Inter Corporate Loans

39
INTER CORPORATE LOANS, INVESTMENTS, GAURANTEES AND SECURITIES INTERCORPORATE LOANS AND INVESTMENTS? (SEC.372A) Provisions regarding intercorporate loans and investments were earlier contained in Sec’s.370 and 372. These provisions have been considerably modified by insertion of Sec.372A, w.e.f. 31.10.98. Sec’s.370 and 372 have been made non-operational by insertion of Sec.372A. Scope of Sec. 372A: Sec.372A regulates the following transactions: 1. Making any loan to any body corporate. 2. Acquiring the securities of any other body corporate. 3. Giving any guarantee or providing any security to: a. A person who gives a loan to any body corporate; or b. A body corporate which gives a loan to any other person. B. Requirements for making loan, investment, guarantee or security: 1. Approval of the Board: Following points may be noted in this regard: a. Approval in all cases: Approval of the Board is required in all cases irrespective of the quantum of loan, investment, guarantee, or security. b. Prior approval: Approval of Board is to be obtained prior to making of loan, investment, guarantee, or security.

Transcript of Inter Corporate Loans

INTER CORPORATE LOANS, INVESTMENTS, GAURANTEES AND SECURITIES

INTERCORPORATE LOANS AND INVESTMENTS? (SEC.372A) Provisions regarding intercorporate loans and investments were earlier contained in Secs.370 and 372. These provisions have been considerably modified by insertion of Sec.372A, w.e.f. 31.10.98. Secs.370 and 372 have been made non-operational by insertion of Sec.372A. Scope of Sec. 372A: Sec.372A regulates the following transactions: 1. Making any loan to any body corporate. 2. Acquiring the securities of any other body corporate. 3. Giving any guarantee or providing any security to: a. A person who gives a loan to any body corporate; or b. A body corporate which gives a loan to any other person. B. Requirements for making loan, investment, guarantee or security: 1. Approval of the Board: Following points may be noted in this regard: a. Approval in all cases: Approval of the Board is required in all cases irrespective of the quantum of loan, investment, guarantee, or security. b. Prior approval: Approval of Board is to be obtained prior to making of loan, investment, guarantee, or security. c. Resolution passed at a Board meeting: The approval of Board shall be obtained by passing a resolution at a Board meeting only. Circular resolution under Sec. 289 or a resolution of committee of directors is not sufficient. d. Power to make intercorporate loans and investments cannot be delegated: It must be ensured that delegation of power under Sec. 292(1)(d) or 292(1)(e) does not result in a contravention of Sec.372A. Power to make intercorporate loans and investments cannot be delegated by a public company. e. Unanimous approval: All the directors present at the Board meeting must vote in

favour of the resolution. f. No specific notice: Under Sec.372A, there is no requirement of giving specific notice to the directors. 2. Approval by special resolution: a. Ceiling limit'. The ceiling limit on making loan, investment, guarantee, or security is higher of the following: i. 60% of the aggregate of paid-up share capital and free reserves of the company. ii. 100% of free reserves of the company. Paid up capital shall include paid up equity share capital as well as paid up preference share capital. b. Where ceiling limit is not exceeded: Where the ceiling limit specified above is not exceeded, no special resolution is required. c. Where the ceiling limit is exceeded: Where the aggregate of loan, investment, guarantee, or security already made together with loan, investment, guarantee, or security proposed to be made exceeds the ceiling limit, previous authorisation by a special resolution is required. d. Time of passing special resolution: If limit under Sec.372A is exceeded, special resolution is required prior to making any intercorporate loan, investment, guarantee or security. e. Manner of passing special resolution: i. The special resolution shall be passed in the general meeting (whether annual general meeting or extraordinary general meeting). ii. However, the special resolution shall be passed by postal ballot, if the following 2 conditions are satisfied: The company is a listed company. The proposed business relates to making of any intercorporate loan, guarantee, or security. It is evident that special resolution shall be passed in general meeting (and not by

postal ballot) if the proposed business relates to making of any intercorporate investment (irrespective of the fact that company is a listed company or not). f. Disclosure requirements in notice of special resolution: The notice of special resolution must state clearly the following particulars: i. The specific limits ii. The particulars of other body corporate in which investment is proposed to be made or loan, guarantee, or security is proposed to be given. iii. Purpose of making loan, investment, guarantee, or security. iv. Specific sources of funding. v. Other relevant details. g. No blanket permission to be given by the shareholders: The notice must also specify the specific securities in which the investments are proposed to be made. A blanket or en-block approval by the shareholders empowering the Board to make loans, investments, guarantee, or security upto a certain limit will not be adequate compliance of the provisions (except in the case of guarantee where the resolution may indicate an amount on annual basis) [Department Circular No. 8/99, dated 4.6.1999]. 3. Approval of Public Financial Institution: The Company shall obtain the prior approval of the Public Financial Institution from which it has taken a term loan. The prior approval is required even if the loan agreement does not specify any such condition. The expression 'Public Financial Institution' has been defined under Sec.4A and includes ICICI, IFCI, IDBI, LIC and UTI. 4. No default in respect of public deposits is subsisting. A company which has defaulted in compliance with Sec. 58A (relating to pubic deposits) cannot make any loan, investment, guarantee, or security, until such default is subsisting. As such, where a company fails to repay public deposits or interest thereon, on the due date, it may make loan, investment, guarantee, security only after the default has been made good.

5. Minimum rate of interest: The rate of interest chargeable on any intercorporate loan shall not be less than the prevailing bank rate. Bank rate' means the rate at which RBI lends money to commercial banks.

Relaxations in conditions:1. No special resolution for guarantee: The Board may give guarantee in excess of the ceiling Inter corporate Loans and Investments limit without passing a special resolution if the following three conditions are satisfied: a. A unanimous resolution is passed in a Board meeting for giving guarantee. b. There exist exceptional circumstances which prevent the company from passing a special resolution. c. The resolution of the Board is confirmed within 12 months: i. in the general meeting of the company; or ii. in the annual general meeting. Held immediately after passing of the Board's resolution; whichever is earlier. 2. No approval of Public Financial Institution: No prior approval of Public Financial Institution is required, if the following two conditions are satisfied: a. The aggregate of loans, investments, guarantee, or security already made together with loan, investment, guarantee, or security proposed to be made does not exceed 60% of the aggregate of paid up share capital and free reserves. b. There is no default in repayment of loan installments or interest to Public Financial Institution. TRANSACTIONS TO WHICH SEC.372A DOES NOT APPLY Transactions excluded: Sec.372A is not applicable to: 1. Loan / Guarantee / Security / Investment made / given by: a. A Banking Company, or b. An Insurance Company, or In the ordinary course of its business.

c. A Housing Finance Company, or d. A Company established with the object of financing industrial enterprises or providing

infrastructural facilities, e. A Company whose principal business is the acquisition of shares, stock, debentures or other securities, f. A Private Company, unless it is a Subsidiary of a Public Company. 2. Investment made in shares allotted u/s 81(1)(a), i.e. Rights Shares, 3. Loan made by a Holding Company to its wholly owned Subsidiary, 4. Guarantee given or security provided by a Holding Company, in respect of loan made to its wholly owned Subsidiary, or 5. Acquisition by a Holding Company by way of subscription, purchases or otherwise, the securities of its wholly owned Subsidiary. MAINTENANCE OF REGISTER IN RESPECT OF INTER-CORPORATE LOANS AND INVESTMENTS U/S 372A? (SEC.372A(5)&(6)) Intercorporate Loans and Investments 1. Contents: 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 Body Corporate: a. Name of the Body Corporate. b. Amount, terms and purpose of the investment / loan / security / guarantee. c. Date on which the investment / loan has been made, and d. Date on which the guarantee has been given or security has been provided in connection with a loan. 2. Date-wise: The particulars of investment, loan, guarantee or security should be entered chronologically in the Register. 3. Time Limit: The particulars should be entered within 7 days of the making of the investment or loan, or the giving of the guarantee or the provision of security. 4. Place: The Register should be kept at the Register Office of the Company. 5. Rights of Members: The Members of the Company have the right to: a. Inspect the Register maintained at the Registered Office.

b. Take extracts and copies from the Register. 6. Consequences of default: The Company and every Officer in default shall be punishable with fine upto Rs.5,000 and with a further fine upto Rs.500 for every day after the first day during which the default continues. CONSEQUENCES OF NON-COMPLIANCE WITH SEC.372A REQUIREMENTS (SEC.372A(9)&(10)) 1. The Company and every Officer in default shall be punishable with imprisonment upto 2 years, or with fine upto Rs.50,000. Where repayments of loans have been made in full, imprisonment shall not be imposed, and where part payments are made, imprisonment shall be proportionately reduced. 2. All persons who are knowingly parties to any contravention shall be liable jointly and severally to the Company for: a. Repayment of the loan, or b. Making good the sum which the Company may have been called upon to pay on account of the guarantee given or the securities provided by such Company. 3. Transaction in violation of Sec.372 is void and ineffective. A transaction which is forbidden in public interest cannot be made lawful by paying a penalty for it.

ILLUSTRATION The Board of directors of M/s Greenfield Projects Limited, a company whose shares are on the Delhi Stock Exchange proposes to give loans to a sister company in excess of the prescribed under section 372A(1) of the Companies Act, 1956. The next annual general meeting the company is due only after six months. Since the Board is anxious to complete the formalities quickly without waiting for the day of the next annual general meeting, advise the Board about the steps to be taken to comply with the legal requirements under the Companies Act, 1956.

Ans. Following requirements shall be complied with if the ceiling limit prescribed under section 372A is exceeded; 1. Unanimous approval of the Board shall be obtained by passing a resolution at a Board meeting. 2. A special resolution shall be passed in a general meeting. There is no requirement that the special resolution shall be passed only at an annual general m Following points must be noted: a. The postal ball ot is mandatory in the case of a listed company if the limit prescribed In the same manner as Register of Members.Inter corporate Loans and Investments _____________________________2.5 MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION under Sec.372A (1) is exceeded [Sec.192A read with Rule 4 of Companies (Passing of Resolution by Postal Ballot) Rules, 2001). b. The notice of special resolution shall state the specific limits, particulars of the company t o whi ch l oan i s t o be g i v en , spec i f i c sou r ce o f fund ing and ot her relevant details. c. The company shall file a copy of the special resolution with the registrar within 30 days of passing the special resolution. 3. The rate of interest chargeable on the loan shall not be less than the prevailing bank rate. 4. The company shall obtain the prior approval of the Public Financial Institution from whom it has taken a term loan. 5. The company shall ensure that no default in respect of Sec. 58A (public deposits is subsisting. The prescribed particulars shall be entered in the register maintained under Sec.372A(5). P.Q.2. ABC Forgings Limited proposes to make a loan of Rs.5 lakhs to PQR Limited, a Company in

which two directors of ABC Forgings Limited hold 30 per cent of the total equity share capital. The proposed loan together with the intercorporate loans and investments already made do not exceed 60 per cent of paid-up share capital and 100 per cent of free reserves of ABC Forgings Limited. Examine the above proposal with reference to the provisions of section 372A of the Companies Act 1956. Whether the provisions of section 295 containing the marginal notes of 'Loans to Director, etc.' would also be applicable in this case? (OR) DEP Limited having subscribed share capital of Rs. 5 crores and free reserves of Rs. 3 crores has not so far given any loan or guarantee to body corporates. Examine with reference to the provisions of the Companies Act, 1956 the legal requirements to be complied with by the company for granting a loan of Rs. 10 lakhs to MN Limited in which 30% of the equity shares is held by one of the directors of DEP Limited. [CA (Final, May,1998] [CA (Final), Nov.2003]

Ans. As per Sec. 295, a public company shall not, directly or indirectly, make any loan to a director or any other person specified under Sec.295, unless it obtains previous approval of the Central Government. `A body corporate at a general meeting of which 25% or more voting power is exercised by a director of the company' is also covered under Sec.295. Moreover, where a company makes a loan to a corporate, it shall comply with the provisions of Sec.372A. The following legal requirements must be complied with in the present case: 1. The Board of ABC Forgings Limited shall consider the contract relating to give loan to PQR

Limited. Since two directors of ABC Forgings Limited are interested they shall disclose their interest, shall not be counted in quorum, and shall not vote Secs.299 and 300). Necessary entries will be made in the register of contracts (Sec. 301). 2. ABC Forgings Limited shall make an application to the Central Government for approval under section 295. Only on receipt of the approval of the Central Government, ABC Forgings Limited will make a loan to PQR Limited (Sec. 295] The Following requirements of Sec.372A shall also be fulfilled: a. A resolution shall be passed at a Board meeting of ABC Forgings Limited with the consent of all the Directors present meeting. b. Approval of Public Financial Institution shall be obtained. However; if there is no default in repayment of principal or interest, the approval of Public Financial Institution is not required (since the ceiling limit of 60% is not exceeded). c. The company shall ensure that no default of Sec.58A (relating to public deposits) is subsisting. d. Since, the ceiling limit specified under Sec. 372A (60% of aggregate of paid up capita! and free reserves or 100% of free reserves, whichever is higher} is not exceeded, no special resolution is required. P.Q.3. Premier Housing Finance Company Limited is prepared to give housing loans to the employees of Supreme Chemicals Limited subject to the condition that the loans are guaranteed by Supreme Chemicals Limited. Supreme Chemicals Limited is not a listed company and the company Inter corporate Loans and Investments _____________________________2.7 MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION 6. Investment in Capital of Partnership Firm is not "Investment" for Sec.372A purposes. 7. Purchase of Shares includes Purchase from Open Market also. Particulars Rs. Rs. 1. Paid Up Capital (a) Equity Share Capital (b) Preference Share Capital

2. Free Reserves: (a) Securities Premium (b) General Reserve (c) Profit & Loss A/c (d) Dividend Equalisation Reserve 3. Maximum Amount u/s 372A without Shareholders' Approval = Higher of (a) 60% of Paid Up Cap. & Free Reserves [60% of (64,50,000 + 83,00,000) ] (b) 100 % of Free Reserves. 4. Investments / Loans already made: (a) Equity Shares in MTC Ltd. (b) Debentures in SKT Ltd. (c) Preference Shares in HUT Ltd. (d) Inter-Corporate deposits. 49,50,000 15,00,000 15,00,000 40,00,000 22,00,000 6,00,000 88,50,000 83,00,000 4,50,000 12,00,000 5,00,000 25,00,000 5. Further amount that can be invested without

Shareholders' Approval =(3) -(4) 64,50,000 83,00,000 88,50,000 46,50,000 42,00,000 6. Proposed Investments / Loans: (a) Loan to MTC Ltd. (b) Debentures in SKT Ltd. (c) Shares in Glaxo Ltd. 15,00,000 8,00,000 15,00,000 38,00,000 Conclusion: Since the proposed additional investment is within the amount permissible as calculated above, the Directors, by passing a unanimous resolution in a Board Meeting, can make the proposed additional investment / loans. P.Q.5. Following is the latest audited Balance Sheet of XYZ Ltd. Capital and Liabilities Rs. Assets Rs. 10,00,000 10,000 9,90,000 1,50,000 1,50,000 2,25,000 5,00,000

2,20,000 1,10,000 60,000 10,00,000 2,00,000 1,25,000 1,00,000 1,00,000 10,50,000 20,25,000 1,25,000 50,000 1,50,000 1,00,000 2,25,000 1,00,000 55,000 Equity Share Capital (10,000shares of Rs100 each) Less Calls unpaid Preference Share Capital Securities Premium A/c Capital Redemption Reserves General Reserve Profit and Loss A/c Sinking Fund Reserve Dividend Equalisation Reserve

Loan from TICC Deposits from S Ltd Liabilities Provision for Taxation 38,30,000 Goodwill Land and buildings Plant and Machinery Equity Shares in A Ltd. Preference Shares in B Ltd. Securities Premium A/c Debentures in C Ltd Shares in P Ltd. Capital in Z & Co. Current Assets 38,30,000Intercorporate Loans and Investments _____________________________2.8 WWW.GNTMASTERMINDS.COM The following is the additional information: 1. The equity share capital, 3,000 shares have been issued as rights shares and 2,000 shares as bonus shares. 2. B Ltd. is subsidiary of XYZ Ltd. with 90% shareholding, whereas A Ltd. is wholly owned subsidiary of XYZ Ltd. 3. Z & Co. is a partnership firm. The directors seek advise as to whether the following additional investments can be made by decision taken in a Board Meeting: 1. Loan to A Ltd: 2. Debentures in B Ltd. Rs. 10,00,000 Rs 2,25,000

3. Purchase of shares of Shree Ltd. in the open market Rs. 95,000 State Reasons. Ans. Particulars Rs. Rs. 1. Paid Up Capital (a) Equity Share Capital (b) Preference Share Capital 2. Free Reserves: (a) Securities Premium (b) General Reserve (c) Profit & Loss A/c (d) Dividend Equalisation Reserve 3. Maximum Amount u/s 372A without Shareholders' Approval = Higher of (a) 60% of Paid Up Cap. & Free Reserves [60% of (11,40,000 + 9,30,000)] (b) 100 % of Free Reserves 4. Investments already made (a) Preference Shares in B Ltd ; (b) Debentures in C Ltd. (c) Shares in P Ltd. 9,90,000 1,50,000 1,50,000 5,00,000 2,20,000 60,000 12,42,000 9,30,000

50,000 1,00,000 2,25,000 5. Further amount that can be invested without Shareholders' Approval =(3) -(4) 11,40,000 9,30,000 12,42,000 3,75,000 8,67,000 6. Proposed Investments: (a) Debentures in B Ltd. (b) Shares in Shree Ltd. 2,25,000 95,000 3,20,000 Conclusion: 1. Since the additional proposed investment is within the limit, the Directors may, by passing a resolution at a Board meeting and obtaining the consent of all the Directors present, approve the proposed investment. Special resolution is not necessary. 2. Prior approval of the Financial Institution, TICC is not required as such, since the proposed investments is less than 60% paid up capital and free reserves and if there is no default in repayment of loan installments or interest thereon as per terms and conditions of such loan. Note: Since A Ltd. is a wholly-owned subsidiary, existing investment is Equity Shares and proposed loan is excluded in the above calculation of ceiling limit u/s 372 A. P.Q.6. ABC Engineering Limited proposes to invest Rs. 20 lakhs in the equity shares of PQR Trading

Limited. The proposed investment together with the investments in securities of companies and loans to body corporate already made exceed 60 per cent of the paid-up share capital and also 100 of free reserves of the company. The company has taken term loans from IDBI. Explain the procedure to be followed by ABC Engineering Limited to give effect to the proposed i nvestment. [CA (Final, May 2004] Inter corporate Loans and Investments _____________________________2.9 MASTER MINDS - QUALITY EDUCATION BEYOND YOUR IMAGINATION Ans . Int ercor por at e l oans an d investment s ar e g ov ern ed by t he pr ov isi ons of S ec. 372A. In the present case the proposed investment of Rs. 20 lakhs in the equity shares of PQR Trading Limited together with the investments in securities of companies and loans to body corporate already made exceed the Ceiling limit, i.e., 60 per cent of the paid-up share capital or 100 per cent of free reserves, whichever is higher. Therefore, a special resolution is required for the proposed investment. The company shal l adopt the f o l lowi ng pr ocedur e f o r making investments in PQR Trading Limited: 1. Unanimous approval of the Board shall be obtained by passing a resolution at a Board meeting. 2. A special resolution shall be passed in the genera! meeting. a. The notice of special resolution shall state the specific limits, particulars of the company to which loan is proposed to be given, specific source of funding and other relevant details. b. The company shall file a copy of special resolution with the registrar within 30 days of passing the special resolution. c. If the company is a listed company, it shall pass the resolution by postal ballot as prescribed under section 192A.

3. The company shall obtain the prior approval of IDBI, the Public Financial institution from whom it has taken a term loan. 4. The company can make such investments only if no default in respect of deposits is subsisting. 5. The prescribed particulars shall be entered in the register maintained under se 372A (5). P.Q.7. M/s. Sharda Fertilizers Ltd. proposes to acquire equity shares of ABC Ltd. worth Rs. 19 lakhs on the basis of the following information advise Sharda Fertilizers Ltd. about the requirements to be complied with under Companies Act, 1956 for the proposed investment in ABC Ltd.: Authorised Share Capital Issued subscribed and paid-up capital Free Reserves Rs.50,00,000 Rs.25,00,000

Rs. 5,00,000

(CA (Final. Nov. 2002 (New Course)] Ans . Intercorporate loans and investments are governed by the provisions of section 372A First determine whether a special resolution is required for making fresh investments. This can be determined as follows: Paid up capital of the company (A) Free reserves (B) Rs.25, 00, 000 Rs. 5,00,000 Rs.30,00,000 Rs.18,00,000

Aggregate of paid up capital and free reserves (C) 60% of aggregate of paid up capital and free reserves (D)

Higher of (B) or (D), i.e., the ceiling limit for intercorporate loans, Investments etc. without requiring a special resolution Proposed investment in equity shares of ABC Limited Rs.18,00,000 Rs.19,00,000

Since the proposed investment exceeds the ceiling limit, a special resolution is required. The company shall adopt the following procedure for making investments in ABC Ltd.

1. U n a n i m o u s a p p r o v a l o f t h e B o a r d s h a l l b e o b t a i n e d b y p assi ng a r esolut i on at a Board meeting. 2. A special resolution shall be passed in the general meeting. a. The notice of special resolution shall state the specific limits, particulars of the company to which loan is proposed to be given, specific source of funding and other relevant details. b. The company shall file a copy of special resolution with the registrar within 30 days of passing the special resolution. c. If the company is a listed company, it shall pass the resolution by postal ballot as prescribed under section 192A. 3. The company shall obtain the prior approval of the Public Financial Institution, if any, from whom it has taken a term loan. 4. The company can make such investments only if no default in respect of Public deposits is subsisting. 5. The prescribed particulars shall be entered in the register maintained under Sec.372A (5

The whole provision of Section 372A of the Companies Act, 1956 can be Sub - Divided into 3 categories:

I. II. III.

INTER -CORPORATE LOANS INTER -CORPORATE INVESTMENTS INTER -CORPORATE GUARANTEES AND SECURITIES

APPLICABLITY OF THE SEC. 372A

The whole provision of Sec. 372A will be applicable to a public company or a private company which is a subsidiary of public company. Thus provision of Sec. 372A is not applicable to a plain private company.

INTER -CORPORATE LOANS

Basic provision

Section 372A is applicable only to a public company or private company which is a subsidiary of a public company. Section 372A imposes certain restriction on giving loans by a company to bodies corporate. However, every loan to be given by a company does not fall within the ambit of this section, though it falls within the ambit of section 292(1)(e). only the loans to be given by a company to bodies corporate are covered under Section 372A. A company which has made a default in the compliance of Sec. 58A is prohibited from making any inter corporate loan till the default is made good. Section 372A is applicable to the indirect inter corporate loan as well. E.g. through any other person or for its benefit.

MEANING OF LOAN:

1. The term LOAN is not defined. In ordinary terms loan means the act of lending on the condition of being returned, especially a sum of money lent at interest. But in case of interest free loan payment of interest is not the criteria.

2. But every loan given by a company which falls within the ambit of Sec. 372A must bear a interest rate not lower than prevailing bank rate.[Sec. 372A(3)] 3. As per explanation of Section 372A loan includes the deposit of money by one company with another. Thus lending money by a company another in the form of Inter Corporate Deposit or any other form will require the compliance of Sec. 372A besides that of Sec. 292. 4. As per the explanation to Sec. 372A loan includes Debentures. Thus one company buying debentures of another company will require the compliance of this section as well as Sec. 292.

LOANS AND COMPANIES OUTSIDE THE PURVIEW OF SECTION 372A

According to sec. 372A of the companies Act, so far as loan are concerned, applies to every company subject to the following exemption: A banking company in the ordinary course of business; An insurance company in the ordinary course of business; A housing finance company in the ordinary course of business; A company established with the object of financing industrial enterprises; A company established with the object of providing infrastructure facilities; Investment company; A plain private company which is not the subsidiary of public company. A holding company to its wholly owned subsidiary company.

Any loan given by the holding company to its 100% subsidiary company is exempted and thus this exemption is not available in case of normal subsidiary. A question arises that whether the exemption given under 372A(8) would be available in case of a subsidiary (C) which is 100% subsidiary of company (B) and company B is itself subsidiary of company A, If company A wants to give a loan to C. As per Sec. 4 of the Act Company C is treated as 100% subsidiary of company A and therefore exemption can be availed if loan is given by the company A to company C.

MEANING OF FREE RESERVE

As per the explanation to Sec. 372A free reserve means which as per the latest audited balance sheet are free for distributable as dividend and shall also include the balance held in securities Premium Account but does not include Share application money.

II.

INTER -CORPORATE INVESTMENTS

BASIC PROVISON Acquisition by way of subscripttion, purchase or otherwise of securities of any other body corporate falls within the ambit of Sec. 372A. It may be noted that the term securities is used in the section in contrast of the term Shares which find place in the erstwhile sec. 370. The term securities is much wider term than term Shares. Sec. 2(h) of Securities Contract (Regulation) Act, 1956 gives very wide definition of term securities and it includes shares, debentures, bonds, stock, debenture stock, derivatives, Government Securities etc. Thus scope of Sec. 372A has enlarged to cover investment in debentures, bonds or other marketable securities of like nature of body corporate. Investment made in the Government securities and in the unit of mutual fund (which generally speaking, are set up as Trust Bodies) though covered in the definition of Securities fall outside the ambit of Sec. 372A because same are not issued by the bodies corporate as defined in the Sec.2(7). However mutual fund issued by the body corporate falls within the ambit of Sec. 372A. Investment made in the unit of Unit Trust of India (set up as body corporate) and also in ADR, GDR issued by the foreign companies falls within the ambit of this section. Share Application money paid on application of shares in other company will not come within the purview of this section in the absence of allotment of securities.

INVESTMENT/COMPANIES WHICH ARE NOT WITHIN THE PREVIEW OF SEEC.372A.

Provision relating to the Inter Corporate Investment shall apply to all the public company. But it does not apply to investment made by the following: A banking company in the ordinary course of business; An insurance company in the ordinary course of business; A housing finance company in the ordinary course of business; A company established with the object of financing industrial enterprises; A company established with the object of providing infrastructure facilities; Investment company; A plain private company which is not the subsidiary of public company. Investment in shares allotted in pursuance of Sec. 81(1)(a) i.e. Right Shares. A holding company in its wholly owned subsidiary company.

Sec. 372A is not applicable investment company i.e. a company whose principal business is the acquisition of shares, stock, debentures or other securities. MCA has the opinion that the words whose principle business is acquisition of shares means the company concerned is expected to hold the shares etc. acquired by it. Merely by including in the MOA investment business as the main object, the company would not be qualified to be regarded as an investment company. It must be actually carrying on the business of investment as principal activity. The exemption is available for only the investment company. A company doing manufacturing activity and also authorized by the MOA to do the investment business and show the investment as stock in trade the exemption from Sec. 372A will not be available to the company [MCA Circular]. Continuation of the investment made by the exempted companies after the cessation of exemption would not require the compliance of sec. 372A. Thus investment made during the period when the company was exempt from the provision of sec. 372A and remained outstanding after the cessation of exemption would not come within the ambit of Sec. 372A. MCA Circular]. The exempted investments are excluded from the calculation in considering the limits prescribed in 372A.

III. INTER -CORPORATE GUARANTEES AND SECURITIES

Besides inter- corporate loans and investment sec.372A also apply to inter- corporate guarantees and securities i.e guarantees provided and securities given by the company in connection with the loan given : By any person to any body corporate; or Any body corporate to any person.

For the purpose of 372A guarantees at least one party i.e lender or borrower must be body corporate otherwise 372A will not apply. For the purpose of Sec. 372A inter corporate guarantee or securities should be in connection with the loan. In respect of other type of guarantee like performance guarantee Sec. 372A will not be applicable. In respect to corporate guarantee and security provided a company has to comply the provision of this section and also take care of the provision of Sec. 295(1)(d)/(e)., if and when applicable.

EXEMPTION IN CASE OF INTER CORPORATE GUARANTEE OR SECURITY

The provision of Sec. 372A in respect of inter- corporate guarantee and security shall not be applicable in case of any guarantee given or any security provided by a holding company in respect of loan made to its 100 % subsidiary company. It should be noted that exemption is given only in case of 100% subsidiary company. In case of normal subsidiary company exemption will not be applicable. Further exemption is given in respect of guarantee given or security provided in respect of loan given to its 100% subsidiary company. In reverse transaction i.e. guarantee given in respect of loan made by its 100% subsidiary company to any other person including body corporate, exemption will not be applicable.

COMMON PROVISION FOR INTER CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

APPROVAL OF BOARD FOR MAKING THE INTER- CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

Every loan, investment, guarantee and security falling within the purview of Section 372A must be sanctioned by a resolution of BODs passed at its meeting with theconsent of all the directors present at the meeting. Resolution passed by Resolution by Circulation is not permitted under Section 372A.

The BODs can at any time make loan or investment to any other bodies corporate or give guarantee or provide any security in connection with loan made to or given by any other bodies corporate without the approval of shareholders up to the amount, which is the higher of the following two i.e. 60% of paid-up capital and free reserves; or 100% of the free reserves of the company.

If the BODs want to cross the limit as given above then it has to take the Prior approval of Shareholders by way of Special Resolution (SR). These limits shall be calculated with reference to the latest audited balance sheet of the company. Both equity and preference share capital shall be taken into account. As per the explanation to Sec. 372A free reserve means those reserves which, as per the latest audited balance sheet of the company are free for Distribution as dividend and also include balance to the credit of securities premium account but shall not include share application money.

SHAREHOLDERS APPROVAL FOR MAKING THE INTER- CORPORATE LOAN, INVESTMENT, GUARANTEE AND SECURITY

If the BODs propose to make a loan or investment to any other bodies corporate or give guarantee or provide any security in connection with loan made to or given by any other bodies corporate in excess of the limit mentioned (i.e. 60% or 100%), it must first obtain approval of the shareholders by a Special Resolution (SR) passed at a general meeting. In case of listed company such SR shall be passed through postal ballot as per the provision of Sec. 192A. However in case of shareholders approval by SR is for crossing the limit because of Inter - Corporate Investment, postal ballot method is not compulsory. The reason being that in Postal Ballot Rules, 2001 requirement of passing SR by postal ballot is not compulsory in case of Inter Corporate Investment.. But the company may voluntarily go for the Postal Ballot There is no limit on the amount up to which Board can give the loans with the approval of the shareholders by way of SR, beyond the limit of 60% or 100%. However, a specific SR must be passed for every Inter Corporate Loan in excess of the limit. Blanket permission to the Board to make the loan or investment up to the specified limit from time to time can not be passed. The MCA has advised the companies are expected to obtain the approval for making the investments into securities or grant of loan to other companies of amounts which are linked with the companys available financial resources and the resolution for investment much beyond the net worth should not be passed by the companies. [MCA Clarification].

GIVING GUARANTEE WITHOUT PRIOR SPECIAL RESOLUTION [PROVISO OF SEC. 372A(1)]

The BODs of a company may give corporate guarantee without previously authorized by the SR even if it is required on crossing the limit in the exceptional circumstances if following conditions is satisfied: A resolution is passed by the BODs authorizing to give guarantee unanimously.

There exists exceptional circumstances which prevent the company for taking previous authorization of Shareholders by SR. v v The resolution of BODs is confirmed by the shareholders by way of SR Within 12 months of passing Board resolution ;or AGM held immediately after the passing of Board resolution.

Whichever is earlier.

APPROVALS OF PUBLIC FINANCIAL INSTITUTIONS (PFIs) FOR INTERCORPORATE LOAN [Section 372A(2)]

Every Inter - Corporate loan, investment, guarantee and security falling within the preview of Section 372A requires the approval of PFIs as referred to in Section 4A from which company has taken any tern loan and such loan is subsisting. This approval will be required irrespective of the fact that whether under the loan agreement it is required or not. The approval may be general approval and it need not be specific in each case of inter corporate loan. A PFI may give approval subject to the certain limit and such conditions as it may think fit. However as per the proviso of Sec. 372A(2) Prior approval of PFI is not required if following two conditions is satisfied: The total amount of inter corporate investment, loans, guarantees and securities is less than 60% of paid up capital and free reserves; and There is no default (at the time of making investment, loan etc.) in payment of installment of the term loan or interest thereon as per the terms thereof.

NOTICE OF MEETING WHERE SR IS PROPOSED TO BE PASSED CONTAINS CERTAIN INFORMATION [3RD PROVISO OF 372(1)]

The notice of the meeting where SR is proposed to be passed contain specifically the following: Particulars of the body corporate in which investment is proposed tp be made or loan to guarantee or security is to be given. Specific limit of such loan, investment, guarantee or security. The purpose of the loan, investment, guarantee or security. Specific source of funding. Any other important details.

PROHIBITON ON MAKING INTER CORPORATE LOAN, INVESTMENT, GUARANTEE, SECURITY IN CASE OF DEFAULT OF SEC. 58A RELATING TO PUBLIC DEPOSIT [SEC.372A(4)]

A company is prohibited from making inter corporate loan, investment, guarantee, security in case it has defaulted in complying with any provision of Sec. 58A, till the default continue. However it should be noted that the prohibition does not extend to default in complying with the provision of sec. 58AA inserted in 2000, relating to Small depositors.

REGISTER OF LOANS, INVETMENT ETC. AND INSPECTION OF SUCHREGISTER [SEC. 372A(5) & (6)]

Sec. 372A(5) of the Act provides for maintenance of specific register of inter corporate loan, investment etc. and it shall contain the following particulars: Name of the body corporate; Amount, term and purpose of loan etc.;

The date on which inter corporate loan or investment is made or guarantee is given or security is provided;

These particulars are required to be entered in the register date wise andchronologically within 7 days of making the loan or investment or giving pf guarantee or providing the security. As per Sec. 372A (6), the register is required to be kept at the registered office of the company and it shall remain open for inspection for any member free of cost. Extract may be taken there from or certified copy may be issued on the payment of Re. 1 for every 100 words and fraction part thereof.

COMPLIANCE OF GUIDELINES ISSUED BY CG [SEC.372A(7)]

CG has been empowered to prescribe the guidelines for the purpose of this section. Thus companies are required to comply with such guidelines also, as and when they may be prescribed, in addition to the compliance of the provisions of this section. CG has not prescribed such guidelines till date.

APPLICABILITY OF SEC. 372A TO COMPANIES NOT HAVING SHARE CAPITAL

Sec. 372 is also applicable to Sec. 25 companies or a company limited by guarantee not having share capital. In these type of companies prescribed limit (60% / 100%) have to be computed in relation to the free reserve alone. [MCA Circular]

PENALTY FOR DEFAULT [SEC.372A (9) & (10)]

PENALTY FOR DEFAULT IN SEC. 372A(5) If there is any default in the compliance with the provision of sec. 372A(5) relating to the maintenance of register, the company and every officer in default shall be punishable with fine up to Rs. 5000 and Rs. 500 per day after the first day in case of continuity default. PENALTY FOR DEFAULT UNDER SEC. 372A OTHER THAN SUB SECTION (5) If there is general default in the compliance with the requirement of sec. 372A other than sub - section (5) the company and every officer in default shall be punishable by way of imprisonment up to 2 years or with fine up to Rs. 50,000. However penalty by way of imprisonment shall not be imposed when the loan or the guarantee / security provided in connection with a loan has been paid in full, and if repaid in part, such penalty is allowed to be reduced proportionately. The offences under this section are compoundable under sec.621A.

TRANSACTION VIOLATING THE SECTION VOID

According to the clarification issued by MCA a transaction which is forbidden in public interest could not be made lawful by paying a penalty for it. Thus any loan or investment made or guarantee given or security provided which is in violation of the provision of sec. 372A is void and effective.