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Inter-Corporate Loan

The Companies Act, 2013 (Act) has come up with a change in the concept of 'Loan and Investment by Company. The new Act provides that inter-corporate investments not to be made through more than two layers of investment companies. The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which includes company incorporated outside India.

There are no such restrictions which are currently imposed under the 1956 Act. Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company are no longer available under the 2013 Act. In pursuance to the provisions of Section 186(1) of the Act, a Company shall make investment through not more than two layers of investment companies.

'Layer' according to explanation (d) of Section 2(87) of the Act in relation to a holding Company means its subsidiary or subsidiaries. 'Investment Company' means a Company whose principal business is the acquisition of shares, debentures or other securities"

The provisions of Section 186 (1) shall not have effect in the following cases: If a company acquires any company which is incorporated outside India and such company has investment subsidiaries beyond two layers as per the laws of such country. A subsidiary company from having any investment subsidiary for the purposes of meeting the requirement under any law/ rule/ regulation framed under any law for the time being in force. 

Objectives:
There are various objectives of the inter-corporate loan. Inter-corporate loans are loans made from one business unit of a company to another.

This is usually for the following reasons and objectives:
  • To shift cash to a business unit to avoid the shortfall in cash.
  • To shift cash into a business unit (usually corporate) where the funds are aggregated for investment purposes.
  • Shifting cash within business units that use a common currency, rather than sending in funds from a foreign location that will subject to exchange rate.

The requirement of Inter corporate loans:

The inter-corporate loan is extremely useful for the following reasons:
  • There is no requirement of any credit application.
  • On very short notice, cash is available to any corporate.
  • The terms of repayment are much.

What is the rate of Interest applicable on Inter-corporate loan?

The rate of interest applicable to inter-corporate loan will be as follows:

  • No corporation will get a loan at a rate of interest lower than the rate that prevails of the Government security closest to the tenor of the loan.
  • However, the above rate of interest is not applicable if the loan is provided for industrial research and development projects, in which the government held 26% or more of the paid-up capital.

Disclosure of particulars of the loan in Financial Statement

Section 186(4) of the Companies Act, 2013, provides that the where a company made some inter-corporate loan, then that company must disclose the following details to the members in the financial statement.
  • Amount of loan provided
  • The investment made/guarantee given
  • Purpose of providing the loan
  • The source of funding for meeting the proposal
  • The particulars of the body corporate interested to make such loan

Procedure for providing Inter-corporate loans:

Following is the procedure which must be kept in mind while providing inter-corporate loans

  • The company can give any loan or any guarantee through board resolution up to 60% of its paid-up capital and 100% of its free reserves and security premium, whichever is more.
  • There must be a meeting of the Board of Directors after giving proper notice.
  • Unless the board resolution passed, any company shall not make any investment. However, where the aggregate loan amount is within the limits as specified under section 186(2) of the Companies Act, 2013, then there is no necessity of getting prior approval of that financial institution.
  • After deciding the source of fund and quantum of requirement, the Company Board can authorize one of the directors or any other person to apply for the approval of financial institution.
Written By: Shubham Parashar

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