loans, investments, deposits, related parties under companies act 2013

THE COMPANIES ACT, 2013

IMPORTANT PROVISIONS RELATING TOLOANS, INVESTMENTS, DEPOSITS

AND RELATED PARTIESwww.kalidasvanjpe.com

Disclaimer : This is for information purpose only. Readers are advised to seek professional help in respect of any issues they have and should not rely on this presentation. Copyright with the author.

CS Kalidas Vanjpe Practising Company Secretary

FEATURES

No change in basic concepts.

Emphasis on rules. Objective: to bring flexibility and adoption of

internationally accepted practices, self regulation with more disclosures, stringent punishment for violation etc.


FEATURES (Contd.)

Most of the privileges, concessions and exemptions of a private company will go.

e.g. Loans, Investments, Related parties.

Will be on par with public companies for most of the matters.


LOANS Sec 185: Two categories : Loans to Directors and

Others. Loans to Directors - Exemption to Private

companies, banking companies gone. Virtually such loans banned with limited

exemptions. Restrictions on loans to Director or “any other

person in whom the Director is interested”


LOANS TO DIRECTORS Exemptions: a) Loan to MD/WTD as a part of

conditions of service to all employees or b) pursuant to any scheme approved by members by

a special resolution Loan, guarantee or security for repayment of loan in

the ORDINARY course of business and charging interest at prevailing bank rate.

C) Any loan, guarantee or security by a holding co to WOS

D) any guarantee or security by a holding co to its subsidiary (loan not covered)

For c and d, subsi to use the funds for its principal business activities


EXPLANATION OF “ANY OTHER PERSON” Any director of a lending co. or of a company which is

its holding co or any partner or relative of such director

Any firm in which such director or relative is a partner Any pvt company of which such director is a director

or member Any body corporate : 25% of the total voting power

exercised or controlled by such director or two or more such directors

Any body corporate : the BOD, MD or Manager is accustomed to act in accordance with directions or instructions of the Board of one or more directors of the lending co.


LOANS AND INVESTMENTS Sec 186: Prohibition on making investments

through more than two layers of investment companies.

Investment company means the company whose principal business is acquisition of shares, debentures or other securities.

Exemptions: a) acquisition of a company abroad if such co is having more than two layers if permitted under law there and b) a subsi co from having any inv subsi co if required by law.


LIMITS ON LOANS/INVESTMENTS 60% of puc, free reserves and securities premium

account or 100% of free reserves and securities premium account whichever is more

Limits applicable for giving any loan, guarantee, providing security or acquisition of securities.

Limits can be exceeded by a special resolution. Prior approval. Approval not necessary in respect of loan, guarantee by a co to WOS or joint venture co. Also approval by special resolution not necessary for investments by holding co in WOS


OTHER PROVISIONS Proposal to be approved at meeting of BOD with

the consent of all directors present. Interested director not to participate.

If any term loan from public fin inst is subsisting, then prior approval of such inst. Exemption: if the loan/inv/guarantee etc is within limits i.e 60% or 100% and no default in loan or int

Disclosure in fin statement about the loan/inv etc of full particulars including the purpose for which it is to be utilised by recipient.


OTHER PROVISIONS (Contd.) Also disclosure in Board’s report. Particulars of loans, investments also in A/R Also in case of Companies where A/R certification

is compulsory, the PCS has to certify the compliance. Scrutiny by Audit committee.

Loan to carry interest not lower than the prevailing yield of Govt security closer to tenor of loan.

Compulsory filing of resolution with ROC. Power to invest or giving of loans etc is

delegatable.


OTHER PROVISIONS (Contd.) No co registered under sec 12 of SEBI Act can

take inter corporate loan or deposits exceeding the limits.

If default in repayment of deposits or payment of interest by a company, then prohibited to give loan or guarantee or security or make acquisition till such default continues.

Every co to maintain register of loan/investments etc at regd office. Open for inspection.

Entries (manual or electronic) to be made within 7 days of transaction in the register and shall be authenticated by CS or other authorised officer.


EXEMPTIONS Except provision of two layer investment

subsidiary, provisions of section will not apply to a banking company or insurance company or a housing finance company in ordinary course of its business or a company engaged in business of financing of companies or of providing infrastructural facilities.

Business of financing of companies shall include (with regard to regd NBFCs) giving of any loan or giving loan etc in the ordinary course of business.


EXEMPTIONS (Contd.) Specific exemption only for investment: A) Any acquisition by a regd NBFC whose

principal business is acquisition of securities (proviso gives exemption only in respect of investment and lending activities [?])

B) by a company whose principal business is the acquisition of securities

C) Acquisition of rights shares offered under further issue of capital.


DEPOSITS

In private company's definition, the clause of prohibition of invitation or acceptance of deposits from persons other than members, directors or their relatives is gone

Now private companies can accept deposits from Directors under exempted category. Director cannot take loan and place the same as deposit.

They have to comply with the conditions and procedure in case of deposits from members.

The term deposit includes any receipt of money by way of deposit or loan or in any other form by the company but excludes such categories as may be prescribed.


DEPOSITS (Contd.) All cos can accept deposits from members.

Required to pass an ordinary resolution Limit 25% of the aggregate of the paid up

capital and free reserves. For sec 76 companies: limit 10%

Period mini 6 m maxi 36 m. To meet short term requirements they can accept deposits of shorter tenure of not less than 3 m. such dep should not exceed 10% of puc and free reserves.


DEPOSITS (Contd.) public companies having a net worth of

not less than one hundred crore rupees or a turnover of not less than five hundred crore rupees (eligible companies) can accept deposits from public (sec 76 companies)

Special resolution. Ordinary resolution will do if aggregate of borrowings do not exceed the aggregate of puc and free reserves


LIMIT ON PUBLIC DEPOSITS Sec 76 cos can borrow up to 10% from

members and 25% from public. For Govt co., the limit is 35%


PROCEDURE Every co to issue a circular to members by

RPAD/Speed post or electronic mode (form DPT1). In addition, advt of circular in two newspapers (applicable to sec76)

Credit rating must. In case of adverse change in rating,

depositors to be given exit option Sec 76 co to follow the procedure of advt,

filing the text with ROC etc


DEPOSIT INSURANCE Compulsory for all companies. at least thirty days before the issue of

circular or advertisement or at least thirty days before the date of renewal. The amount deemed to include principal and int.

maximum cover Rs. 20,000/- Premium to be borne by the Co and cannot

be recovered from depositors


DEPOSIT INSURANCE (Contd.) If defect in insurance due to non payment,

the Co to rectify the defect or enter into a fresh contract within 30 days. If not , the co to repay the deposits and int covered by such insurance within next 15 days. If not, int at 15% applicable for period of default and also penal provisions.


SECURITY FOR DEPOSITS Concept of secured deposits introduced. Although the Act makes it optional, the

rules make it compulsory for companies accepting deposits from members, if shortfall in insurance cover.

All companies accepting deposits from members shall create a charge on their assets excl intangible assets to the extent amount remaining unsecured by insurance.


DEPOSITS (Contd.) For sec 76 co., the provisions of creation of

security will apply only in case of secured deposits

In case of deposits which are secured, the amount of such deposits and the interest payable thereon shall not exceed the market value of such assets as assessed by a registered valuer

Security to be created in favour of trustee (similar to debenture trustee)


DEPOSITS (Contd.) Creation of Deposit Repayment Reserve

mandatory. This is in the form of liquid assets. Amount equivalent to 15% of deposits maturing during the year and next year.

Earlier Private companies were not required to maintain liquid assets. Now even for deposits from members, it is compulsory.

They also have to file return of deposits. CS Kalidas Vanjpe

Practising Company Secretary

DEPOSITS (Contd.) In case of deposits held by existing

companies, they have to be repaid within the due date or one year.

National Company Law Tribunal can extend time for repayment.

Rules however have given respite to cos. They can repay the deposit and interest as per the terms on which they are accepted. That will be sufficient compliance. But if they fail, then penal provisions will apply.


DEPOSITS (Contd.) A statement of deposits to be filed with

ROC within 3 months of commencement of Act or from the date on which such payment is due.

Practical problem for Pvt cos. Statement to be certified by auditor May lead to cash flow problems or

disputes among shareholders


DEPOSITS – EXEMPTION CRITERIA

Some exemptions: Advance for supply of goods/services should be

appropriated within 365 days Advance for sale of property should be adjusted

against property Supply of capital goods exempted but if any of

the above all cases, if the company has to refund money as the Co did not have necessary permissions/approvals to deal in the goods etc, then the amount will be treated as deposit.

Security deposit for performance of contract.


EXEMPTION (Contd.) Unsecured loan from promoters/relatives in the

form of quasi equity. Security deposit from employee not exceeding his

annual salary and it should be non-interest bearing.

Govt loans or govt guaranteed loans Inter corporate deposits Bonds or debentures either secured or

compulsorily convertible into eq shares Bank or Institutions’ loans etc.


EXTREMELY IMPORTANT PENAL PROVISION:

If existing deposit is not repaid within due date or one year or extended time, minimum penalty Rs. 1 cr., may go to Rs. 10 cr.

Officer in default liable to imprisonment upto 7 years or fine (min Rs. 25 lakhs, Maximum Rs. 2 cr) or both.

If fraud in acceptance is proved, every officer accepting deposit, is personally responsible for losses, damages.


RELATED PARTY Defined first time in the Act which is broader than

the Accounting standard. Related party with reference to a company

means:a) A Director or his relativeb) A KMP or his relativec) A firm in which a director, manager or his

relative is a partnerd) A private company in which a director or

manager is a member or director


RELATED PARTY (Contd.)e) A public co. in which d or m is a d and holds along

with relatives more than 2% of pucf) Any body corporate whose BOD/MD/M is accustomed

to act in accordance with the advice, directions or instructions of a d or m.(excl professional capacity)

g) Any person under whose advice etc a d or m is accustomed to act (excl Pro capacity)

h) Any co. which is a holding, subsidiary or asso co or a subsi of a holding co to which it is a subsi

i) Such other person as may be prescribed: a director or KMP of holding co or his relative


REALTED PARTY TRANSACTIONS (RPT) Prior approval of the BOD at a meeting is required for

following RPTs: A) sale, purchase or supply of any goods or materials B) selling or otherwise disposing off or buying property C) Leasing of property D) availing or rendering of any services E) Appointment of agents for purchase or sale of any goods,

materials services or property F) such party’s appt to office/place of profit in co/subsi/asso

co G) underwriting of subscription of securities or derivatives

of co.


RPT (Contd.) Agenda of Board meeting should disclose: A) Name of Related party and nature of relationship B) Nature and duration of contract and particulars C) Material terms including value D) Advance paid or received, if any. E) Manner of determining pricing and other

commercial terms both included and not considered. F) Whether all relevant factors considered. If not,

rationale for not considering G) Other relevant /important info. Interested Director shall not be present during

discussions.CS Kalidas Vanjpe


RPT (Contd.) Prior approval of the Company by special

resolution necessary: companies with following criteria

A) sale/purchase/supply directly or through agents exceeding 10% of annual turnover or Rs. 100 cr whichever is lower.

B) selling etc of property directly or through agents exceeding 10% of net worth (NW) or Rs. 100 cr whichever is lower.

C) leasing of property exceeding 10% of NW or 10% of turnover or Rs. 100 cr whichever is lower.


RPT (Contd.) D) availing or rendering of service directly

or through agents exceeding 10% of turnover or or Rs. 50 cr whichever is lower.

E) office or place of profit –remuneration exceeding 2.5 lakh pm

F) remuneration for underwriting exceeding 1% of NW


RPT (Contd.) Audit committee has to approve the

transactions with related parties. Also disclosure in Financial statements,

Board’s report. Particulars of RPTs also in A/R Also in case of Companies where A/R

certification is compulsory, the PCS has to certify the compliance.


EXEMPTIONS A)Transactions entered into in the ordinary course

of business and at arm’s length. Arm’s length means a transaction between two

related parties that is conducted as if they were unrelated, so that there is no conflict of interest. Concept borrowed from excise.

B) a contract with another partner of the firm in which d or m or his relative is a partner

C) transactions arising out of compromise, arrangements and amalgamation.


CONSEQUANCES OF NON-COMPLIANCE

Contract without approval may be ratified within 3 months by BOD or shareholders. If not ratified, then voidable at the option of the BOD. If related to a director, he shall indemnify the co agt losses

Co can proceed agt the director or employee for recovery of losses.

Director or employee of listed co: imprisonment upto one year or fine 25K to 500k. Other co : only fine.

Such director is disqualified for 5 years for appt as director and also vacates his office u/s 167


OTHER POINTS Enhancement in penalty, appointment of

prosecutors for courts and adjudicating officers for trying offences. This means enforcement of the provisions would be done seriously.

Hence, a change in mindset necessary. “Chalta Hai” attitude needs to be abandoned. Documentation needs to be perfect.

Likely effects: a) cost of compliance b) increase in business of insurance co. c) increase in litigation, cash flow problems for

private cos.CS Kalidas Vanjpe


THANK YOU.
