Inter corporate loans and guarantees

Non-Applicability of the section

  • A company shares, debentures or other securities.
  • A private limited company which is not an additional of public limited company.
  • Any company loan to its wholly-owned subsidiary.
  • Holding company loan is made to its wholly-owned subsidiary.
  • Shares allotted under section 81(1)(a) of the act
  • Acquisition of securities by a holding company in its wholly-owned subsidiary.

Loan or Guarantee to a company which may attract section 295

Where a company proposes to give loan or give guarantee in respect of a loan in respect of both of which section 295 is attracted, the lending company shall take the prior approval of the central government.

Approval of central government no longer applicable

Prior to the enactment of the new section 372A, giving of loans and making investment beyond 30% of the paid-up capital and free reserves required the prior approval of the central government in addition to the approval of shareholders. Henceforth, the need for central government approval has been discontinued.

Meaning of free reserves/loan

  • Company with defaults under section 58A
  • A company which has defaulted in the payment of interest or repayment of principal in respect of deposits accepted from the public under section 58A of the act cannot:
  • make any loan to a body corporate
  • give any guarantee or provide any security in respect of any loan extended to a body corporate.
  • company registration and their activities.

Department of company affairs circular

The provisions in the companies act 1956 relating to inter-corporate investments, loans and guarantee have been recently liberalized by the government through companies amendment act 1999. However, apprehensions have been expressed in some quarters with regard to possible misuse of these provisions by companies.

Government said advice to companies

Having allowed free hand for the companies in the matter of making loans and investments and giving guarantees, the government now seems to think that it is necessary for companies to be told that they should not venture to give loans and make investment beyond the net worth of the companies. There is no doubt that the board of director of companies will exercise adequate financial prudence in the matter of utilizing funds of their companies for giving loans and making investments.

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