Implications of insertion of the word ‘person’ – Section 186 of the Companies Act, 2013


ePoints 2

| Company Secretary, Essel Mining & Industries Limited (An Aditya Birla Group Company)





Added by | Posted in Company Law | Type: , , | on December 5, 2013

Disclaimer:  The views expressed in this article are solely the views of the author and are not connected in any way with the views of the Company/ or the Group where the author is employed.

By: Narendra Singh, Company Secretary, Essel Mining & Industries Limited (An Aditya Birla Group Company)

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BACKGROUND

The term ‘person’ has been included in the section 186(2)(a) of the Companies Act, 2013 (‘the Act’) which deals with the matter pertaining to giving of loan by the company and the same is yet to be notified by the Ministry of Corporate Affairs (‘MCA’). Nevertheless, the section 372A of the Companies Act, 1956 which inter-alia deals with loan to body corporate continues to be in the existence till section 186 of the Act comes into force.

Further, section 186 would be applicable on all companies including private limited companies except the companies mentioned in sub-section 11 of said section of the Act.

As per section 2(31) of the Income Tax Act, 1961 (‘IT Act’), ‘person’ includes an individual, a Hindu undivided family, an association of persons or a body of individuals, whether incorporated or not etc. In general usage also, a person is a human being and can include firms, labor organizations, partnerships, associations, corporations, legal representatives, trustees, trustees etc.

POINT OF DELIBERATION

In the absence of any explanation and with the unadorned reading of the said section, it appears that loan given by the company to all person as defined in the IT Act, besides covering ‘body corporate’, would cover loan given by the Company to its employee also. This would certainly lead to additional enormous compliances and disclosures to ensure the acquiescence of the said section 186 of the Act.

Further, as per section 186 of the Act, a company cannot give loan at a rate of interest lower than the prevailing yield which means the companies would be prohibited to give loan to its employees also at a rate of interest lower than the prevailing yield.

MAJOR IMPLICATION UPON NOTIFICATION OF SECTION 186

Upon notification of section 186 by the MCA, the companies would be required to ensure the following relating to giving loan to person:-

(i)     Approval of the Board and the Shareholders

 As the existing approval of the Board and the shareholders obtained by the companies would be relating to giving loan to body corporate only, the companies shall be required to seek fresh approval of the Board and their shareholders to give loan to the persons which includes employees also. The explanatory statement shall contain complete disclosures including the nature of concern or interest of each key managerial personnel or their relative in the said business matter.

(ii)    Disclosures in Financial Statements

Section 186(4) of the Act requires that the company shall disclose in their financial statements full particulars of the loan given and purpose for which loan is proposed to be utilised by the recipient of loan. Such disclosures of large employee base conglomerate might run into few pages as the companies continue to give loan to its employees under various welfare schemes.

(iii)  Maintenance of Register

As per the draft rules issued by MCA, Rule 12.9 states that every company  giving  loan  shall  maintain  a  register  in  Form  No.  12.2  and enter  therein  separately,  the  particulars  of  loans  e.g.  nature, date, name of the person, amount, period, purpose, date of passing resolution etc., the companies would be require to collate and enter all such details of loan given to all person also in the Register which might be a cumbersome exercise.

(iv)  Rate of interest

As the section 186(7) of the Act states that no loan shall be given by the company at a rate of interest lower than the prevailing yield, the existing scheme of giving loan at nominal rate to employees by the companies might become redundant.

WAY FORWARD

As the word ‘person’ is not defined in the Companies Act, 2013, it would be appropriate if the MCA while notifying the section 186 of the Act, clarifies and exempt the loan given or proposed to be given by the company to its employee as per the applicable policies of the Company from the preview of the said section of the Act.

In the absence of such exemption and clarification, MCA should exempt the companies from charging the prevailing rate of interest on the loan given by the companies to its employees till the notification of section 186 of the Act and maintaining the details of such loan in prescribed Register of loan etc.

CONCLUSION

With the insertion of the word ‘person’ in the section 186(2)(a) of the Act, enormous disclosures and compliances would be required to observed by the companies. As the companies give loan at nominal rate of interest to its employee under various welfare scheme, it is advisable for the companies to gear up and be ready seek approval of the Board and the shareholders as the case may be to ensure compliances of the section 186 of the Act.

Further, the MCA should exempt the loan given by the companies to its employees from the preview of said section failing which the loan under welfare schemes of the companies would become ineffective.

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