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Section 372A of the companies act 1956 shall continue

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)

20 November 2013

Dear All,

As a major relief to Corporate, MCA vide its Circular no 18/2013 dated 19thNovember 2013 has issued a clarification with respect of the operation of Section 372A of the Companies Act 1956.

In a scenario wherein Section 185 i.e. Loan to directors of the Companies Act, 2013 was notified while Section 186 of such Act relating to Loan and Investment by Companies was not notified, lot of confusion was created in the industry especially pertaining to loans etc. to wholly owned subsidiaries. The Government has now clarified that Section 372A of the Companies Act 1956 shall continue to be effective till the notification of Section 186 of the Companies Act, 2013.

You are requested to please take note of the same.

Regards

Ankur

Courtesy: Companiesact.in

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5 Replies

Sneha (Company Secretary) (1594 Points)
Replied 21 November 2013

Sir, please answer my query. Sec 185 of Companies Act, 2013 also includes "Company can neither take loan nor give loan/security and gaurantee". No limit prescribed in section 185 as it is covered by Sec 186 of Companies Act, 2013 (not yet effective).

Sec 372A of Companies Act, 1956 is applicable only to public company and pvt co subsidiary of public company.

So provision of sec 185 of CA, 2013 and Sec 372A of CA, 1956 is contradictory in terms of giving loan/gaurantee/security by pvt. companies ??

Swayam (Audit Executive) (35 Points)
Replied 25 November 2013

Hello.

Can someone please clarify if Section 372A is applicable to State Govt. undertakings?

Also, I have read that Section 370 & 372 were scrapped & Section 372A has replaced them. Is this correct? (I am conducting audit for the FY 2012-13, so the New Companies Act, 2013 won't apply. Please reply as per the provisions applicable in FY 2012-13.)

Thanks.

Abinash Dubey (Article Assisstant & CA Final Student) (21 Points)
Replied 10 January 2014

Dear friends,

Section 372A of the Companies Act, 1956 is still applicable and it is not applicable to Private Companies. So private companies can give and take loan between the group companies and holding & subsidiary companies. Corresponding section 186 of the Companies Act, 2013 has not yet been made operational.

Section 185 of the new Companies Act, 2013 is also applicable to private companies. Accordingly, a company cannot give loan to its directors and other specified persons which as per my understanding includes holding/subsidiary/ other group companies where there are common directors or which are controlled by director/directors of the lending company. So no loans are possible between holding/subsidiary/group companies after 12-09-2013.

Isn't there a overlapping of section 185 of the Companies Act, 2013 and 372A of the Companies Act, 1956. Please clarify or comment on it.

With Regards,

Abinash Dubey

S.ASWATH (Manager) (704 Points)
Replied 29 January 2014

In this regard what can be the solution the section 185 restrict loans to director and group compnaies in which the same directors are there

if the director are changed for this purpose then this section will not be applicable. is it not loop hole??????????

CA ISHA (CA) (38 Points)
Replied 02 July 2014

Hello,

I like to share my views , Sec 185 and Sec 186(Sec372A of the Co Act 1956) are both different. Sec 185 speaks about the loan to directors and its related provision, Sec 185 provides that No company shall directly or indirectly, advance any loan ( including loan represented by book debt), to any director or any other person in whom director are intrested or give any gurantee or any security in connection with the loan taken by him or such other person. Except to

a) to the MD(managing Director) or WTD(whole time director) of the Company

i)as a part of condition of service extended to all its employees or

ii)by a scheme approved by the members of the company by passing SR

b)a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Sec 186 is in relation to loans and Investment by the Company.

A Company cannot make investment through more than 2 layers of Investment Company. Provided that this sub section shall not have any effect:

a)a company from accquiring a company incorporated in a Country outside India having more than 2 layers of Investmnet subsidiary as per the laws of such Country

b) a subsidiary company having an Investment subsidiary for meeting the requirements under the law or rules or regulations framed under any law for time being in force.

A company shall not directly or indirectly

i)give any loan to any other person or body corporate

ii)give to any gurantee or provide any security in connection with the loan to any person or any body corporate and

iii)accquire by way of subscripttion or purchase or otherwise,securities of any body corporate,

in excess of 60% of Paid up capital + Securities premiun+free reserves or 100% of securities premium + free reserves , whichever is more,

the company has to obtain the prior approval of the members of the company by passing SR for such excess limits specified above.

Please correct me in case, i have missed out on anything.

With Regards,

Isha Agarwal