Inter corporate loans Investments and guarantees,securities

Meaning of body corporate referred to in section

The term “body corporate” is wider in scope and means not only companies registered under the Act but also foreign companies. It also includes a corporation formed under any special law. The term specially includes co-operative societies and any institution which the central government may by notification specify.

Companies under the same management omitted

The new section has altogether omitted the concept of companies under the same management as defined in erstwhile section 370. Henceforth inter-corporate loans, guarantees/securities and investments to or in any other company, whether under the same management or otherwise, will be registration in the same manner.

Scope of investment greatly expanded

In the erstwhile section 372, the reference was only investment in shares. In the new section 372A, the reference in section 2 (45AA) is to securities which is broader in scope than shares and means as defined in section 2(h) of securities contracts (regulation) act 1956.


Company registration rights

Powers of board by itself

The board of directors itself can:

  • Make loans to any body corporate
  • Given any guarantee or provide security to any person in connection with a loan made by that person to any body corporate.

Exercise of power by board at board meeting

The following are the features of the exercise of the power by the board:

  • The aggregate of the loans, investment and guarantee/security, existing as well as proposed will not exceed 60% of the paid-up capital and free reserves or 100% of free reserves, whichever is more.
  • The proposal will be approved at a meeting of the board.
  • Where the company is obtained loan from any public financial institution, as defined in section 4A of the act which is subsisting and there is no default in repayment or payment of interest to the financial institution.The board can approve if the proposal which together with existing such loans, investment and security does not exceed 60% of paid-up capital and free reserves.
  • If there is default of the conditions of the loan from the public financial institution, which is subsisting, the prior approval of the said institution should be obtained before the board approves the proposal.
  • No action under section 372A should be taken by the board if the company has committed a default under section 58A of the companies act 1956 till such default is subsisting.
  • The resolution should be passed by the board with the consent of all the directors present at the meeting.
  • The board shall ensure that the company has compiled with any guidelines prescribed by the central government as per section 372.

Where the existing transactions together with the proposed exceed limits prescribed in Sub-section (1)

Where the proposal to purchase securities or to give loans or to provide security together with existing loan, investment and security to or in a body corporate will exceed 60% of paid-up capital and free reserves or 100% free reserves, whichever is more, the board will proceed as under :

First Board Meeting

As the above proposal needs the prior approval of the general meeting, the board will fix the date and time for calling their registration in general meeting. The board will approve the notice containing the draft resolution to be passed as special resolution.

Approval of public financial institution

At the same time, if there is any loan from a public financial institution pending repayment, the company shall obtain the prior approval of the financial institution on the company’s proposal whether their registration is default or not.

Holding of a second board meeting

After the proposal has been approved by the general meeting by special resolution and by the public financial institution if applicable, another board meeting will be held to accord approval to give loan, purchase shares or provide guarantee or security as may be applicable. The board shall accord approval with the consent of all the directors present.

Shareholders’ approval by special resolution through postal ballot

It is stated above that where it is proposed to make investment in shares or to give loan or guarantee or provide security which, together with the existing transactions will exceed 60% of paid-up capital and free reserves or 100% of free reserves, the matter will require the prior approval of the shareholders by a special resolution.

 Guarantee can be given even in excess of limits without prior approval of shareholders

It is provided in the second proviso to sub-section (1) of section 372A that the board of directors of a company may give guarantee in excess of the limit of 60% or 100% without being previously authorized by a special resolution of the shareholders if the following conditions are satisfied :

  • The board passes a resolution to give the said guarantee and the resolution is passed with the consent of all the directors present at the board meeting.
  • The prior approval of the public financial institution, to which repayment of a term loan is subsisting has been received, in case the proposal will make the aggregate of loan, investment and guarantee in excess of 60% or 100% as the case may be.
  • There exist exceptional circumstances which prevent the registration of a company from obtaining previous authorization by a special resolution of the general meeting for giving the guarantee.
  • The resolution of the board under clause (i) above is confirmed within 12 months in a general meeting or the annual general  meeting held next after the resolution is passed by the board whichever is held earlier. It therefore follows that wherever the board approves of giving a guarantee which would make it in excess of the limit, it must be ensured that the same is confirmed within 12 months or earlier of the limit, it must be ensured that the same is confirmed within 12 months or earlier in a general meeting or AGM, whichever is held first.

You may also like...

Leave a Reply