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Date: 20th March 2010 |
Compiled by: M Sathya Kumar |
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Inter corporate
Loan/Investment/Guarantee/ Security Section 372A of the Companies Act, 1956 (The
Act) deals with intercorporate Loan, Investment,
Guarantee and Securities in connection with loan. All the four transactions
are frequently taken place in any company and henceforth the section becomes
more important and therefore it requires to special heed by virtue of strict
penal provisions and because of no much space to play. Here the author has
made an attempt to reduce & brief the provisions of section 372A in
analytical way which is more handy to remember and
apply rather than to describe it in legal language. Table A
Table B
If the total of table B is within the
deadline figure, Board resolution will do. If the total of table B is exceeds the dead
line figure, the following provisions of the section becomes mandatory to be
complied with. 1. A resolution at Board meeting shall be
passed in this regard with consent of the all the director present at the meeting.
(Power u/s. 372A can not be delegated nor can board resolution be passed by
circular.) Every inter corporate
investment/loan/guarantee/security falling within section 372A (even within
limit) must be sanctioned by a resolution of the board passed at its meeting.
Such decision can not be taken by circular resolution nor can it be delegated
by the Board. Section 292(1) (d) & (e) permits
delegation of power to invest and loan, however S. 372A does not permit. S.
292 is general whereas s. 372A is special in nature.
As per settled principle of interpretation, special provision shall prevail
over general provisions. The MCA is of the view that in view of the specific
provision contained in erstwhile s. 372(5)-corresponding to S. 372A(2), the
power of the board under the section can not be delegated – DCA
circular No. 48(50)-CL-IV/61 dated 12th February, 1962. However, delegation u/s. 292 is permitted
for transactions which are not fall within s. 372A, e.g. loan to
Individual/firm/trust/ mutual fund. 2. Prior approval of public financial
institution, where any term loan is subsist (this is not necessary, if there
is no default in payment of interest and installment as per agreement and
proposed amount in aggregate is within the dead line figure). 3. Rate of interest on loan shall not be
lower than prevailing bank rate, being the standard rate made public under
section 49 of RBI Act, 1934. 4. A special resolution shall be passed at
general meeting by giving 21 clear days notice. In case of listed company,
resolution shall be passed by following postal ballot procedure pursuant to
section 192A of the Companies Act, read with postal ballot Rules. 5. The word used in the section is
“Body corporate” and not the “Company”. Body
Corporate means as defined u/s. 2(7) of the Act. It is inclusive definition.
In legal parlance and for the purpose of the section, Body corporate means
body having separate legal entity, perpetual existence and common seal. 6. As provided by proviso, Notice of general
meeting shall indicate clearly the specific limit, the particular of body
corporate in which the investment is proposed to be made or security
provided, or guarantee to be given, the purpose of the transaction and
specific source of funding. As per the proviso, all the above details
are required to be mention in the Notice convening the general meeting. I am
of the opinion that the specific limit and name of the body corporate should
be mention in resolution itself and rest of the details can be mentioned in
explanatory statement along with other information as required by Section 173
of the Act. Explanatory statement can be considered as part of Resolution and
Notice too. 7. Company defaulting in complying section
58A of the Act, pertaining to deposit, can not entered in to, directly or
indirectly, in any transaction as covered by section 372A, till such default
is subsisting. By this proviso, Legislature has secured compliance of the
tricky provisions of section 58A of the Act. 8. A Company shall require to maintain register at registered officer for this
purpose by entering prescribed details within 7 days. 9. In exceptional Circumstances, Board may
give guarantee without being previously authorized by special resolution
subject to conditions that the Board resolution is confirmed by special
resolution within 12 months or forth coming Annual General Meeting, which
ever is earlier. This window can be used only for giving guarantee. 10. However it’s not clearly
mentioned, but by interpreting the wording of the section, it can be said that
Guarantee means Guarantee given for Loan to or by any body corporate and it
does not includes guarantee given by a company for any borrowing availed for
itself. 11. The word used in the section is
“Securities”, it means as defined under Security (contract &
Regulation) Act. It is vide definition and covers
also, bond, debenture, script, or any other marketable securities of like
nature of body corporate and also derivatives and right & interest in the
securities. In this context, it can be inferred that warrant / instrument
convertible in to shares is also comes under the net of the Section 372A. 12. Investment in Mutual Fund & Govt.
Securities are falls outside Section 372A as the same are not issued by
body corporate. Most of the mutual funds are constituted as
“Trust” under Indian Trust Act. Such trusts are not body
corporate. However investment in units of UTI Mutual fund which are issued by
UTI trust company Pvt. Ltd. is well covered u/s. 372A and investment in unit
of UTI set up u/s. 3 of Unit trust of India Act, 1963 is also covered u/s.
372A. 13. Capital Market Derivatives / Future & Options Section 372A is not applicable: In Future
& option, there is no acquisition of securities. In present scenario in The crux word “otherwise”
definitely relevant to “derivative” if there is acquisition /
delivery of securities by way of derivative/future/option. Even if we consider derivative as
“agreement to acquire securities, it doest meant to say investment.
Because it can be said as acquisition/Investment when delivery take place.
Until and unless delivery take place, Section 372A will not be applicable
just to “contract to acquire”, which may or may not be
materialize. 14. As per DCA Circular F.No. 5/17/99-CLV;
General Circular No. 8/99 dated 4/6/99 a) Resolution for “Investment”
much beyond the net worth should not be passed by the Company. Here it is
pertinent to underline the word “Investment”. It means the
restriction is not applicable for Loan, guarantee, and securities. b) The Company should specifically indicate
in explanatory statement to the resolution, the specific securities in which
it is proposed to invest the amount, en block approval should normally be
avoided (except in the case of guarantee where the resolution can indicate an
amount on annual basis.) Here, its seems
that the DCA eyes on mentioning the name of security, i.e. equity,
preference, debenture etc. rather than to cover everything under umbrella of
“Securities” as the definition is very vide. Explanation: a) “Loan” includes debentures or
any deposit of money made by one company with another company, not being
banking company. (Deposit with Bank is exempted). So, whenever one applying
his mind for exempting inter corporate deposit from
Section 58A, at the same time one should check compliance with Section 372A.
Because what is exempted by one section is covered by another. b) “Free reserve” 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 to
the security premium account but shall not include share application money.
(Paid up capital can be considered as on the date of investment). (It is not expressly provided that in arriving
at the aggregate of the free reserve, the amount of accumulated balance of
loss, balance of deferred revenue expenditure and other intangible assets, should be deducted. Capital and debenture
redemption reserve is free reserve after redemption of preference shares and
debenture respectively.) Exemption: As per Ss. (8) nothing contained in this
section shall apply a) To Banking company b) A company whose
principal business is the acquisition of shares, stock, debentures or other
securities. c) To a private
company, unless it is a subsidiary of public company d) To investment made
in shares pursuant to sec. 81(1) (a) – Rights shares. (This is can be
happen only in case right issue offer by public company because the section
81 is inapplicable to private companies. Right shares offered by private
company as per its articles or otherwise can not be said to have been offered
u/s. 81(1) (a) and therefore investment in rights shares issued by private
company can not be eligible for exemption u/s.372A. Here, It worth to make it clear that, the
above will be counted for the purpose of subsequent investment / loan/
guarantee / securities. e) To any loan made by
holding company to it’s wholly owned subsidiary f) To any guarantee /
security by holding company, in connection with loan made to it’s wholly
owned subsidiary company g) To acquisition by a
holding company, by way of subscription, purchases or otherwise, the
securities of its wholly owned subsidiary. In between reading of the words, it can be
inferred that Investment in other body corporate for the purpose of make that
company, a wholly owned subsidiary is not exempted because the exemption is
for investment in wholly owned subsidiary. So needless to say that there must
be status of wholly owned subsidiary before the proposal of investment in a
company. The exemption is also available for indirect wholly owned
subsidiary The continuation of investments made by the
exempted companies, after the exemption ends would not require compliance
with S. 372A. Thus, investments made during the period when the company was
exempt under this section and remained outstanding after after
the cessation of the exemption, would not come within the restrictions
contained in S. 372A. (DCA Circular no 13/98/CL-VI/67, dated 24 February
1971.) Penal Provision As per Ss. (9), the company and every
officer of the company who is in default shall be punishable with
imprisonment up to 2 years or fine up to Rs. 50000. Provide further that all
persons who are knowingly parties to any such contravention shall be liable,
jointly and severally, to the company for the repayment of loan Article
by Suresh Savaliya, a renowed
lawyer who is an expert in the field of law |
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