Loans & Investments under Companies Act, 2013

CA Praveen Mittal

Provisions related to Loans and Investments under Companies Act, 2013

General Powers of board

With respect to borrowing of Monies – the board of directors of the company are empowered to borrow monies by means of resolution passed at a meeting of the Board. Such power of the Board may also be delegated to any committee of directors, the managing director, the manager, or any other principal officer [Section 179]

With respect to Loan and Investment – for making investment, giving loan or guarantee or security board resolution with the consent of all the directors present at the meeting is required [Section 186]

Restrictions on Powers of board

(a)    As per section 180 of the Companies Act, 2013, SPECIAL RESOLUTION of the company is required in case if the money to be borrowed together with the money already borrowed exceeds the paid share capital and free reserves of the company. However, the amount of temporary loans obtained from the company’s bankers in the ordinary course of business will not be included in the moneys borrowed

Temporary loan for this purpose means loans repayable on demand or within six months from the date of the loan, such as cash credit arrangements, discounting of bill, etc. but does not include loan raised for the purpose of financial expenditure of a capital nature

(b)   As per section 185 of the Companies Act, 2013, no company is authorized directly or indirectly to advance any loan to or give any guarantee or provide any security in connection with any loan taken by the following persons: –

1. Any of its director or any partner or relative of such director;
2. Any director of its holding company or any partner or relative of such director;
3. Any firm in which any such director or relative is partner;
4. Any private company of which any such director is a director or member;
5. Any body-corporate at a general meeting of which not less than 25% of total voting power may be exercised or controlled by any such director, or by two or more such directors, together;
6. 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;

(c)    However, section 185 shall not apply in the following cases: –

1. If a loan is given to MANAGING or WHOLE TIME director as a part of the conditions of service extended by the company to all its employees or pursuant to a scheme approved by the members by a SPECIAL RESOLUTION;
2. If the company is in the business of providing loans and in respect of such loan interest is charged at the bank rate declared by RBI;
3. In case of loan, guarantee or security given by holding company to subsidiary company or with respect to loan to subsidiary company, provided that such loan is utilized by subsidiary company for its principal business activities;
   

Note: – as per Circular No. 13 / 94 / CL – VI / 67, dated 24^th February, 1971 in case if loan is given by holding company to subsidiary company and subsequently it ceases to be holding – subsidiary companies then also the exemption would continue to apply

(d)   As per section 186 of the Companies Act, 2013, prior approval by means of SPECIAL RESOLUTION and also prior approval from public financial institution where any term loan is subsisting, is required by the company in case if its gives directly or indirectly any loan or guarantee or provides any security or invests in securities, exceeding 60% of aggregate of its paid up share capital, free reserves and securities premium account, or 100% of aggregate of its free reserves and securities premium account, whichever is more;

(e)    No Company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. The term layer in relation to a holding company means its subsidiary or subsidiaries;

General restriction towards company

1. Rate of interest to be charged by the company for giving loan should be equal to or more than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenor of the loan;

2. No company shall give loan, guarantee, security or invest in case if it is in default in repayment of deposits or payment of interest thereon;

Disclosure requirements

1. The Company is required to disclose in its Annual Accounts the full particulars of such loan, guarantee or security and its purpose of utilization;

Penalties

1. In contravention of section 185 – the company shall be punishable with fine ranging between Rs.5,00,000/- to Rs.25,00,000/-. Also the concerned director shall be punishable with imprisonment for six months or fine ranging between Rs.5,00,000/- to Rs.25,00,000/- or with both;

2. In contravention of section 186 – the company shall be punishable with fine ranging between Rs.25,000/- to Rs.5,00,000/-. Also every officer in default shall also be punishable with imprisonment for two years and fine ranging between Rs.25,000/- to Rs.1,00,000/-;

Secretarial Issues

1. Every company is required to keep a register in form MBP – 2 for the purpose of giving loan, guarantee, security or making investment;

2. Register of Investments not held in its own name by the Company shall be in Form No. MBP – 3;