Thursday, July 29, 2010

Inter Corporate Borrowing and its legal issues under Companies Act, 1956

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Inter Corporate Borrowing and its legal issues under Companies Act, 1956

Inter corporate borrowings are governed by section 372A of the companies Act. This section can be understood in the following ways:

Scope of Section 372A

  • When a company makes a loan to any other body corporate
  • When a company acquires the securities of any other body corporate
  • When a company gives any guarantee or provides any security to
(i) Any person who gives a loan to any body corporate or
(ii) A body corporate, which gives a loan to any other person.

Consequences of Non-Compliance
1.      The Company and every Officer in default
a) Imprisonment up to 2 years, or
b) With fine up to Rs.50, 000.

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.

The provisions of Section 372A

1. Approval of the Board:
a. Approval in all cases
b. Prior approval
c. Resolution passed at a Board meeting
d. Power to make inter corporate loans and investments cannot be delegated
e. Unanimous approval

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 the ceiling limit is exceeded: Previous authorization by a special resolution is required.

c. Time of passing special resolution: Special resolution is required prior to making any inter corporate loan, investment, guarantee or security.

d. Manner of passing special resolution:
i. 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 inter corporate loan, guarantee, or security.

e. Disclosure requirements in notice of special resolution
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

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

5. Minimum rate of interest: Prevailing bank rate. ‘Bank rate' means the rate at which RBI lends money to commercial banks.

6. Relaxations in conditions:

1. No special resolution for guarantee: The Board may give guarantee in excess of the ceiling 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:
a. Loans, investments, guarantee, or security 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.


Loans: It includes debentures or any deposit of money made by one company with another company, not being a banking company

Free Reserves: means those reserves which, as per the latest audited balance sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.

Paid Up Capital: Paid-up capital is essentially the portion of authorized share capital that the company has issued and received payment for.

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Pooja Shroff said...

could you please assist me in drafting a inter company loan agreement, if you have a draft handy could you please mail it to me at