Amended Legal Position of Intercorporate Loans

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Amended Legal Position of Intercorporate Loans 

Inter-corporate loans and investments are important sources of funds for every company. Additionally, it provides guidance on loans, securities, and guarantees given to subsidiaries. Companies can also make investments in other entities as per Section 186 of the 2013 Act.

(A) Restriction on loans to directors by a company (Section 185 of the 2013 Act):

A company cannot advance any loan, including loan represented by a book debt, directly or indirectly to any of its directors. However, in certain situations, companies are allowed to advance loans or provide guarantee/security. In other words, as per the amended provisions, such advancement of any loan or guarantee or security is partly prohibitive and partly restrictive. 

(a) Prohibitive to:
– Directors of the company, or
– Any partner of such director; or
– Directors of a company which is its holding co.
(b) Restrictive to:
– Any private co. of which any such director is a director or member;
– Any body corporate, the BoD, MD or manager, whereof is accustomed to act in accordance with the directions

(B) Special Exemption To Private Companies:

The amended section 185 seeks to completely replace the existing provisions of section 185 of Companies Act, 2013.

As per the notification, the provisions of Section 185 shall not apply to a private company –

  1. in whose share capital, no other body corporate has invested any money.
  2. No default in repayment of such borrowings subsists at the time of making transactions under Section 185 of the 2013 Act.

(C) Extension of the penal provisions:

The amended section 185 has extended the penal provisions to an officer of the company, which has been defined in section 2 (59) to include any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act. 

(D)  Requirements prescribed under the Listing Regulations:

 Regulations do not contain specific provisions on inter-corporate loans/investments or loans to directors.

Review of loans by the audit committee :
The role of the audit committee, inter alia, includes scrutiny of inter-corporate loans and investments.
Disclosure in the annual report:
Annual report of every debt and equity listed entity.

(E) Other Points to Remember :

  1. The exemption of the non-applicability of the provision of section 186 (except the provision relating to restriction on layers of subsidiaries) has been extended to a rights issue made by a body corporate especially to include foreign companies.
  2.  In the case of Government Company
  3. Section 186 shall not apply to:-
    4. (a) a Government company engaged in defense production;
    (b) a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee 

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