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Presents The Power of 30!
A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
COPYRIGHT•The presentation is a property of Vinod Kothari & Co.
•No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.
•In case of linking, please do give credit and full link
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Pammy JaiswalVinod Kothari & Company
Kolkata
1006-1009 Krishna Building224 AJC Bose RoadKolkata – 700017
Phone:033-22811276/ 22813742/7715E: [email protected]
New Delhi
A/11, Hauz Khas,New Delhi 110016
Phone:011-41315340/ 65515340
Mumbai
403-406, 175 , Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400 001
Phone: 022 22614021/ 62370959
www.vinodkothari.comEmail: [email protected]
GIVING OF LOANS, INVESTMENT, GUARANTEE AND SECURITY
APPLICABLE PROVISIONS UNDER THE CA, 2013
Giving of Loan,
Investment, Guarantee
And Security (LIGS)
Section 179
Section 185
Section 186
Section
187
SECTION 179 – POWERS OF BOARD
APPROVING AUTHORITY FOR LIGS
Board in its meeting shall approve the granting of loan or making of investment or guarantee or security
Unless delegated to any committee or a principal officer of the company
The resolution for such delegation to be filed in e-form MGT-14
Generally many companies delegate this power upto a certain threshold for ease of operations.
SECTION 185 – LOANS TO DIRECTORS AND DIRECTORS’ ENTITIES
QUICK SNAPSHOT
Substitution of entire existing provisions
Partly prohibitory and partly restrictive
Aligning of interest rate with Section 186(7)
Directors of subsidiary, JV, associate companies still excluded
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PROHIBITION U/S 185(1)
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A company shall not-
directly or indirectly
advance any loan including any loan represented by book debt to; or
give any guarantee or provide any security in connection with a loan availed by any director of the company, its holding company
any partner or relative of above
firm in which the above director or relative is partner
RESTRICTION U/S 185(2)A company may by passing a Special Resolution (SR)-
directly or indirectly
advance any loan including any loan represented by book debt to; or
give any guarantee or provide any security in connection with a loan availed by
Any person in whom any of the director of the company is interested
Provided the explanatory statement for passing such SR Discloses full particulars of the loans given, or guarantee given or security provided and
The purpose of the said loan, guarantee or security
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PERSON IN WHOM DIRECTOR IS INTERESTED
any private company of which any such director is a director or member
any body corporate at a general meeting of which not less than twenty five per cent.of the total voting power may be exercised or controlled by any such director, or bytwo or more such directors, together
any body corporate, the Board of directors, managing director or manager, whereof isaccustomed to act in accordance with the directions or instructions of the Board, or ofany director or directors, of the lending company
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EXEMPTION PROVIDED
Exemption to : Loan
to MD/WTD as part conditions of service to all employees or pursuant to a scheme approved by an SR
is in the ordinary course of business where interest charged not less than prevailing yield of G sec of 1 year, 3 year, 5 year or 10 year
made by holding company to WOS
WOS to utilise money in its principal business activities
Guarantee or security provided
by holding company in respect of loan made to WOS or loan made by bank or FIs to subsidiaries
Subsidiary to utilise money in its principal business activities
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OVERVIEW
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Loans to Directors
[Section 185]
Are you public company
Are you private company
Are you govt. company
Are you advancing loan to director or giving guarantee or providing any security in connection with any loan
taken by -
1. No body corporate members
2. Borrowings from banks Fis < twice the paid up
capital or Rs. 50 crore or
No default in repayment of borrowings
No
Whether approval of the administrative Ministry
obtained
No
Cntd. next slide
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a) any director of company, or of a company which is its holding company or any partner or relative of any such director
b) any firm in which any such director or relative is a partner
Yes
Is that any of the following -
a) Loan to MD/WTD
i. as part of conditions of service extended by company to all employees
ii. pursuant to any scheme approved by the members by a special resolution
b) loan or guarantee given or securities given for due repayment of any loan bycompany in its ordinary course of business and interest is charged at a rate notless than the rate of prevailing yield of 1Year/3Year/5year/10Year Governmentsecurity closest to the tenor of the loan
c) any loan made by holding company to its WOS company or anguarantee/security provided by holding in respect of any loan made to subsidiarycompany provided loan is used by subsidiary for principal business activity
d) any guarantee given or security provided by holding company in respect ofany loan made by any Bank or FI to its subsidiary company provided loan is usedby subsidiary for principal business activity
Yes
Allowed
No
Prohibited
No
Allowed
any person in whom any of the director of the company is interested
"any person in whom any of the director of the company isinterested" means—
(a) any private company of which any such director is a director ormember;
(b) any body corporate at a general meeting of which not less thantwenty-five per cent. of the total voting power may be exercised orcontrolled by any such director, or by two or more such directors,together; or
(c) any body corporate, the Board of directors, managing director ormanager, whereof is accustomed to act in accordance with thedirections or instructions of the Board, or of any director or directors,of the lending company.
Yes
Are the conditions being satisfied -
(a) a special resolution is passed by the company ingeneral meeting : Provided that the explanatorystatement to the notice for the relevant general meetingshall disclose the full particulars of the loans given, orguarantee given or security provided and the purposefor which the loan or guarantee or security is proposedto be utilised by the recipient of the loan or guaranteeor security and any other relevant fact; and
Yes - Allowed No - Prohibited
No
Allowed
IS “DEPOSIT” COVERED BY SEC. 185?
By way of Press Note, dated 4-6-1985 : (1986) 59 Com Cases (St) 8, the MCA stated that:
The Law Ministry has advised that deposits kept by one company with another company is “loan” as envisaged under section 295/370
Keeping with this loans under Sec. 295 of Act, 1956 will also include “deposits”
Loans and deposits are of course not same
There are various case laws to prove this.
S. 185 does not employ the same language as S. 370 of Act, 1956 wherein loans were taken to include deposits
Unless expressly specified by way of clarification or similar, S. 185 may not include a deposit
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SEC. 185 – A FEW THINKERS -1/3
What is meant by “ordinary course of business” in proviso to S. 185(1)
• The phrase does not mean ‘principal business’ , ‘main objects’
• Also, does not mean what is ‘extra-ordinary’ in the ordinary course of business. What is extra-ordinary is classified under the head “extra-ordinary” items in the balance sheet.
• Any business which is carried on with regularity and frequency can be taken to be ‘ordinary course of business’
• If say any manufacturing company has a separate treasury department dedicated togiving loans to directors, if such loans are forwarded only for financial accommodationof directors and not as a separate line of business, then not covered.
Are deposits covered?
• The section does not make any separate distinction as such.
• Going by the case laws in this case, loans are different than deposits
• The line of difference is thin and circumstantial
• Thus, deposits are not covered by the section
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SEC. 185 – A FEW THINKERS -2/3
Are advances covered?
• Advances are money advances against some due which is to be become due at alater period.
• It is a pre-payment against goods or services
• So, advances are not covered.
Does the section apply to book debts?
• Section is applicable only if loan or ‘loan in substance is advance.
• This intent was also discussed in point 12.65 of the Standing Committee’s onFinance’s report on Companies Bill, 2009
• S. 296 of Act, 1956 made reference to book debts
• If a book debt is prolonged beyond the usual credit period, so as to allow moretime to a debtor, such a debt may also amount to a loan.
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SEC. 185 – A FEW THINKERS -3/3
Whether Debentures are also covered under Section 185
Debentures are not covered by Section 185.The restriction of furnishing of security as usedin Section 185 relates to the security interestand not subscription of securities.
In case of holding-subsidiary relationship, can “accustomed to act” be assumed?
No. This being not defined is purelycircumstantial and upto the person alleging thesame to prove
If it can be proved that instructions weregiven consistently and the board of thesubsidiary applied such instructions withoutanalysing the rationale, then “accustomed toact” can be established
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PERSONS LIABLE FOR CONTRAVENTION
Company shall be punishable with a fine.
• Minimum-5 lakhs
• Maximum-25 lakhs
Every officer shall be punishable
• Imprisonment- 6 months; or
• Fine-Minimum-5 lakh
• Maximum-25 lakh; or
• Both
Director or other person whom the loan/guarantee/security is provided:
• Imprisonment-6 months; or
• Fine-Minimum-5lakh
• Maximum-25lakh; or
• Both
SECTION 186 – LOANS AND INVESTMENTS BY COMPANIES
QUICK SNAPSHOT- 1/2
• Investment through more than 2 layers of investment companies not allowed
Exemption for making foreign subsidiaries if permitted by foreign law
Exemption for such investment subsidiaries as required by law i.e. NBFCs, Banking companies, Insurance companies, and Govt. companies.
• Limit on giving loan, guarantee or security to any person (employees not covered) or any bodies corporate and making investment in the securities of a bodies corporate
60% of PUSC, FR and SPA, or
100% of FR and SPA, whichever is more
The above limits not applicable for transactions between holding and its wholly owned subsidiary
• Prior SR required in case of breach of the limits
• Also in case of subsistence of a term loan
• Unanimous consent of the Board as well as PFI concerned shall be required
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QUICK SNAPSHOT -2/2• Full details of the loan, investment , guarantee or security as the case may be to be given in financial statements.
• Intermediaries registered u/s 12 of SEBI Act shall not take inter-corporate loans and deposits in excess of thelimits specified under the regulations applicable to such company.
• Company shall maintain register in Form MBP-2 either physically or in electronic mode
• record all the transactions of gving or making LIGS
• within 7 days of the transaction
• kept at the registered office
• authenticated by CS or person authorised by the board
• Does the coupon rate on the issue of debenture (being a security) should be fixed in accordance with Section186 (7) of the Act?
The explanation provided in Section 372A of Companies Act, 1956 to the effect that "loan" includes debentures or anydeposit of money made by one company with another company, not being a banking company, is not provided in Section 186.Therefore, compliance of Section 186 (7) will not be mandatory in case of issue of debentures.
Companies in default of repayment of deposits shall not give or make LIGS till the default subsists.
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EXEMPTIONS PROVIDED
Loan, Guarantee, Security, investment made
Banking company
Insurance company
HFCs
a company which is established with the object ofand engaged in the business of financing industrialenterprises
a company which is established with the object ofand engaged in the business of providinginfrastructure facility
Investment made
investment company
Rights issue u/s 62
Rights issue by any body corporate
NBFC whose principal business is acquisition ofsecurities
Investment made in respect of lending or investment activities
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CO-RELATION BETWEEN SECTION 185 AND 186
While section 185 mandates the lending companies to charge at the prevailing yield for the loans or guarantee or security in connection with such a loan which attracts the provision in order to avail exemption
Section 186(11) exempts certain classes of companies from the section except for sub-section (1)
Sub-section (7) lays down the requirement of charging a rate of interest at the prevailing yield of a govt. security
So, if a company is exempted from section 186, however, the transaction attracts section 185, whether interest is to be charged at the prevailing yield?
Yes, both are independent sections.
SECTION – 187 HOLDING OF INVESTMENT IN ITS OWN NAME
• All the investments of a company are to be held in its own name
• However, in case of WOS , the same can be held in the names of the nominees
READ OUR RELATED RESOURCES HERE
1. Companies (Amendment) Act, 2017 brings relief under section 185and 186 - Click here
2. Other corporate law articles – Click here
ABOUT USVinod Kothari & Co.,
Based in Kolkata, Mumbai, Delhi
We are a team of consultants, advisors & qualified professionals having over 30 years of practice.
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