An Overview of Inter-Corporate Loans and Investments

A company, with the consent of the board or the stakeholders, can provide loans, investment, securities, and guarantee to another company or corporate body. Yes, the Board of Directors under Section 179 of the Companies Act, 2013 holds the power to invest the funds of the company. However, the companies must follow a restriction and maintain the highest amount of inter-corporate loans and investment.

Besides, a corporate guarantee is similar to corporate loans, because the person or the companies to whom you are giving have the power to decide the enforcement of the guarantee or security in certain conditions. In case of such a situation, the company has to pay the amount. Hence, apart from the loans, you need to follow the restrictions on the guarantees, which the companies can give.

Limit on Inter-corporate Loans and Investments

Under Section 186(2), the companies must not provide loans, guarantee and even purchase securities of any other corporate body that exceeds either 60% of its free reserves, paid-shared capital, and security premium account or 100% of its free reserves and security premium account, whichever is greater.

If you find the aggregate of inter-corporate loan, investment, guarantee, and securities associated with the loan already made or proposed to be made exceeds the limit specified in Section 186, the Board of Directors with the consent of all the board members can process the inter-corporate loan and investment. According to Section 186(5), if the aggregate exceeds beyond the limit mentioned, you need to pass a prior resolution and obtain prior approval of the financial institution, especially if you find the loan term subsides.

What Are The Restrictions On Loans And Guarantee?

If a company has records of payment issues, the company cannot make inter-corporate loans, securities, and guarantees. The prohibition remains in effect until the company completely addresses the default payment issues. Moreover, the company cannot make any kind of investment exceeding more than two layers of investment companies, although there are some exceptions.

What Is The Ideal Rate of Interest for the Loans?

Section 186(7) states that the company must provide loans at a rate of interest that is lower than the yield of one, three, five, or ten years’ Government Security closest to the period for which the company sanctioned the loan. However, the same criteria do not apply if the company sanctioned the loan for industrial research and development projects, where the Government holds more than 26% of the paid-up capital.

Disclosure in Financial Interests

Section 186(4) states that the company must disclose to the board members all the financial statements stating the particulars of the loans, guarantee, and security provided along with all investments that the corporate body made. The company must also state the reason for sanctioning the loans and the proposed usages of the loans, guarantee, security, and investments made by the recipients.

Default With Repayment of Deposits

According to Section 186(8), if the company has made a default while repaying the deposits after the commencement of the Companies Act, 2013 or fails to pay the interest for the loan thereafter, shall not be eligible to provide any loan or guarantee or security or make any acquisition until the settlement of the defaults.

Maintaining the Registers

According to Section 186(9) and (10), the company must maintain a register mentioning the loans, guarantees,s, and securities that it provided. The register must remain in the office of the company and

  • Shall be kept open for inspection at such office
  • Any board members can take extracts from the register and shall produce copies of the same after payment of the fees as prescribed.

The Takeaway

However, there are certain exemptions to the Act. In case the company breaches the provisions of the section, it is liable for punishment under Section 186(13). The penalty includes a fee ranging between INR 25,000 up to five lakhs. Besides, every officer of the company shall face imprisonment for a term of up to two years with a fine of INR 25,000, which might extend to one lakhs.

Write to us for any compliance help

Share this post?