The Companies Act, 1956 contains provisions and restrictions on intercorporate loans and investments under section 372A. Broadly, the provisions are summarised as under :
1. A company cannot, directly/indirectly,
a. Make loan to any other body corporate
b. Give guarantee/provide security in connection with any loan by any other person
c. Acquire securities in any manner of any other body corporate exceeding 60% of its paid-up capital and free reserves or 100% of its free reserves whichever is more.
2. If the above referred limits are to be exceeded, for aggregate of loans and investments, a prior authorisation of special resolution passed in General Meeting is required.
3. In relation to guarantee, Board may approve, without prior special resolution requirement, in the following circumstances :
a. Board resolution is passed authorising guarantee.
b. Exceptional circumstances exist preventing company from obtaining special resolution.
c. Board resolution in (a) above is confirmed within 12 months in General Meeting or in the immediately succeeding AGM, whichever is earlier.
4. The notice for General Meeting and special resolution shall indicate the full particulars of investments/loans/guarantee to be given.
5. It is provided that loans/investments/guarantee shall be sanctioned in a Board Meeting with consent of all Directors present. Prior approval of Public Financial Institution is necessary, if any term loan is subsisting. Prior approval of Public Financial Institution is not required, if loans/investments/guarantee does not exceed the limit of 60% of its paid-up capital and free reserves and there is no default in repayment of loan instalment/interest payment is made as per terms and conditions in relation to loans from Public Financial Institution.
6. Loan could not be made at rate of interest below the bank rate.
7. A company having defaulted in complying with the provisions of acceptance of deposit rules u/s. 58A cannot make any loan/investment/guarantee while default is subsisting.
8. Particulars of every loan/investment/guarantee shall be entered in a Register within 7 days of such event in a chronological manner. The Register shall be kept at the registered office of the company and open for inspection. Extracts from such Register can be made by any member of the company on payment of requisite fees.
9. Central Government may prescribe further guidelines on intercorporate loans/investments.
10. The provisions of S. 372A shall not be applicable to the following companies :
i) Banking/insurance/housing finance/infrastructure company in its ordinary course of business.
ii) Company with principal business of acquisition of shares/securities.
iii) Private company unless it is a subsidiary of a Public Company.
iv) Investment made pursuant to 81(1)(a).
v) Loan/guarantee/investment by holding company to 100% subsidiary.
11. Default in complying with provisions of Section 372A would involve imprisonment up to two years or fine up to Rs. 50,000. If loan is repaid, there would be no imprisonment and, if repaid in part, the imprisonment would be appropriately reduced. All persons knowingly concerned with any contravention under this section, would have to make good the loss to the company.
12. Non-maintenance of Register would involve a fine of Rs. 5,000 along with further fine of Rs. 500 per day till the default continues.
13. “Loan” is defined to include debentures or deposit of any money made by one company to another, but not by a banking company. “Free Reserves” are defined to mean reserves free for distribution as dividend and includes securities premium account but not share application money as per latest audited balance sheet of the company.