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INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)

1. The provisions of the Companies Act, 1956 would need consideration when a Company makes a loan toor invests in another body corporate. The provisions of section 372A are as below:

2. The sec tion applies to the following type of transactions (by say, Company A) :—

a. Loan by Company A to any other body corporate. "Loans" include inter-corporate depositsand debentures.

b. Giving by Company A of guarantee of provision of security in connect ion with a loan made

by:—

(i) Any other person to any other body corporate of 

(ii) To any other person by any other body corporate.

c. Acquisition by Company A, by way of subscription, purchase or otherwise the securities of 

any other body corporate. "Securities" for this purpose would be as defined under section2(h) of the Securities Contracts (Regulation) Act.

3. The sec tion applies to public companies only and thus not to private companies. The section also doenot apply loans, etc. made by the following companies:—

a. Banking, insurance or housing companies, in the ordinary course of their business;

b. Companies established with the object of financing industrial enterprises or of providinginfrastructural facilities.

c. Company whose principal business is the acquisition of shares, stock, debentures or othersecurities.

4. The section also does not apply to the following transactions:—

a. Investment in shares allotted pursuant to sec tion 81(1)(a).

b. Loans by holding companies to its wholly owned subsidiary. guarantees/securities by holding

companies for loans to its wholly owned subsidiary. Investments in securities by holdingcompany of its wholly owned subsidiary.

5. A company make loans, etc . up to the higher of the following:—

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a. 60% of its paid-up share capital and free reserves.

b. 100% of its free reserves.

"free reserves" for this purpose means reserves free for distribution as dividends and share premium

but excluding shares application money.

6. For loans, etc. beyond the limit/in Sr. No. 5 above the company would need approval by way of spec ia

resolution where the prescribed disclosures should be made in respect of the proposed loan, etc.

7. For any loans, etc., approval shall be taken of the company at a Board meeting with the consent of athe directors present at the meeting and also the prior approval of the public financial institution whose

term loan to the company is subsisting. However, where the loan, etc. is not beyond 60% of thecompany’s paid-up share capital and free reserves and there is no default in repayment loan or paymenof interest, the prior approval of the public financial institution would not be required.

8. Loans shall not be made at lower than the prevailing bank rate, as defined.

9. Companies that have subsisting defaults of section 58A cannot make loans, etc .

10. The company should maintain a register of loans, etc. with prescribed details.

11. For contravention of provisions of this section (other than the requirements relating to maintenance o

register), imprisonment or fine is provided for. However, such term of imprisonment/ amount of fine wouldbe reduced to the extent to which the loan, investment, etc. is recovered.