explain the provisions relating to INTER CORPORATE LOANS
AND INVESTMENTS:
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Answer Posted / balram gorak, corporate lawyer
The provisions of the Companies Act, 1956 in relation to
the Inter Corporate Loans and Investments are explicated as
under:
A company cannot :-
make any loan to any other body corporate
give guarantee or security in connection with any loan made
by any person to another body corporate
acquire, by subscription, purchase or in any other manner,
securities in any other body corporate
exceeding 60 % of its paid up share capital and free
reserves or 100 % of its free reserves, whichever is more,
unless approved by a special resolution passed at a general
meeting of members.
The Board of the company may give a guarantee without being
previously authorised by a special resolution of members if
all the following conditions are satisfied :-
a Board resolution is passed to this effect
there exist exceptional circumstances which prevent the
company from obtaining previous authorisation by special
resolution
the Board resolution is confirmed within 12 months in a
general meeting or its next Annual general meeting,
whichever is earlier.
Notice of such resolution must clearly indicate the
specific limits, the particulars of the body corporate in
which the investment / loan / guarantee / security is
proposed, the purpose of the investment / loan /
guarantee / security, sources of funding, etc.
No investment / loan / guarantee / security may be made or
given unless the Board resolution sanctioning it is with
the consent of all directors present at the meeting and
prior approval of the public financial institution ( if any
term loan is outstanding ) is obtained.
Approval of the public financial institution is not
required if the investment / loan / guarantee / security is
with the 60 % limit as mentioned above and there has been
no default in repaying the term loan and / or interest
thereon.
No loan can be made at a rate of interest lower than the
bank rate prescribed by the Reserve Bank of India.
A company which has defaulted in repaying public fixed
deposits cannot make or give any investment / loan /
guarantee / security unless the fixed deposit is fully
repaid along with interest due as per the terms and
conditions of the fixed deposit.
A register of such inter-corporate loans and investments
must be maintained giving the relevant details.
The above provisions do not apply to :-
Any loan / guarantee / security made or given by :-
a banking company or an insurance company or a housing
finance company in the ordinary course of its business or a
company established with the object of financing industrial
enterprises or providing infrastructural facilities
a company whose principal business is the acquisition of
shares, stocks, debentures or other securities
a private company unless it is a subsidiary of a public
company
Investment made under Rights issue of securities
Loan made by holding company to its wholly subsidiary
company
Guarantee or security given by a holding company for loan
to its wholly owned subsidiary
Acquisition of securities by a holding company in its
wholly owned subsidiary
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