Section 372A(2)

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udit sharma

Company Secretary

2303 Points Joined October 2010

Hi...

Pls. help......

Facts of the case

The paid up capital and Free Reserves of A Ltd. as at 31-03-2010 is as under:

Paid up Capital : Rs. 125,00,00,000/-

Free Reserves : Rs. 25,00,00,000/-

________________

Total Rs. 150,00,00,000/-

________________

60% of the Paid up Capital+

Free Reserves : Rs.90,00,00,000/-

100% of Free Reserves : Rs.25,00,00,000/-

As per section 372A (1) of the Companies Act, 1956 A Ltd. can make Loan, give guarantee or provide security in connection with a loan made by any third person to any Body Corporate or by any Body Corporate to any third person to the extent of Rs.90.00 Crores.

The aggregate of the loans made, guarantee give and security provided by A Ltd till date is to the tune of Rs.75.00 Crores. A Ltd. proposes to make a loan of Rs.25.00 Crores to B Ltd.

For the purpose, A Ltd. has to obtain:

1. Unanimous consent of the Directors present at the Board Meeting where the proposal to grant loan to B Ltd. is considered by the Board.

2. Prior Approval of the Shareholders by way of a Special Resolution to be passed in the General Meeting of the Company.

Company A has availed a Term Loan of Rs.60 Crores from IDBI(Public Financial Institution)and it is subsisting till date.

Since the aggregate of the Loans made, guarantee given or security provided by A Ltd.(together with the Loan of Rs.25 Crores to be made to B Ltd.) exceeds the limit of 60% of the paid up capital and free reserves of the Company, the Company has to obtain the prior approval of IDBI even thought the Company has not defaulted in payment of interest or loan installments as per the terms and conditions of IDBI.{Section 372A(2)}.

Now, as per proviso to Section 372A (2) no prior approval of the Public Financial Institution is required if the aggregate of the loans made, guarantee given or security provided together with the loans/guarantee/security proposed to be made is within the specified limits (which is 60% of the paid up capital+ Free Reserves) and neither has the Company defaulted in payment of interest and loan installments.

My query is suppose the aggregate of the loans made, guarantee given, security provided is within 60% of paid up capital+ free reserves and the Company has not defaulted in payment of interest and loan installments whether the Company has to obtain any approval of IDBI after granting of Loan???????

If yes, suppose IDBI does not accord its approval then what????????

Replies (4)

Jaideep

Service

1368 Points Joined January 2009

Dear Udit,

Crystal clear question...

As the aggregate of the loans made, guarantee given, security provided is within 60% of paid up capital+ free reserves and the Company has not defaulted in payment of interest and loan installments, no need to obtain approval of IDBI Bank. But this is as per Companies Act, 1956.

However, Bankers normally keep clause for taking prior approval for providing any loan or additional gurantee to other companies, this clause will be applicable even for wholly owned subsideries where mentioned section is not applicable.

In view of the same it is always advisable to get prior approval from the concerned bank.

As far as consequences are concerned, it depends upon bank, as it will be a breach of terms and conditions to loan agreement form the borrower side.

I hope, these inputs will add some value.

Regards

Jayashree S Iyer

Company Secretary

3224 Points Joined August 2009

Quote:

"Since the aggregate of the Loans made, guarantee given or security provided by A Ltd.(together with the Loan of Rs. 25 Crores to be made to B Ltd.) exceeds the limit of 60% of the paid up capital and free reserves of the Company, the Company has to obtain the prior approval of IDBI even though the Company has not defaulted in payment of interest or loan installments as per the terms and conditions of IDBI.{Section 372A(2)}."

Unquote:

The exemption under proviso to Section 372A(2) is available only when the aggregate of the loans and investments so far made does not exceed the limit of 60%.

In the instant case the limit is exceeded. Hence prior approval of IDBI Bank is required. If IDBI doesn't approve then you cannot go for further loan/investments.

Syam kamal

Company Secretary

156 Points Joined June 2010

Originally posted by : Jayashree S Iyer
	Quote: "Since the aggregate of the Loans made, guarantee given or security provided by A Ltd.(together with the Loan of Rs. 25 Crores to be made to B Ltd.) exceeds the limit of 60% of the paid up capital and free reserves of the Company, the Company has to obtain the prior approval of IDBI even though the Company has not defaulted in payment of interest or loan installments as per the terms and conditions of IDBI.{Section 372A(2)}." Unquote: The exemption under proviso to Section 372A(2) is available only when the aggregate of the loans and investments so far made does not exceed the limit of 60%. In the instant case the limit is exceeded. Hence prior approval of IDBI Bank is required. If IDBI doesn't approve then you cannot go for further loan/investments.

Fully agree with Jayashree madam.... Well explained

Syam kamal

Company Secretary

156 Points Joined June 2010

Originally posted by : Jayashree S Iyer
	Quote: "Since the aggregate of the Loans made, guarantee given or security provided by A Ltd.(together with the Loan of Rs. 25 Crores to be made to B Ltd.) exceeds the limit of 60% of the paid up capital and free reserves of the Company, the Company has to obtain the prior approval of IDBI even though the Company has not defaulted in payment of interest or loan installments as per the terms and conditions of IDBI.{Section 372A(2)}." Unquote: The exemption under proviso to Section 372A(2) is available only when the aggregate of the loans and investments so far made does not exceed the limit of 60%. In the instant case the limit is exceeded. Hence prior approval of IDBI Bank is required. If IDBI doesn't approve then you cannot go for further loan/investments.