CORPORATE LOANS AND INVESTMENTS

The Companies (Amendment) Act, 1999 inserted a new section - 372A which replaced the erstwhile Ss. 370 and 372. Now a single section is meant to regulate inter-corporate loans, guarantees and investments which were earlier being regulated through two sections (i.e., s.370 for loans and guarantees and s.372 for investments). The provisions of s.372 A are summarised below:

  (1) A company is prohibited, directly or indirectly, to (a) make any loan to any other body corporate; (b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and (c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate, exceeding 60% of its paid-up share capital and free reserves whichever is more. However, this limit can be exceeded by previously authorised special resolution passed in a general meeting.

Further, the Board may give guarantee without being previously authorised by a special resolution, if following three conditions are satisfied: (a) a resolution is passed in the meeting of the Board authorising to give guarantee in accordance with the provisions of this section; (b) there exists exceptional circumstances which prevent the company from obtaining previous authorization by a special resolution passed in general meeting for giving a guarantee; and (c) the resolution of Board is confirmed within 12 months, in a general meeting of the company or the AGM Held immediately after passing of the Board resolution, whichever is earlier.

Furthermore, it is mandatory that the notice for the special resolution indicate the specific limits, the particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee to be given the purpose of the investment, loan or security or guarantee, specific sources of funding and such other details.

  (2) Provides that no loan or investment can be made 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 institutions referred to in s.4A, where any term loan is subsisting, is obtained.

Exception. The above provisions shall not apply to the following: (a) any loan made by a holding company to its wholly owned subsidiary; or (c) acquisition by a holding company, by was of subscription, purchases or otherwise, the securities of its wholly owned subsidiary.

  (3) No loan to any body corporate shall be made at a rate of interest lower than the prevailing bank rate, being the standard rate made public under s.49 of the Reserve Bank of India Act,1934.

  (4) No company, which has defaulted in complying with the provisions of s.58A shall, till such default is subsisting, shall, directly or indirectly (a) make any loan to any body corporate; (b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and (c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate.

  (5) (a) Every company shall keep a register showing the following particulars in respect of every investment or loan made, guarantee given or security provided by it in relation to any body corporate (i) the name of the body corporate; (ii) the amount, terms and purpose of the investment or loan or security or guarantee; (iii) the date on which the investment or loan has been made; and (iv) the date on which the guarantee has been given or security has been provided in connection with a loan. (b) The particulars of such investment, loan, guarantee or security shall be entered chronologically in the register within 7 days of the making of such investment or loan, or the giving of such guarantee or the provision of such security.

  (6) The Register shall be kept at the registered office of the company concerned and (a) shall be open to inspection at such office; and (b) extracts may be taken therefrom and copies thereof may be required by any member of the company to the same extent, in the same manner and on payment of the same fees as in the case of the register of members of the company; and the provisions of s.163 shall apply accordingly.

  (7) The Central Government is authorised to prescribe guidelines for the purposes of this section.

(8) In application of the provisions of this section. Nothing contained in this section shall apply (a) to any loan made, any guarantee given or any security provided or any investment made by (i) a banking company, or on insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of financing industrial enterprises, or of providing infrastructural facilities. (ii) a company whose principal business is the acquisition of shares, stock, debentures or other securities; (iii) a private company, unless it is a subsidiary of a public company; (b) to investments made in shares allotted in pursuance of s.81 (1)(a).

  (9) Penalty for not complying with the provisions of this section excluding sub-s.5. The company and every officer of the company who is in default shall be punishable with imprisonment which may extend to 2 years or with fine which may extend to Rs 50,000. Further, all persons who are knowingly parties to any such contravention shall be liable, jointly and severally, to the company for the repayment of the loan or fo making good the same which the company may have been called upon to pay by virtue of the guarantee given or the securities provided by such company.

  (10) Penalty for not complying with the provisions of sub-s.5. The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs 5,000 and also with a further fine which may extend to Rs 500 for every day after the first during which the default continues.

The words ‘loan’ and ‘free reserves’ are explained as follows: ‘Loan’ includes debentures or any deposit of money made by one company with another company, not being a banking company. ‘Free reserves’ means those reserves which, as per latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.