INTER-CORPORATE LOANS AND INVESTMENTS

As per Section 372A :

1. No Company shall, directly or indirectly:

1. make any loan to any other body corporate;
2. give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and
3. acquire, by way of subscripttion, purchase or otherwise the securities of any other body corporate;

exceeding 60% of its paid-up share capital and free reserves or 100% of its free reserves, whichever is more.

2. However, a company may make loan, give any guarantee or provide security and/or make investment in aggregate exceeding the aforesaid limits of 60% or 100% if the same is previously authorised by a special resolution passed in a general meeting.
3. The Board of directors may give guarantee without being previously authorised by a special resolution if:

1. a resolution is passed in the meeting of the Board authorising to give guarantee in accordance with the provisions of Section 372A;
2. there exist exceptional circumstances which prevent the company from obtaining previous authorisation by a special resolution passed in a general meeting for giving a guarantee; and
3. the resolution of the Board is confirmed within twelve months, in a general meeting of the company or the annual general meeting held immediately after passing of the Board resolution, whichever is earlier.

4. Notice of such resolution shall indicate:

1. the specific limits;
2. the particulars of body corporate in which the investment is proposed to be made or loan or security or guarantee to be given;
3. the purpose of the investment, loan or security or guarantee;
4. specific sources of funding; and
5. any other detail which is material.

5. No loan or investment shall be made or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all directors present at the meeting.
6. The company has to obtain prior approval of the public financial institution referred to in Section 4A, where any term loan is subsisting.
7. However, the prior approval of Public Financial Institution shall not be required where the aggregate of loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, alongwith the investments, loans, security or guarantee proposed to be made or given does not exceed the limit of 60% specified above and if there is no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
8. Loan given to any body corporate shall carry the rate of interest not lower than the prevailing bank rate being standard rate made public under Section 49 of the Reserve Bank of India Act, 1934.
9. No company, which has defaulted in complying with the provisions of Section 58A shall directly or indirectly:

1. make any loan to any body corporate;
2. give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, any body corporate; and
3. acquire, by way of subscripttion, purchase or otherwise the securities of any other body corporate,

till such default is subsisting.

This prohibition will operate in respect of any default under Section 58A and the Rules made thereunder and not only on the default of repayment of deposit or payment of interest thereon.

10. The Central Government may prescribe guidelines for the purposes of this Section.

Explanations: For the purpose of this Section:

1. "Loan" includes debentures or any deposit of money made by one company with another company, not being a banking company;
2. "Free reserves" means those reserves which as per latest audited balance-sheet of the company, are free for distribution as dividend and shall include balance to the credit of the securities premium account but shall not include share application money.

Section 372A compared with Section 295 — It should be noted that the provisions of Section 295 of the Companies Act will be applicable in case a loan is given by a company to another private company in which a director of the first company is a director or member of the private company. As a result, prior approval of the Central Government shall have to be taken for such a loan. Also in cases where one or more directors of the lending company exercise 25% or more of the total voting power in any other body corporate, approval of the Central Government would be necessary.

Applicability of Section 372A to Section 25 Company or a guarantee Company not having share capital — The provisions of Section 372A shall also apply to these Companies. In such cases where there is no share capital, computation shall be based upon the free reserves of the company if any.