All you need to know about the company funds and investments

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Do you wish to lend the funds of your company or to make investments in shares of other companies?

 

 

investments

If your company, whether a private or a public company proposes to grant loans and investments or give any guarantee provide security in connection with a loan to any other body corporate or person or acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, first check if your company is a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the sole object of financing industrial enterprises or of providing infrastructural facilities. In that case, the provisions of section 186 of the 2013 act with respect to granting loans or giving any guarantee or providing any security will not apply to such companies. If your company is by a non-banking financial company registered under the reserve bank of India act, 1934 and whose principal business is an acquisition of securities, the provisions of section 186 of the 2013 act with respect to an acquisition of securities will not apply to such NBFC’s for its investments and lending activities. If your company is a company whose principal business is the acquisition of securities, the provisions of section 186 of the 2013 act with respect to an acquisition of securities will not apply to such company. Further where a company acquires shares as and by way of a right issue within the meaning of section 62(1)(a) of the 2013 act, the provision of section 186 of the 2013 act with respect to an acquisition of securities will not apply to such acquisition.

For the above purposes, the expression “business of financing of companies” shall include, with regard to a Non-Banking Financial Company (NBFC) registered with the reserve bank of India, “business of giving of any loan to a person or providing any guarantee or security for due repayment of any loan availed by any person in the ordinary course of its business.

investments

If a loan or guarantee is given or if a security has been provided by a company to its wholly owned subsidiary company or a JV (Joint Venture) company or acquisition has been made by a holding company, in the way of subscription, purchase or otherwise of, the securities or the wholly owned subsidiary company, the requirement of sub-section (3) of section 186 of the 2013 act which would not apply. It is to be noted that it is necessary for such a company to disclose the details of such guarantee or loans or security or acquisition in the financial statement as provided in the sub-section(4) of section 186 of the 2013 act.

If the above exemptions are not applicable, the next step would be to apply the check which could be termed as the section 185 test to check if the loan or guarantee or security proposed to be granted/provided by  your company is barred by the provisions of section 185 of the 2013 act for any reason whatsoever.

No such section 185 test will be required to be done if your company is entitled to any grounds upon which exemption from section 185 of the 2013 act is available or the loan proposed to be granted comes under the exception category.

The following is the exception to the statutory bar contained in section 185:

investments

  • As per the section 185, the statutory bar would not apply to any company which the ordinary kind of business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans which the interest is charged at a rate not less than the bank rate declared by the reserve bank of India.
  • Further any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company.
  • There is no bar to grant of loans or provisions of guarantee or security to any director of a private company or any person in whom any director of a private company is interested only if the lending private company meets the following “Tri criteria”.
    • No other body corporate should have invested in the share capital of that private company;
    • The borrowings of such private company from banks and financial institutions or any other body corporate is less than twice of its paid-up share capital of Rs.50 Crores, whichever is lower; and
    • Such private company should not have defaulted in repayment of borrowings subsisting at the time of granting the loan or providing the guarantee or security, as the case may be,
  • Thereafter your company must see if the person to whom the loan etc. is proposed to be granted is a person in whom any director of your company is interested within the meaning of the said expression as explained under sub-section(1) of section 185 of the 2013 act.
  • The following persons/entities come under the category of persons in whom a director is interested.
    • Any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
    • Any firm in which any such director or relative is a partner;
    • Any private company of which any such director is a director or member;
    • Any body corporate at a general meeting of which not less than twenty-five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
    • Any body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the board, or of any director or directors, of the lending company.

The granting of loans or providing guarantee or security to directors of holding the company or to their relatives will not be hit by the statutory bar contained in section 185 of the 2013 act if such persons are not coming under the category of person in whom a director of the lending company is interested.

Section 185 test could be said to have been passed, if either the proposal comes under exception category or is entitled to exemptions or is a case where the person to whom the loan, guarantee or security is provided is not a person in whom a director of your company is interested.

It is not necessary to carry out the section 185 test if the present proposal of your company is confined to making investments in the securities of any other body corporate by an acquisition of securities, whether by way of subscription, purchase or otherwise.

Once your company crosses the section 185 test or whereas aforesaid, the section 185 test need not be carried out at all, please check aggregate of the value of the all loans, guarantees, securities already granted and proposed to be granted to any other body corporate or person and the value of any investments already made and proposed to be made.

investments

Also calculate the aggregate value of the paid-up share capital, free reserves, and securities premium account.  If the aggregate value of all loans, securities, guarantees already granted and proposed to be granted to any other body corporate or person and the value of any investments already made and proposed to be made is less than 60% of the aggregate of the paid up share capital, free reserves and securities premium account of your company, a board resolution alone is necessary for the purpose of carrying out the present proposal of your company to grant loans, securities, guarantees to any other body corporate or person or to make any investments in any other body corporate.

Where the proposed transaction involving the granting of guarantees, investments, loans and security or acquisition of securities enjoys exemption in view of sub-section (11) of section 186 of the 2013 act or as the case may be, in view of rule 11(1) of the companies (meetings of board and its powers) rules, 2014, the aggregate value of loans, guarantees, securities, and investments made or proposed to be made under the exemptions need not be reckoned to determine whether the proposal is within the 60% ceiling aforesaid or not.

The first and foremost requirement is to GET AUTHORISED by the board of directors for the lending/acquisition by means of a resolution duly passed at a meeting of its board of directors or a committee of directors.

Therefore it is necessary to follow the usual procedures relating to calling and holding a meeting of the board of directors as per SS-1 issued by the Institute of Company Secretaries of India (ICSI) under section 118 of the 2013 act.

The board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager of any other principal officer of the company or in the case of a branch office of the company, the principal officer of the branch office, the borrowing powers on such conditions as it may specify.

After the passing of the board resolution, your company must file the e-fork MGT-14, it should be filed with the ROC within 30 (thirty) days of the passing of the board resolution.

If the aggregate value of all the loans, investments, guarantees, securities already granted and proposed to be granted to any other body corporate or person and the value of any investments already made and proposed to be made would go beyond 60% of the aggregate of the paid-up share capital, free reserves and securities premium account of your company, a special resolution of the company duly passed in a general meeting is necessary.

Where it is necessary to have the special resolution, please call a general meeting of your company. For calling and holding a general meeting, please follow the procedure stated in SS-2 issued by the ICSI under section 118 of the 2013 act.

The special resolution required to be passed for the purpose of complying with sub-section (3) of section 186 of the 2013 act will be a special business within the meaning of section 102 of the 2013 act. Therefore, an explanatory statement must be furnished to the members with respect to every item of special business (sub-section (1) and (2) of section 102 of the 2013 act). Further specify the limit up to which the board of directors is authorized to grant loans, guarantees, securities or make investments.

After the passing of a special resolution, your company must file the e-form MGT-14. It should be filed with the registrar of companies (ROC) within 30 days of the passing of the special resolution.

In this respect, please note the following:

  • Every such resolution is required to be filed with the ROC within 30 days of the passing of the resolution.
  • Section 403 of the 2013 act grants in its proviso to sub-section (1) additional time limit of 270 days that from the date by which it should have been submitted, filed, registered or recorded.
  • Thus in the case of e-form MGT-14 from the date of an event, a total 300 days is available for completing the filing or registration requirement.
  • In any case, if the time limit including the additional time limit specified under section 403 of the 2013 act,(corresponding to section 611 and Schedule X of the 1956 act) wherever applicable, has expired, the relevant e-form or as the case may be the relevant application cannot be filed unless the delay in doing the same has been condoned by the central government as per section 460 of the 2013 act.

The e-form MGT-14 must be digitally signed by company secretary or any director or CFO or CEO and it should be uploaded after it is certified by a company secretary in practice or a chartered accountant or cost accountant in practice.

If the company fails to file the form before the expiry of the period specified under section 403 of the 2013 act with the prescribed fee, the company shall be punishable with fine which shall not be less than Rs.1,00,000 (rupees one lakh only) but which may extend to Rs.5,00,000 (Rupees five lakh only) and every officer of the company who is in default shall be punishable with fine which shall not be less than Rs.25,000 but which may extend to Rs.1,00,000.

Make a full disclosure in the financial statements of your company, the particulars of the loans, guarantees, security and investments and also the purpose for which the loan or guarantee is given or security is provided and the purpose for which the recipient is going to utilize the same.

While obtaining the approval of the board of directors for the granting of any loan or guarantee or security, the board resolution must be duly passed at a meeting of the board of directors with the consent of all the directors present at the meeting. Moreover, the company should obtain the prior approval of public financial institutions if any term loan availed by the company from any such institution is subsisting.

Under section 2(72) of the 2013 act “a public financial institution” means-

  • The Life Insurance Corporation of India, established under section 3 of the Life Insurance Corporation Act, 1956;
  • The Infrastructure Development Finance Company Limited referred to in clause (vi) of sub-section(1) of section 4A of the 1956 act so repealed under section 465 of the 2013 act;
  • The specified company referred to in the Unit Trust of India (Transfer of Undertaking and repeal) act, 2002;
  • Institutions notified by the central government under sub-section(2) of section 4A of the 1956 act so repealed under section 465 of the 2013 act;
  • Such other institution as may be notified by the central government in consultation with the reserve bank of India;
    • Provided that has no institution shall be so notified unless-
      • It has been established or constituted by or under any central or state act; or
      • Not less than fifty-one percent, of the paid-up share capital, is held or controlled by the central government or by any state government or governments or partly by the central government and partly by one or more state governments;
    • The company which is registered under section 12 of the SEBI (Securities and Exchange Board of India) act, 1992 and covered under such class or classes of companies been prescribed would not take inter-corporate loan or deposits that exceeds the prescribed limited and that kind of company can furnish in its financial statement of the details of the loan or deposits.
    • Any loan is given by a company in pursuance of section 186, an interest at the rate not less than the prevailing yield of one year, three-year, five-year or ten-year government security closest to the term of the proposed loan should be charged.
    • A company which is in default in repayment of any deposits accepted before or after the commencement of this act or in default in the payment of interest on deposits cannot undertake any transaction involving the giving of any loan or guarantee or be providing any security or make any investment. Please ensure that your company is not in any such default.
    • The company must keep and maintain a register in which the particulars of every transaction attracting the provisions of sub-section (2) read with (3) of section 186 must be entered.
    • Every company giving the loans an investments or giving the guarantee or providing security or making an acquisition of securities should, from the date of its incorporation, maintain a register in Form.No.MBP-2.
      • The particulars of loans and guarantees given securities provided and acquisitions made must be entered in that register.
      • Entries in the register shall be made chronologically in respect of each such transaction.
      • The entries in the register must be made within seven days of making such loan or giving a guarantee or providing security or making an acquisition.
      • The register may be maintained manually or electronically.
      • The register shall be kept at the registered office of the company.
      • The register shall be preserved permanently and shall be kept in the custody of the secretary of the company or any other person authorized by the board for the purpose.
      • Entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the board for the purpose.
      • The extracts from this register may be furnished to any member of the company on payment of such fee as may be prescribed in the articles of the company which shall not exceed Rs.10 for each page.

The register of loans, guarantees, and security ought to be maintained as required under sub-section (9) of section 186, must be kept at the registered office of the company. The register is open for inspection at the registered office and extracts of the register can be furnished to members of the company upon payment of prescribed fee.

Ensure that the board’s report discloses particulars of guarantees, loans or investments under section 186 of the 2013 act.

For an offense arising from a contravention of sub-section (1) of section 185, the company is punishable with a fine which shall not be less than Rs.5,00,000 but which may extend to Rs.25,00,000, For an offense is involving a contravention of section 185, the director or another person to whom any loan is advanced, guarantee is given or security is provided is punishable with imprisonment which may extend to 6 months or with a fine which shall not be less than Rs.5,00,000 but which may extend to Rs.25,00,000 or with both.

An offense under section 185 of the, 2013 act is a compoundable offense for the company. For others who are liable for punishment, the offense is compoundable only by the court trying the offense.

For an offense involving a contravention of section 186 of the 2013 act, the company is punishable with a fine which shall not be less than Rs.25, 000 but which may extend to Rs.5, 00,000. For an offense involving a contravention of section 186, every officer of the company who is in default is punishable with imprisonment which may extend to 2 years and with a fine which shall not be less than Rs.25, 000 but which may extend to Rs.1, 00,000.

An offense under section 186 is a compoundable offense for the company. For others who are liable for punishment, the offense is non-compoundable even by the court trying the offense.

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