Inter-Corporate Loans and Investments post CA 2013

Investment refers to an asset or item that is purchased with the hope that it will generate income or appreciate in the future. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price. Loan is the act of giving money, property or other material goods to another party in exchange for future repayment of the principal amount along with interest or other finance charges. A loan may be for a specific, one-time amount or can be available as open-ended credit up to a specified ceiling amount. According to Section 2(11) body corporate or corporation includes a company incorporated outside India, but does not include”(i) a co-operative society registered under any law relating to co-operative societies; and(ii) any other body corporate (not being a company as defined in this Act),which the Central Government may, by notification, specify in this behalf. This article deals with these terms defined above, i.e. this article deals with the regulations brought by the Companies Act (CA) ,2013 to the process of inter-corporate investment and loan.

Section 186 (1) of the CA 2013 restricts a company from making investment through more than 2 (two) layers of investment companies. An investment company has been defined to mean a company whose principal business is the acquisition of shares, debentures or other securities. These provisions, however, would not apply to (i) a company which acquires any other company in a country outside India, if such other company has investment subsidiaries beyond two layers as per the laws of such country; or (ii) a subsidiary company which has any investment subsidiary for meeting the requirements under any law.

Section 186 of the Companies Act ,2013 provides with certain restrictions on a company from providing loans, giving any guarantee or security, or acquiring any securities of a body corporate, exceeding (i) 60% of its paid up share capital, free reserves and securities premium account or (i) 100% of its free reserves and securities premium account, whichever is more. However, a company may go beyond such restrictions by passing a special resolution at a general meeting. These provisions are substantially the same as contained in Section 372A of the CA 1956.

 

 

 

However, some changes have been made causing some differences between the two aforementioned sections. The following table (1.1) will show some such distinctions.

Table 1.1

Section 372A ( CA 1956)	Section 186 ( CA 2013 )
Applicable only to public companies.	Applies to private companies as well.
Restricted a company from giving any loans to other body corporate.	Restricts companies from providing loans to any person or any other body corporate and hence loans to individuals and other non-corporate entities are also covered.
Such strict specifications were not mentioned.	The CA 2013 requires companies to disclose its loans, investments made, guarantee given or security provided and its purpose, to its members in the financial statement.

 

Other difference between section 186 (2013) and Companies Act, 1956 include:

The CA 1956 did not impose any restrictions on companies which made investments through multiple layers of investment companies. However, Section 186 (1) of the CA 2013 restricts a company from making investment through more than 2 (two) layers of investment companies, which has already been mentioned before.

 

The decision to impose a limit on number of investment subsidiaries was taken by the Ministry of Corporate Affairs (“MCA”) in the wake of the Purti scam, which exposed the lacunae existing in the Indian corporate regime. Section 186(1) has been introduced with a view to increase transparency in corporate transactions. This restriction is set to significantly affect a variety of corporate transactions in India, especially with respect to companies that operate across multiple sectors with an investment company at the top; a structure common in the real estate and infrastructure sectors. However, since the CA 2013 seems to restrict investment through more than 2 layers of investment companies, it may still be possible to structure investments through companies other than investment companies. The restrictions imposed on inter corporate loans and investments have been largely viewed as a harbinger to usher in accountability in corporate transactions. The Ministry of Corporate Affairs has attempted to bring the Indian corporate legal framework in tandem with global best practices, by increasing shareholder participation in affairs that directly affect the finances of the company. CA 2013 also espouses and encourages several new disclosure norms to increase transparency in commercial dealings.

 

 

 

The corporate world is grappling with issues brought forward by two Acts i.e. the CA 1956 and CA 2013, which contain several conflicting sections. With parts of CA 1956 still in application, some provisions of CA 2013, have already become partially applicable. This simultaneous implementation has led to increased confusion amidst the mindsets of Indian Corporates. Fortunately Section 186 is yet to be notified and the MCA has recently made clear that all exemptions to firms over granting of loans (by a holding company to its subsidiaries) will continue till the relevant section is notified. According to MCA officials, the clarification became a necessity after the ministry received a number of representation from companies seeking clarity on two sections ” Section 185 and Section 186 ” of the new Companies Act, 2013, one of which was notified on September 12 along with the 97 sections leading to the confusion.[1]

1. 1.      The word loan must be constructed as dealing with loans not amounting to deposits-Durga Prasad Mandelia v. Registrar of Companies[2].
2. 2.      There is not provision under section 370 of the 1956 Act which prescribes that a loan includes a deposit for the purpose of that section- Pennwalt India Ltd. v Registrar of Companies [3]
3. 3.      It was held that even after the company had diversified into other activities, the company was an investment company and, as such , was entitled to the benefit of the exemptions it is entitled to as an investment company- Asst.Registar of Companies v H.C.Kothari [4].
4. 4.      When the company had almost practically changed from an investment company to something else, the exemptions are not available D.C. Kothari v Asst.Registar of Companies[5].

CONCLUSION

The following changes have taken place following CA 2013, which are relevant:

• Companies restricted from making investments through more than 2 (two) layers of investment subsidiaries.
• Loans and investments to group companies made difficult.

The positives to be taken are that the Government has made it clear that it wants corporate accountability but in the attempt of doing that the aforementioned provisions might go on to hinder business transactions and impede industrial growth. In order to ameliorate our current business environment less restricted investment modes should be available to corporates.