According to Section 185 of the Companies Act 2013, save as otherwise provided in this Act, 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. We have discussed this Section earlier here.
Rule 10 of the Companies (Meetings of Board and its Powers) Rules 2014 exempt wholly owned subsidiary from the requirements of Section 185 when such loan is utilised for principal business activity of the subsidiary company.
Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is exempted from the requirements under this section. [Rule 10(1)]
Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section. [Rule 10(2)]
Only condition is such loans made under sub-rule (1) and (2) are utilised by the subsidiary company for its principle business activities. [Proviso to Rule 10]
The provision of this section 185 shall also not apply to –
- the giving of any loan to a managing director or a whole – time director –
- as a part of service conditions extended by the company to all its employees; or
- pursuant to any scheme approved by the members by a special resolution;
- 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. [Proviso to sub – section (1) of Section 185]
Section 186 deals with loan and investment by a company. This section deals with capacity of a company to make investment and give a loan. Section 186 deals with general power to give loan or make investment while Section 185 deals with specific condition of loan to directors and related concerns only.
As a general rule, 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. [Section 186(2)]
We have discussed relevant procedure under this Section 186 earlier here. Rule 11 of the Companies (Meetings of Board and its Powers) Rules 2014 further explain this section.
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 acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply. [Rule 11(1)] Section 186(3) requires special resolutions passed in general meeting in case the giving of any loan or guarantee or providing any security or the acquisition exceeds the limits specified under sub-section (2) of Section 186.
The company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement. [Proviso to Rule 11(1) read with Section 186(4)]
For the purposes of clause (a) of sub-section (11) of section 186, the expression “business of financing of companies” shall include, with regard to a Non-Banking Financial Company registered with the Reserve Bank of India, “business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business”. [Rule 11(2)] This excludes proposed payment banks as they cannot provide loan.
No company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and also 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 take any inter-corporate loan or deposits, in excess of the limits specified under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India. [Rule 11(3)]
Special Resolution for loan and Investment:
Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under section 186, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting. [Rule 13(1)] This explain provision of Section 186(3). It is clarified that it would sufficient compliance if such special resolution is passed within one year from the date of notification of this section. [Explanation to Rule 13(1)]
A resolution passed at a general meeting in terms of section 186(3) to give any loan or guarantee or investment or providing any security or the acquisition under section 186(2) shall specify the total amount up to which the Board of Directors are authorised to give such loan or guarantee, to provide such security or make such acquisition. [Rule 13(2)]
The company shall disclose to the members in the financial statement the full particulars in accordance with the provision of section 186(4). [Proviso to Rule 13(2)]
Register of Loan and Investment:
Every company giving loan or giving guarantee or providing security or making an acquisition of securities shall, from the date of its incorporation, maintain a register in Form MBP – 2 and enter therein separately, the particulars of loans and guarantees given, securities provided and acquisitions. [Rule 12(1) read with Section 186(9)]
The entries in the register shall be made chronologically in respect of each such transaction within seven days of making such loan or giving guarantee or providing security or making acquisition. [Rule 12(2)]
The register shall be kept at the registered office of the company and the register shall be preserved permanently and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose. [Rule 12(3)]
The entries in the register (either manual or electronic) shall be authenticated by the company secretary of the company or by any other person authorised by the Board for the purpose. [Rule 12(4)]
The register can be maintained either manually or in electronic mode. [Rule 12(5)]
The extracts from the register may be furnished to any member of the company on payment of such fee as may be prescribed in the Articles of the company which shall not exceed ten rupees for each page. [Rule 12(6)]
MBP – 2:
Register of loans, guarantee, security and acquisition made by the company
- Nature of transaction (whether loan/ guarantee/ security/acquisition)
- Date of making loan/acquisition / giving guarantee/ providing security
- Name and address of the person or body corporate to whom it is made or given or whose securities have been acquired (Listed/Unlisted entities)
- Amount of loan/ security/acquisition/guarantee
- Time period for which it is made/ given
- Purpose of loan/acquisition/guarantee/ security
- % of loan/acquisition/ exposure on guarantee/ security provided to the paid up capital, free reserves and securities premium account and % of free reserves and securities premium
- Date of passing Board Resolution
- Date of passing special resolution, if required
- For Loan
- Rate of interest
- date of maturity
- For Acquisitions:
- Number and kind of securities
- Nominal value and paid up value
- Cost of acquisition (in case of securities how the purchased price was arrived at)
- Date of selling of investment
- Selling price (how the price was arrived at)
- Signatures and Remarks
Please note: This blog post is not a professional advice. I welcome your comments and feedback. Readers may share this post on social media by using buttons given here.
Need Member’s comment on this:
My holding company has given a loan to its wholly owned subsidiary in the last financial year in different tranches as per Companies Act, 1956. But as per CA, 2013 loan to subsidiary is allowed only if it is given for its principal business activity. Unfortunately our loan was not for principal business activity and WOS has no fund to repay back the loan amount.
Now in September what is the option available? Shall we convert this amount to share application pending allotment? If yes then do this capital needs to be allotted?
If you have a enabling clause in loan agreement for such conversion of loan amount to share application money, you may convert as per agreement.
Be careful of Section 42(6) of CA13 while exercising such option. Section 125(2)(h) also need consideration.
Please share your views.
Section 42(6) is very clear for share application money taken w.e.f. 1st April, 2014 but is it somewhere clarified from the department that share application money pending at 31.03.2014 should be allotted and within what time period it should be allotted and does this type of transaction comes under private placement.
What is your best professional assessment?
This is more important than view of department.
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