Notified Rate of Interest Under Section 208

Relevance of Present Section 208

Section 208 of the Companies Act enables payment of interest on share capital subject to conditions prescribed in the said Section. The use of word ‘interest’ instead of dividend distinguishes returns paid out of capital and returns paid out of profits. 

As per Section 208 (1)(b) of the Companies Act, the interest on capital paid pursuant to Section 208 can be charged to capital which may lead to cost overruns of long gestation projects. The return on the investment in favour of the shareholders also acts as a disincentive on the part of the shareholders to push for early completion of the project. 

Further, rates of interest are decided by the market forces and the policy of the Reserve Bank of India in vogue from time to time. 

The arena of corporate financing has undergone several changes since inception of Section 208 in 1956. Corporates are increasingly resorting to a variety of instruments to finance infrastructure projects and alternative forms of financing are available at rates of interest which are market driven. Section 208 of the Companies Act has, therefore, outlived the purpose for which it was introduced. 
 

The rate of interest shall, in no case, exceed four per cent per annum or such other rate as the Central Government may, by notification in the Official Gazette, direct.

Good advice by Mr. Vishal.