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Section 293(1)(d)

udit sharma (Company Secretary) (2303 Points)

04 January 2011

Interpretation of the words "Borrowed and to be borrowed" - does it mean that the borrowed amount includes the entire sanctioned amount or just only such amount which is actually drawdown by the company

Eg : I had a loan sanctioned for Rs. 50cr but i made a drawdown of Rs.5cr,now i want to take another Rs. 50 cr from some other bank . My paid-up cap & Reserves are Rs. 75cr.
Do i need to get shareholders consent??

Regards

CS Udit Sharma

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10 Replies

Charu (nil) (122 Points)
Replied 04 January 2011

Dear Udit,

The expression used in section 293(1)(d) is " money to be borrowed,together with the monies already borrowed".

When the Bank sanction the amount, it means that you are entitled to draw that much amount. When you actually draw that may be matter of time. Hence in this case, you are eligibile to draw (borrow) upto 50 Cr. It means You have agreed to bound yourself with the liability of 50 cr. Usually, the banks requires creation of charge on entire sanctioned limit, irrespective of fact what amount is actually drawn therefrom. Hence, any further commitment to borrow loan of Rs.50 cr will attarct section 293 of the Act, Unless you or Bank repudiate your claim for remaining undrawn amount.

udit sharma (Company Secretary) (2303 Points)
Replied 04 January 2011

Hi...

Thanks for your reply Charu!

This is for secured Loans but in case of unsecured loans, suppose a Company has granted an unsecured loan of Rs.30 Crores to my company. Now the Company has drawndrown only Rs. 5 Crores. So my borrowings from other Company would be Rs. 5 Crores or Rs. 30 Crores?

Pls. reply asap.

Regards

CS Udit Sharma

Charu (nil) (122 Points)
Replied 04 January 2011

Hi Udit,

As I said earlier, the limits of borrowings to be determined u/s 293 shall be recognized as total sanctioned limit. What you actually draw will be reflected in accounts only. Here, the auditors may disclose the fact by way of note on notes on accounts.

Jayashree S Iyer (Company Secretary) (3224 Points)
Replied 05 January 2011

I feel the term "borrowed" will include only the amount actually drawn down by the company and not the amount of loan sanctioned to the Company. The company's liability is to the extent of drawn down amount only which is reflected in the company's accounts as well.

Only when the draw down exceeds the limits specified in 293(1)(d), the consent of members is required. May be due the terms used in section 293(1)(d)
viz.,

"where the moneys to be borrowed together with the moneys already borrowed will exceed the aggregate of the paid up capital of the company and its free reserves.....",

we may obtain prior approval of the members in general meeting, if the loan is expected to cross the total limit specified in this sub-section.

Just the credit facility extended by the financier will not make the limit crossed unless it is drawn down.

This is my personal view.

Other experts please give your views.

Sudhir Garg (Service) (236 Points)
Replied 07 January 2011

Dear All

One practical aspect. If second sanctioning authority is Bank or financial instituion, it will certainly ask your "Corporate Authority documents" at the time of sanction of the facility and not at the time of your taking of actual disbursement.

It is the matter of interpretation and in my opinion, approval will be required at the time of actual drawdown only. But to be on safer side, you should take, if possible the same at the time of sanction as after sanction Company Secretary may not come to know of taking of other unused sanctioned amount by Accounts / Finance department.

Regards / Sudhir

Chirag (CA) (33 Points)
Replied 07 January 2011

Dear All,

The lending Institutions require the borrower to create charge on the total sanctioned amount , and not on drawn amount. Even at the time of further enhancements, the total enhamced limits are taken into account for modification of charge. Therefore, it is the sanctioned limits which matters.

Rightly said by Charu, sanctioned amount reflects the total exposure of the company to borrowings. Actual withdrawal may be matter of time. We should understand thing in practicality.

Jayashree S Iyer (Company Secretary) (3224 Points)
Replied 08 January 2011

Originally posted by : Chirag

Dear All,

The lending Institutions require the borrower to create charge on the total sanctioned amount , and not on drawn amount. Even at the time of further enhancements, the total enhamced limits are taken into account for modification of charge. Therefore, it is the sanctioned limits which matters.

My Clarification - It's quite natural because the lending institutions want full sanctioned amount to be covered by security.

Just creating a charge or providing security does not resut in make you liable for the whole amount. Liability is only to the extent of draw-down.

Rightly said by Charu, sanctioned amount reflects the total exposure of the company to borrowings. Actual withdrawal may be matter of time. We should understand thing in practicality.

My clarification - It's the total exposure of the FI and not of the Company. Many Big Companies get the credit limits sanctioned but do not avail the credit for reasons of high interest and go in for alternate source of funding resulting in savings to the company. This is the practicality.

Sudhir Garg (Service) (236 Points)
Replied 10 January 2011

Dear All

Jayshree is 100% correct.

While determining the limit for amount to be borrowed, attention is required to be paid on "Amount outstanding at that time". Even repayment of availed banking facilities also to be considered.

Regards/Sudhir

1 Like

Jatin J Thakkar (Manager-Finance) (21 Points)
Replied 30 September 2011

What if a short time limit for 6 months tenure is availed??? Whether it will attract the Sec 293(1)(d) applicability??

CA.SKR (CA; CS-Final (One Group); DISA (ICAI); Insolvency Professional) (442 Points)
Replied 02 October 2011

Originally posted by : Jatin J Thakkar
	What if a short time limit for 6 months tenure is availed??? Whether it will attract the Sec 293(1)(d) applicability??

"Provisions of Sec 293 (1) (d) are applicable where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company's bankers in the ordinary course of business), will exceed the aggregate of the paidup capital of the company and its free reserves, that is to say, reserves not set apart for any specific purpose.

Explanation II : The expression "temporary loans" in clause (d) means loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature."

In my opinion, as per above, if short term loan for 6 months from Bank is availed for working capital (i.e. CC limits, OD limits etc.), than provisions of Sec-293 (1) (d) are not applicable. If this short term loan is for capital expenditure, than Sec-293(1)(d) is applicable.