Ministry of corporate Affairs has issued a General Circular on 14th February 2014. My readers can download this Circular from MCA site link here.
We have already discussed Section 185 in one of the earlier post here.
The Section under discussion basically says, 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.
The reason of recent representation to the Government was the different of approaches under earlier provision of Section 372A of the Companies Act, 1956 and newly enforced Section 185 of the Companies Act, 2013. The earlier provision specifically exempts any loans made, any guarantee given or security provided or any investment made by a holding company to its wholly owned subsidiary. The new provision of Section prohibits guarantee given or any security provided by a holding company in respect of any loan taken by its subsidiary company except in the ordinary course of business.
This is a transitional issue because Section 185 is one of the 99 (1+98) sections of the Companies Act, 2013 which are presently in force.
Present clarification issued by MCA suggests that any guarantee given or security provided by a holding company in respect of loans made by a bank or financial institution to its (wholly owned) subsidiary company shall be exempted until the Section 186 of the Companies Act, 2013 notified as in force.
This clarification shall be applicable to cases where loans are obtained and exclusively utilized by the subsidiary for its principal activities.
This is similar to earlier exemption under Section 372A(8)(d) of the Companies Act, 2013.
Even after this clarification, we have to face heat of transaction period till the Companies Act 2013 completely notified. Same, this clarification may raise apprehension that the Government may take more time to notify the Companies Act, 2013 in total.
Please note: This blog post is not a professional advice.