INTER-CORPORATE LOANS

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1 INTER-CORPORATE LOANS Student Paper Writer - Poorna Iyer When borrowing from Banks, there are many formalities in terms of Documentations to be adhered to. All these formalities can be done away with the aid of Inter Corporate Deposits [hereinafter referred to as Inter-Company Deposits as per The Companies (Acceptance of Deposits)Rules,2014]. Inter-Company Deposits are deposits made by one company with another company. It is pertinent to note that LLP is included in the definition of a Corporate but not a company. Features: Usually given by cash-rich companies to low rated, cash starved companies, unable to get a loan. Since it is an Unsecured Loan,the risk involved is higher. Also,since the cost of funds are much higher for a corporate than a bank,the interest rates are higher for than the bank rates ACCEPTANCE OF INTER COMPANY DEPOSITS Earlier private companies were allowed to take loans from directors, shareholders and relatives of directors which were the major sources of funds for most of the private companies, apart from banks. However, with the introduction of the Section 73 of Companies Act,2013 this exemption has been removed, and, only deposits taken from directors are exempted from the definition of deposits provided he gives a declaration that the amount he is giving is out of his owned funds. Going forward private companies shall have to adhere to strict norms for borrowing from any person other than directors thereby increasing the compliance costs for small private companies. In such a scenario, Private Limited Companies can resort to Inter-Company Deposits as a quick source of finance without any cumbersome procedures to be followed. LENDING OF CORPORATE LOANS Section 186 of the Companies Act, 2013 permits lending of corporate loans subject to the fulfillment of the following requirements/conditions: Prohibition on Investment through more than two layers of Investment Companies. The above restriction is not applicable for o Investment in company incorporated outside India which has investment subsidiaries beyond two layers as per laws of that country

2 The amount of Investment should be restricted to: o 60% of paid up capital + free reserves+ securities premium account OR o 100% of free reserve, Whichever is more o Any investment beyond the above limits needs approval of the shareholders in the general meeting. Every companies which contravenes the provisions of this section shall be liable to a penalty which shall not be less than Rs.25,000/- but which may extend to Rs.5 Lakhs & every officer in default shall be punishable with imprisonment for a term which may extend to two years and fine which shall not be less than Rs.25,000/- but which may extend to Rs.1,00,000/- SECTION 73 READ WITH SECTION 185 Although Section 73 permits acceptance of inter-company deposits, there are various issues involved while lending of loans to companies. For Example: Giving of loans may attract provisions of Section 185 which states that no loan to be given to directors or entity in which director is interested. Accordingly, while giving loans there may arise situations where the director of lending company is a director in borrowing company CONCLUSION Companies Act, 2013 demonstrates the systemic move towards greater regulation of corporate transactions in India with a view to facilitate increased accountability. Companies Act, 2013 has introduced greater disclosure and compliance requirements in regulating access of capital by companies via loans and borrowings. However, the move towards increased regulation of corporate loans and borrowings under Companies Act, 2013 shall significantly affect the ability of companies (specifically private companies) to access funds. LOAN TO DIRECTORS

3 Provisions relating to giving of loans to directors have now been made stringent under Section 185 of Companies Act, 2013.Subject to the limitations set out in the old act it was possible to advance loans to directors. Private Limited companies (not being a subsidiary of public limited company) enjoyed the relaxation of advancing loans to their directors as per Section 295 of Companies Act,1956.Corporates now have to be very vigilant in advancing any amount to their directors as they will be faced with heavy penalties in the event of non-compliance. After being assented by both the houses of parliament, Section 185 came into effect on when it was notified by Ministry of Corporate Affairs. As per Section 185 of Companies Act,2013, a company cannot directly or indirectly enter into any of the following transactions with any of its directors or with any other person in whom the director is interested: 1. Advance any loan, including any loan represented by book debt; 2. Give any guarantee or provide any security in connection with any loan taken by him or such other persons. ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED MEANS FOLLOWING SPECIFIED PERSONS: 1. Any Director of the Lending Company or of a Company which is its Holding Company. 2. Any Partner or Relative of any such Director. 3. Any Firm in which any such Director or Relative is a Partner. 4. Any Private Company of which any such Director is a Director or Member. 5. Any Body Corporate at a General Meeting of which 25% or more of Total Voting Power may be exercised or controlled by any such Director, or by two or more such Directors. 6. Any Body Corporate where the Board of Directors, Managing Director or Manage are accustomed to act in accordance with the directions or instructions of the Board, or of any Director of the Lending Company. EXCEPTIONS:- 1. Loan provided to a Managing or Whole Time Director as a part of the conditions of the service which is extended by the Company to all its Employees, or loan given pursuant to any scheme approved by the members by a special resolution.

4 2. A Company which in the ordinary course of its business provides loans or guarantees or securities for the due repayment of any loan, and in respect of such loans an interest is charged at a rate which is not less than the Bank Rate declared by the RBI i.e. transactions must be in accordance to the norms and customs of industry at arm length price. EXEMPTION TO SUBSIDIARY COMPANIES: In accordance with Rule 10 of the Companies (Meetings of Board and Its Powers) Rules, 2014 following transactions are exempted provided that such loans are utilized by the subsidiary company for its principle business activities: 1. Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company. 2. Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company. PENALTIES FOR CONTRAVENTION OF PROVISIONS 1. On Lending Company: Lending Company shall be punishable in case of contravention of this section with a minimum fine of Rs.5 lacs but which may extend maximum to Rs.25 lacs. 2. On Director or any other Person: In case of contravention of this section, the recipient Director or other Person to whom any Loan, Guarantee, Security is advanced, given or provided in connection with any loan taken by him or the person shall be punishable with imprisonment which may extend to six months or with a minimum fine of Rs.5 lacs but which may extend maximum to Rs.25 lacs or with both. CONCLUSION In light to bring transparency in affairs of companies, changes are made in provisions for loans to directors. Efforts are made to bring private companies also within the coverage of this section, therefore, the provisions of Section 185 of the Companies Act, 2013 does not provide any exemption to a private company as provided earlier under Section 295.Even under section 295, loans made to or

5 security provided or guarantee given required previous approval of CG but these requirements are not present under section 185.Directors bear a fiduciary character so they must serve as trustee of company. The said changes are anticipated to reduce scams, increase responsibility and accountability of directors by bringing more governance.