INTER-CORPORATE LOANS AND INVESTMENTS

This article focuses on understanding the meaning and scope of inter-corporate loans and investment under section 186 of the Companies Act, 2013 and also comparing the Act of 2013 with the provisions of the earlier Act of 1956.

I. INTRODUCTION 

In finance, the term investment means the idea of purchase of assets which will provide income in future or appreciate or can be sold at a higher price. Loan means advancement of money, property or other material goods to other party in exchange of future repayment of the principle amount along with the interest or charges. Under the Companies Act, 2013 (in short “CA 2013”) there is a concept of inter-corporate loans and investments (u/s 186) which plays a vital role for the growth of industries as there is flow of funds for the group companies or the other companies who are in need of funds.  Section 372 A of the Companies Act, 1956 (in short “CA 1956”) corresponds to section 186 of the Companies Act, 2013 deals with inter-corporate loans and investments. The Companies Act, 1956 did not provide for any restrictions with the loans and advancement unlike the newly enacted Companies Act, 2013. Hence at the outset it is important to refer to section 186 of the Companies Act, 2013 and point out some of the key differences between the two aforesaid sections i.e., section 372 A (CA 1956) and section 186 (CA 2013).  

II. ANALYSIS OF SECTION 186: COMPANIES ACT, 2013

For example: A is the Holding company, B is the subsidiary company of A and C is the subsidiary company of B. Thus according to sec. 186 investments can move from A to B i.e., one layer and from B to C i.e., second layer and not further.

2. According to provision of section 186 (2), a limitation is imposed on the quantum of loan and investment that a company can make. A company can offer any loan or provide any guarantee or security and acquire securities of Body corporate through the Board resolution that is up to 60% of its paid-up capital, security premium account and free reserves or 100% of its free reserves and security premium whichever is more.

3. Section 186 (3) is an exception to section 186 (2) which specify that if giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting would be necessary.

(Note: However, in cases where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or purchase or subscription of securities of wholly owned subsidiary company by its holding company, special resolution would not be required even if the said limit in sub-section 2 exceeds).

4. Section 186 (4) and the proviso to Rule 13 of the Companies (Meetings of Board and its members) Rules, 2014 provides that the company in its financial investment must disclose to each of its members the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.

5. Section 186 (5) provides that no investment would be made or loan or guarantee or security would be provided by the company unless the resolution sanctioning is passed at a meeting of the Board with the consent of all the directors those who are present at the meeting.

A proviso to clause 186 (5) makes it necessary that, if there is existing loan from any public financial institution, the permission of that public financial institution would be required for any subsequent loan from any other source. However, the permission of the public financial institution would not be required if the aggregate loan, investments or guarantee and security proposed is within the limits mentioned under section 186 (2) and there is no default in the repayment of loan or interest to the public financial institution.  

6. Section 186(6) of the Act provides that the Companies which are registered under Section 12 of SEBI Act, 1992 and covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall not take inter-corporate loans or deposits exceeding the prescribed limit and shall furnish details of loans or deposit in their financial statements.

7. According to section 186 (7) the rate of interest at which the company provides loan must not be  lower than the rate of interest prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

8. According to section 186 (8) a company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

9. According to section 186 (9 & 10) a company giving loan or giving a guarantee or providing security or making acquisition is required to maintain a register which shall contain all the particulars and shall be maintained in the manner as prescribed in Rule 12 of the Companies (Meetings of Board and its members) Rules, 2014

III. NON-APPLICABILTY OF SECTION 186

Some companies by their very nature of business provide loans and make investments. Hence, Section 186 (except sub-section 1) will not be applicable to any loans or guarantee given by:

• A banking company, the insurance company or a housing finance company in its ordinary course of business.
• A non-banking financial company registered under Chapter III B of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.
• A company framed with the purpose of financing industrial enterprises or providing infrastructure facilities.
• A company whose primary business involves the acquisition of securities.

IV. CONTRAVENTION OF SECTION 186

In case of a company: Fine: Minimum- 25000

Maximum- 500000

In case of an officer in default: Imprisonment- 2 years

Fine: Minimum- 25000

Maximum- 100000

V. KEY DIFFERENCES BETWEEN SEC. 372 A (CA 1956) AND SEC. 186 (CA 2013)

SEC 372 A (CA 1956)	SEC 186 (CA 2013)
Applicable to public companies only.	Applicable to private companies as well.
No restrictions on investments made through multiple layers of investments companies.	Restricts a company from making investments through more than two layers of investment companies.
Strict specifications were not mentioned.	Makes compulsory, the disclosure of it loans, guarantee and security provided and its purpose to its members in financial investments.

VI. PURPOSE OF TWO LAYER OF INVESTMENT

The intention behind the government keeping this restriction is so that they are able to track where the funds have been raised and where have they actually been used i.e. this is to prevent siphoning off funds through layers of subsidiaries (shell companies even). However, it is important to note that there is no limit on the horizontal layers of investment but only on the vertical layers. For instance: A Company cannot make more than two layers of investment i.e. it cannot invest in B.1.1 Company after the Companies Act, 2013

VII. IMPORTANCE OF SECTION 186

Section 186 of the Companies Act is one of the most sections as far as the board meetings are concerned. It is a general section which refers to all the loans and investments. The aforesaid section holds a lot of practical importance as well. The reason being whenever a company gives a loan, makes an investment in other company or invests through its subsidiary or issues a guarantee or a security to others, it would attract section 186 of the Companies Act, 2013. It is important to note that section 186 does not impose any limitations upon the company to make investments of give loans but only talks about compliance. And the compliance so mentioned in section 186 are a strict compliance which the company has to adhere to. Whenever the company fails to adhere to such compliance, penalties can be imposed upon the company.  

In Alliance Commodities Private Limited vs. Office of Registrar of Companies-West Bengal (09.07.2019 – NCLAT)[1] the appellant company had challenged the order of the NCLT for striking down its name from the Registrar of Company (ROC).

The appellant company had not filed its Annual Returns and Financial Statements for more than two consecutive years and there were reasonable grounds to believe that the Appellant Company was not carrying on any business or was not in operation for a period of two immediately preceding financial years. Also, the Appellant Company was not doing the business of trading in all types of commodities as per its object but was engaged in granting of short term loans and advances for which it was not incorporated. Even these advances were made to the sister concern of the Appellant Company.

The fact that no shareholder’s meeting was convened and the Director’s Report revealed that no loans were advanced to others though the balance sheets did show that the Company was engaged in advancing loans to corporate persons which could be viewed as an illegal transaction by a Shell Company.

Held: That the Appellant Company had been engaged in granting short term loans and advances to its sister concern which was not the intended object of the Company. That making of such loan advances being prima facie violative of Section 186 of the Act can be termed as illegal transactions by a Shell Company and that probability of advancing loans for the purpose of siphoning of the funds and for evasion of tax cannot be ruled out. And thus the appeal was dismissed.

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[1] MANU/NL/0284/2019

            

REFERENCES

• Inter Corporate Loans And Investments, by  Sakshi Raje on December 30, 2018, available at: http://lawtimesjournal.in/inter-corporate-loans-investments/
• All about Inter-Corporate Loans and Investments made by Company, by Neeraj Bhagat & Co. on 06 Sep 2019, available at: https://taxguru.in/company-law/inter-corporate-loans-investments-company.html
• Inter-Corporate Loan and Investment, by Sreeram Viswanath, available at: https://www.indiafilings.com/learn/inter-corporate-loan-and-investment/

BY: HITESH VACHHANI [FOUNDER MEMBER, JURISTIC LEGAL]

DECLARATION

I, Hitesh Vachhani, do hereby declare that the views so expressed are personal and not influenced by the views of others. This article is only for study purpose.