company Secretary) (818 Points)

23 September 2013

It is known that a private limited company can accept loan from its director, relative of director or member.

I wanted to know whether a private company which is a subsidiary company, accept loan (unsecured) from its member?

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4 Replies

P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 23 September 2013

Section 3(1)(iii)(d) of Companies Act 1956 had put restriction on a private company on acceptance of deposits from persons other than its members, directors or their relatives. However, this Section now stands repealed w.e.f. 12.9.2013 and definitions of private company given in Section 2(68) and of public company given in Section 2(77) of Companies Act 2013 have come into force. Interestingly Sec.2(68) of new Act does not contain a clause similar to Sec.3(1)(iii)(d) of 1956 Act.

Proviso to Sec.2(77) clearly provides that a subsidiary of a public company shall be deemed to be a public company.

Chapter V of new Act dealing with deposits has not yet come into force. Hence we have to refer Sec.58A of 1956 Act with Rules framed thereunder.

Deposit accepted by a public company from its members have not been excluded from the definition of ;deposit' in the Rules framed u/s 58A. Hence it appears that subsidiary of a public company cannot accept deposit from public without giving advertisement and following procedure u/s 58A.

Contrary views are welcome.

Thanks

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Sumit Jaiswal (Company Secretary) (818 Points)
Replied 23 September 2013

Thanks Mr. Agrawal for your reply. I agree with your reply. I wish to point out just a minor typo error. The section 2(77) as mentioned above would be section 2(71).

I have another question: What if that person giving the loan is a director? Can the private company which is a subsidiary of public company accept loan from its director?

P C Agrawal (Registered independent director Past Chairman of Aurangabad Chapter of ICSI Practicing Company Secretary at Aurangabad) (8229 Points)
Replied 24 September 2013

Rule 2(b)(ix) of Companies (Acceptance of Deposits) Rules 1975 excludes from 'deposits':

[(ix)		any amount received from a person who, at the time of the receipt of the amount, was a director of the company or any amount received from a relative of a director or its member by a private company:
		Provided that the director, relative of a director or member, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting from others;]

Hence this will be not covered u/s 58A if above declaration is given.

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Shah Viral Pramodbhai (Chartered Accountants) (106 Points)
Replied 22 January 2014

Private company cannot accept loans other than from its members, directors and relatives. If it accepts, then it shall be deemed to have violated company law rules.