LOAN AND INVESTMENT

LOAN TO DIRECTORS, ETC. (SECTION 185):

No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

This provision shall not apply to –

1. the giving of any loan to a managing director or a whole  – time director –
   1. as  a part of service conditions extended by the company to all its employees; or
   2. pursuant to any scheme approved by the members by a special resolution;
2. a company which in the ordinary course of its business provide loans or give guarantees or securities for the repayment of any loan and in respect of such loan an interest is charged at a rate not less the bank rate declared by the Reserve Bank of India.

The expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) any body corporate at a general meeting of which not less than twenty – five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body – corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Kuber temple: Hindu god of Treasury/funds, elder brother of Ravan (Photo credit: varunshiv)

If any loan is advanced or a guarantee or security is given or provided in contravention, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

LOAN AND INVESTMENT BY COMPANY (SECTION 186):

A a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies.

The provisions of this sub-section shall not affect,—

(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary for the purpose of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.

No company shall directly or indirectly —

(a) give any loan to any person or other body corporate;

(b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate,

exceeding sixty per cent of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

Where the giving of any loan or guarantee or providing any security or the acquisition exceeds the limits specified, prior approval by means of a special resolution passed at a general meeting shall be necessary.

The company shall disclose to the members in the financial statement the full particulars of 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 utilised by the recipient of the loan or guarantee or security.

No investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.

Prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit as specified in sub-section (2), and there is no default in repayment of loan instalments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.

No company, which is registered under section 12 of the Securities and Exchange Board of India Act, 1992 and covered under such class or classes of companies as may be prescribed, shall take inter-corporate loan or deposits exceeding the prescribed limit and such company shall furnish in its financial statement the details of the loan or deposits.

No loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan.

No 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 give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.

Every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register which shall contain particulars as may be prescribed.

The register shall be kept at the registered office of the company and —

(a) shall be open to inspection at such office; and

(b) extracts may be taken there from by any member, and copies thereof may be furnished to any member of the company on payment of such fees as may be prescribed.

This Section, except sub – section (1), shall not apply –

(a)  to a loan made, guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

(b) to any acquisition –

1. made by a non – banking finance company whose principal business is acquisition of securities in respect of investing and lending activities;
2. made by a company whose principal business is the acquisition of securities;
3. of shares allotted in further issue of capital;

If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years and with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.

INVESTMENTS OF COMPANIES TO BE HELD IN ITS OWN NAME (SECTION 187):

All investments made or held by a company in any property, security or other asset shall be made and held by it in its own name. The company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company, if it is necessary to do so, to ensure that the number of members of the subsidiary company is not reduced below the statutory limit.

This Section does not prevent a company:

(a)  from depositing with a bank, being a banker of the company, any shares or securities for the collection any dividend or interest payable thereon; or

(b) from depositing with, or transferring to, or holding in the name of a scheduled bank, being a bankers of the company, shares or securities, in order to facilitate the transfer thereof;

(c)  from depositing with or transferring to any shares or securities by way of security for the repayment of any loan advanced to the company or the performance of any obligation undertaken by it;

(d)  from holding investments in the name of depository when such investments are in the form of securities held by the company as a beneficial owner.

Register of Investment:

Where in pursuance of clause (d) of sub-section (2), any shares or securities in which investments have been made by a company are not held by it in its own name, the company shall maintain a register which shall contain particulars and such register shall be open to inspection by any member or debenture-holder of the company without any charge during business hours subject to such reasonable restrictions.

If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.

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