Companies Act, 1956
Sec 372A - Inter-corporate loans and investments.
(1) No company shall, directly or indirectly,-
(a) make any loan to any other body corporate:
(b) 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
(c) acquire by way of subscription, purchase or otherwise the securities of any other body corporate, exceeding sixty percent of its paid -up share capital and free reserve, or one hundred percent of its free reserves, whichever is more:
Provided that where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceeds the aforesaid limits, no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorized by a special resolution passed in a general meeting:
Provided further that the Board may give guarantee, without being previously authorized by a special resolution, if,-
(a) a resolution is passed in the meeting of the Board authorizing to give guarantee in accordance with the provisions of this section:
(b) there exist exceptional circumstances with prevent the company from obtaining previous authorization by a special resolution passed in a general meeting for giving a guarantee: and
(c) the resolution of the Board under clause (a) 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:
Provided also that the notice of such resolution shall indicate clearly the specific limits, the particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee to be given, the purpose of the investment, loan or security or guarantee, specific sources of funding and such other details.
(2) No loans 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 the directors present at the meeting and the prior approval of the public financial institution referred to in section 4A, where any term loan is subsisting, is obtained:
Provided that prior approval of a public financial institution shall not be required where the aggregate of the loans and investments so far made, the amounts for which guarantee or security so far provided to or in all other bodies corporate, along with the investments, loans, guarantee or security proposed to be made or given does not exceed the limit of sixty percent specified in sub-section (1),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:
Provided also that nothing contained in sub-sections(1) and (2) shall apply to -
(a) any loan made by a holding company to its wholly owned subsidiary:
(b) any guarantee given or any security provided by a holding company in respect of loan made to its wholly owned subsidiary: or
(c) acquisition by a holding company, by way of subscription, purchases or otherwise, the securities of its wholly owned subsidiary.
(3) No loan to any body corporate shall be made at a rate of interest lower than the prevailing bank rate, being the standard rate made public under section section 49 of the Reserve Bank of India Act, 1934 (2 of 1934)
(4)No company, which has defaulted in complying with the provisions of section 58A, shall, directly or indirectly,-
(a) make any loan to any body corporate:
(b) give any guarantee, or provide security, in connection with a loan made by any other person to, or to any other person by, anybody corporate : and
(c) acquire, by way of subscription, purchase or otherwise the securities of any other body corporate, till such default is subsisting.
(a) Every company shall keep a register showing the following particulars in respect of every investment or loan made, guarantee given or security provided by it in relation to any body corporate under sub-section (1), namely:-
(i) the name of the body corporate:
(ii) the amount, terms and purpose of the investment or loan or security or guarantee
(iii) the date on which the investment or loan has been made: and
(iv) the date on which the guarantee has been given or security has been provided in connection with a loan.
(c) The particulars of investment, loan, guarantee or security referred to in clause (a) shall be entered chronologically in the register aforesaid within seven days of the making of such investment or loan, or the giving of such guarantee or the provision of such security.
(6)The register referred to in sub-section (5) shall be kept at the registered office of the company concerned and -
(a) shall be open to inspection at such office : and
(b) extracts may be taken there from and copies thereof may be required, by any member of the company to the same extent, in the same manner, and on payment of the same fees as in the case of the register of members of the company: and the provisions of section 163 shall apply accordingly.
(7)The Central Government may, prescribe guidelines for the purposes of this section.
(8)Nothing contained in this section shall apply,-
(a) to any loan made, any guarantee given or any security provided or any investment made by-
(i) 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 object of financing industrial enterprises, or of providing infrastructural facilities;
(ii) a company whose principal business is the acquisition of shares, stock, debentures or other securities;
(iii) a private company, unless it is a subsidiary of a public company;
(b) to investment made in shares allotted in pursuance of clause (a) of sub-section (1) of section 81.
(9) If default is made in complying with the provisions of this section, other than sub-section (5), the company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to fifty thousand rupees:
Provided that where any such loan or any loan in connection with which any such guarantee or security has been given, or provided by the company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section, and where such loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be appropriately reduced:
Provided further that all persons who are knowingly parties to any such contravention shall be liable, jointly and severally, to the company for the repayment of the loan or for making good the same which the company may have been called upon to pay by virtue of the guarantee given or the securities provided by such company.
(10) If default is made in complying with the provisions of sub-section (5), the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees and also with a further fine which may extend to five hundred rupees for every day after the first during which the default continues.
Explanation - For the purposes of this section -
(a) "loan" includes debentures or any deposit of money made by one company with another company, not being a banking company:
(b) "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.