Scribd Logo
Upload

Welcome to Scribd!

  • 79 views

    Inter Corporate Loans

    Uploaded by

    YashJain
    The document discusses regulations around corporate loans, investments, and guarantees under the Companies Act of 1956 and 2013 in India. 1. Under the 1956 Act, section 372A placed restrictions on the loans, investments, guarantees and securities that companies could provide to other bodies. Board and shareholder approval was required if amounts exceeded certain percentage limits of paid-up capital and reserves. 2. The 2013 Act made several changes including restricting investments through more than two layers of companies, expanding limits to apply to individuals as well, requiring disclosure of loan details, and increasing penalties for violations. 3. Procedures for companies providing loans or guarantees include obtaining board approval, shareholder approval if limits are exceeded, maintaining

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Inter Corporate Loans

    Uploaded by

    YashJain
    79 views9 pages
    The document discusses regulations around corporate loans, investments, and guarantees under the Companies Act of 1956 and 2013 in India. 1. Under the 1956 Act, section 372A placed restrictions on the loans, investments, guarantees and securities that companies could provide to other bodies. Board and shareholder approval was required if amounts exceeded certain percentage limits of paid-up capital and reserves. 2. The 2013 Act made several changes including restricting investments through more than two layers of companies, expanding limits to apply to individuals as well, requiring disclosure of loan details, and increasing penalties for violations. 3. Procedures for companies providing loans or guarantees include obtaining board approval, shareholder approval if limits are exceeded, maintaining

    Original Description:

    Business Law Sample

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses regulations around corporate loans, investments, and guarantees under the Companies Act of 1956 and 2013 in India. 1. Under the 1956 Act, section 372A placed restrictions on the loans, investments, guarantees and securities that companies could provide to other bodies. Board and shareholder approval was required if amounts exceeded certain percentage limits of paid-up capital and reserves. 2. The 2013 Act made several changes including restricting investments through more than two layers of companies, expanding limits to apply to individuals as well, requiring disclosure of loan details, and increasing penalties for violations. 3. Procedures for companies providing loans or guarantees include obtaining board approval, shareholder approval if limits are exceeded, maintaining

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    79 views9 pages

    Inter Corporate Loans

    Uploaded by

    YashJain
    The document discusses regulations around corporate loans, investments, and guarantees under the Companies Act of 1956 and 2013 in India. 1. Under the 1956 Act, section 372A placed restrictions on the loans, investments, guarantees and securities that companies could provide to other bodies. Board and shareholder approval was required if amounts exceeded certain percentage limits of paid-up capital and reserves. 2. The 2013 Act made several changes including restricting investments through more than two layers of companies, expanding limits to apply to individuals as well, requiring disclosure of loan details, and increasing penalties for violations. 3. Procedures for companies providing loans or guarantees include obtaining board approval, shareholder approval if limits are exceeded, maintaining

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 9

    INTRODUCTION

     The concept of giving a corporate guarantee or security is also as


    good as giving a loan, because the person to whom guarantee or loan
    in given can decide to enforce it in certain conditions and in such
    situation, the company will have to pay the amount. Thus apart from
    loans and investments, restrictions are also placed on the guarantees
    which the company can give or security it can provide for a loan.[1]

    The Securities that are purchased/ borrowed by corporations rather


    than individual investors are captioned under inter-corporate and
    advances. Inter-corporate investments allow a company to achieve
    higher growth rates compared to keeping all of its funds in cash.
    These investments can also be used for strategic purposes like
    forming a joint ventures or making acquisitions. Companies purchase
    securities from other companies, banks and governments in order to
    take advantage of the returns from these securities. Marketable
    securities that can readily be exchanged for cash, such as notes and
    stocks, are usually preferred for this type of investment.[2]

    A ‘body corporate’ or ‘corporation’ is the appropriate term that can


    borrow loans and advances under these provisions (as per the
    respective act).

    Though the law in enforce had shifted from the Companies Act’56 to
    the Companies act of 2013 with effect from 1 st April 2014 with the
    initiation of a new Financial Year, the significant changes with respect
    to the topic has been discussed below.

    THE COMPANIES ACT, 1956


    Shareholders, investors and lenders invest funds in a company only
    after analyzing the returns, risk factors of the project and appraising
    the financial position, viability of the project, future prospects and
    other relevant factors. To keep a control on diversion of such funds,
    the following regulation has been made relating to making of loans and
    investments in any other company.

    Under section 372A of the Companies Act, 1956, directors of


    companies are empowered to make investments and loans, give
    security and guarantees to other bodies corporate, up to specified
    percentage limits only. The board of directors has to obtain the
    consent of the members by means of a special resolution if these
    percentages are exceeded. There also exist exemptions to certain
    transactions from the operation of this section.

    SCOPE OF SECTION 372A

    The said section of Companies Act, 1956 regulates the following


    transactions:

    Making any loan to any body corporate.

    Acquiring the securities of any other body corporate.

    Giving any guarantee or providing any security to:

    A person who gives a loan to any body corporate; or

    A body corporate which gives a loan to any other person

    ANALYSIS OF SECTION 372A


     Requirements of Approvals:

      Board of Directors:

    Approval of Board is to be made prior to making of loan, investment,


    guarantee or security. Unanimous consent of all directors present at
    the meeting is required. And, the approval of Board shall be obtained
    by passing a resolution at a Board meeting.
    Company by Passing Special Resolution:

    Special Resolution should be passed in a General Meeting if the


    amount of making loan, investment, guarantee or security is higher of
    the following:

    60 per cent of the paid-up share capital + free reserves, or,

    100 per cent of free reserves of the company

    Public Financial Institutions:

    If any term loan obtained from a PFI subsists a loan, the company, only
    with the prior approval of the PFI, can make investment, guarantee or
    security subject to the following exceptions:

    If the amount of existing and proposed loan, investment, guarantee or


    security given does not exceed 60 per cent of the paid-up capital and
    free reserves.

    No Default in Repayment of Loans or interests to the PFI.

    No Default in Respect of Public Deposits is Subsisting

    A company which has defaulted in compliance with the Section 58A


    (relating to public deposits) cannot make any loan, investment,
    guarantee, or, security, until such default is subsisting.

    Register of Inter-corporate Loans and Investments

    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 any body corporate.

    Contravention of Other Provisions

    The company and every officer of the company who is in default shall
    be punishable with imprisonment up to 2 years or a fine up to Rs.
    50,000. However, if the loan is paid in full, no imprisonment shall be
    imposed, and where the loan is repaid in part, the imprisonment shall
    be proportionately reduced.

    THE COMPANIES ACT, 2013


     The Act has come up with a change in the concept of ‘Loan and
    Investment by Company. The 2013 Act states that companies can
    make investments only through two layers of investment companies
    subject to exceptions, which includes company incorporated outside
    India. Section 186 of the act of 2013 deals with it.

    SIGNIFICANT CHANGES:
     Restriction on layers[3]: Firstly this section prohibits investment
    through more than 2 layers of investment companies. However this
    restriction is not applicable for investment in company incorporated
    outside India which has investment subsidiaries beyond two layers as
    per laws of that country.

    Limits: The limits are same as of 1956 act but these limits not only
    covers the transactions with bodies corporate but also transactions
    with any person.

    Disclosure: This is a new requirement. Section 186(4) stipulates that a


    disclosure has to be made in the financial statement about the full
    particulars of loans given, investments made or guarantees or security
    given and the purpose for which the recipient is going to utilise the
    loans/guarantees/security.

    Restriction on companies registered with SEBI:  This is also a new


    requirement to protect the shareholders interest. The central
    government may notify such class of companies which will be
    prohibited from taking inter corporate loans or deposits exceeding the
    prescribed limit and shall make a disclosure of loans or deposits
    taken in its financial statement.
    Rate of Interest: The rate of interest on loans given cannot be less
    than the prevailing yield rate on 1 year,3 year, 5 year or 10 year
    government securities closest to the tenor of the loan.

    Penalty: The fine for violation of Section 186 has been increased. Fine
    levied can be  any sum  between Rs.25,000 to 05 lakhs on defaulting
    company  and  every defaulting  officer  can be punished with
    imprisonment for a term  up to 2 years besides the  fine ranging from
    Rs.25,000 to 1.00  lakh.

    Withdrawal of exemption: This section is applicable to both private


    and public Ltd while section 372-A is applicable only to public Ltd
    companies.

    PROCEDURES IN MAKING LOAN:


    The Company while giving loan to any other body corporate may adopt
    following procedures, providing guarantee or security in connection
    with a loan or acquisition by way of subscription, purchase the
    securities of any other body corporate.

    It is to be kept in mind that a company can give any loan or give any
    guarantee or provide security and acquire securities of any Body
    corporate through Board resolution up to 60% of its paid up capital,
    free reserves and security premium account or 100% of its free
    reserves and security premium whichever is more.

    On the basis of aforesaid conditions and requirements of the company


    meeting of Board of Directors is to be convened after giving proper
    notice and proposals of giving loan or giving guarantee or providing
    security etc. are to be discussed.

    No investment shall be made or loan or guarantee or security given by


    the company unless the resolution sanctioning it is passed at a
    meeting of the Board with the consent of all the directors present at
    the meeting.

    It is to be checked whether there is any existing loan from any public


    financial institution, if so, prior approval of that public financial
    institution is also required for any subsequent loan from any other
    source. However, prior approval of Public Financial Institution shall not
    be required where the aggregate loan, investment, guarantee and
    security proposed is within the limits as specified under section 186(2)
    and there is no default in repayment of loan or interest thereon to the
    Public Financials Institution.

    After deciding the source of fund and quantum of requirement, the


    Board may authorize one of the directors of the company or any other
    person to apply for the concerned public financial institutions for
    approval.

    Arrange to convene a general meeting of shareholders after giving


    proper notice and to pass special resolution therein, where the giving
    of any loan or guarantee or providing any security or the acquisition
    exceeds the limits specified i.e. 60% of its paid up capital, free
    reserves and security premium account or 100% of its reserves and
    security premium whichever is more.

    File the copy of special resolution in Form No. MGT-14 along with the
    fee as provided in Companies (Registration of offices and fees) Rules,
    2014 with the Registrar within 30 days of passing the resolution.
    Necessary documents are required to be attached as per the
    requirements of the form.

    Registers are to be maintained in Form MBP-2 by every company giving


    loan or giving guarantee or providing security or making an acquisition
    shall, from the date of its registration and the particulars of loan and
    guarantee given, securities provided and acquisition are to be entered
    therein.

    Entries in the register shall be made chronologically in respect of each


    such transaction of making such loan or giving guarantee or providing
    security or making acquisition.

    It is to be ensured that no loan shall be given at a rate of interest


    lower than the prevailing yield of one year, three year, five year or ten
    year Government security closest to the tenor of the loan.
    The company shall disclose to the members in the financial statement
    the full particulars of the loans given, investment made or guarantee
    given or security provided and the purpose for which the loan or
    guarantee or security is proposed to be utilized by the recipient of the
    loan or guarantee or security.

    Scrutinise the repayment history of the company with regards to


    repayment of any deposits or interest thereon. No company that is in
    default in the repayment of any deposits or in payment of interest
    thereon shall give any loan or give any guarantee or provide any
    security or make any investment through acquisition of another
    company till such default is subsisting.

    CASE STUDY: CAIRN INDIA – VEDANTA


    Cairn Energy plc is a global oil and gas exploration company
    headquartered in Edinburgh, United Kingdom. It has operational
    interests in Albania, Bangladesh, Greenland, India, Nepal and Tunisia
    and produces around 33,000 barrels of oil equivalent per day. Its
    largest activities are in India, where it has made more than 20
    discoveries in Rajasthan, including a major oil discovery in
    Mangala. As at 30 June 2010 it had total proven commercial reserves
    of 247.4 million barrels of oil equivalent. Its primary listing is on
    the London Stock Exchange and it is a constituent of the FTSE 100
    Index. It has a secondary listing on the Bombay Stock Exchange.

    Vedanta Resources plc is a global mining and metals company


    headquartered in London, United Kingdom. It is the largest mining
    and non-ferrous metals company in India and also has mining
    operations in Australia and Zambia. Its main products are copper,
    zinc, aluminum, lead and iron ore. It is also developing
    commercial power stations in India in Orissa (2,400 MW)
    and Punjab (1,980 MW). It is listed on the London Stock
    Exchange and is a constituent of the FTSE 100 Index.

    Cairn India granted a loan of $1.25 billion to its parent Vedanta for a
    term of two years as a part of Cairn’s treasury operations. Cairn had
    committed $800 million loan in the first quarter of 2014-15. As per the
    loan agreement, Cairn India will be getting the interest of 300 basis
    points above the benchmark London Interbank offered Rate. The
    reason for this quoted by the company officials is that the company
    had a cash surplus and therefore it decided to extend loan to its
    parent company. The only problem it suffered was that the
    shareholders’ approval wasn’t taken (as they were required to take
    under Clause 49 of Listing Agreement).

    STRATEGY USED BY VEDANTA RESOURCES:

    Vedanta uses its stated strength of assets optimization and cost


    reduction to perhaps extract more profits creates cash flows.

    First Sesa Goa is offering to buy minimum 20% from public. Then
    based on the response, Vedanta will buy 40-51% from Cairn India Ltd.

    Then in this case Vedanta holds only 60% shares in Cairn India. If we
    suppose that they buy 51% from cairn and then float minimum 20%
    public buy tender, and they get more than 20%, they will end up
    holding more than 70% which is may be out of reach of Vedanta
    Resources.

    The gravity of the Deal was so huge that it saw a rare move by Mr.
    James Cameron, Prime Minister of United Kingdom who wrote to Mr.
    Manmohan Singh, Prime Minister of India, specifically addressing the
    deadlock that the Deal encountered. Mr. Cameron highlighted the need
    for greater transparency  and  predictability  in  India’s  policy 
    environment  to  enhance  trade  and  investment.

    CONCLUSION
    “The new Act is now operational, having wide and far ranging impacts.
    It significantly raises the bar on governance. Companies have to start
    aligning their systems and processes to comply with the new Act. The
    final Rules have made some very significant changes and it is
    heartening to note that the ministry has taken into account several of
    the recommendations made by the corporate sector in finalizing these
    Rules, keeping in mind the practical difficulties that would have been
    faced by the corporate sector in implementation.”[4]

    The changes in the final Rules address the concerns and genuine
    hardship that companies faced in financing their subsidiaries. The new
    requirement provides safe harbor with respect to both loans and
    guarantees given by a holding company to its wholly owned
    subsidiaries.

    Excluding redeemable preference shares from the definition of total


    share capital is a positive development, especially since redeemable
    preference shares are more akin to debt than equity. However, it
    would have assisted if the MCA had specified the treatment of
    optionally convertible preference shares.

    We welcome the MCA’s move permitting companies to align their


    depreciation policy for tangible assets in line with the useful life of the
    asset, as is the case internationally. Further, the requirement to
    disclose justification for deviation will also, in a transparent manner,
    provide reasons to the users of financial statements. Revenue-based
    amortization, will maintain status quo for companies having toll road
    projects.

    Therefore, the 2013 Act is a culmination of several years of discussion


    on how to shape the corporate law in India. The 2013 Act provided a
    fillip to the governance environment in companies. The rationalization
    and reliefs provided in the final Rules will surely go a long way in
    assisting companies implement this new Act.

    You might also like