Reports on Section 372A and 295

Reports on Section 372A and 295

1.     372A      Inter-corporate loans and investments.

2.   295        Making of loans, or to give guarantee or to provide

                    security to directors or their related parties.

SECTION 372A – INTER CORPORATE LOAN, INVESTMENT, GUARANTEE, & SECURITY

Section 372A of the Companies Act, 1956 (The Act) deals with inter-corporate Loan, Investment, Guarantee and Securities in connection with loan. All the four transactions are frequently taken place in any company and henceforth the section becomes more important and therefore it requires to special heed by virtue of strict penal provisions and because of no much space to play. Here the author has made an attempt to reduce & brief the provisions of section 372A in analytical way which is handier to remember and apply rather than to describe it in legal language.

 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 authorised by a special

resolution passed in a general meeting:

Provided further that the Board may give guarantee, without being previously authorised 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.

Important: Loans advanced by the Companies (except as exempted under section (8), which, interalia, covers Private Companies) to any other body corporate are governed by this section. Additionally, loans/investment, if any, made to the body corporate which attracts section 295(1) (d)/ (e) also requires previous approval of Central Govt.

Table A

No.	Particular	Rs.
a.	Paid up Capital as per last audited Balance sheet (equity & Preference share capital)
b.	Free Reserve as per last audited Balance sheet
c.	Total Rs.
	60 % of the total at c or 100 % of reserve (b), which ever is higher, (Dead line figure)

Table B

No.	Transaction covered by sec. 372A	Rs.
a.	Loan to any other body corporate including Deposit and debenture
b.	Guarantee / Security, in connection with loan made by any other person to any body corporate & vice versa
c.	Security, in connection with loan made by body corporate to any other person & vice versa
d.	Investment by way of subscription, purchase or other wise in securities of any other body corporate
	Total Rs.

If the total of table B is within the deadline figure, Board resolution will do.

(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, alongwith 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 instalments 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.

(5) (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 therefrom 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 subsection (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.

Rational Behind prohibition of loan to directors: the object of this enlargement of the scope of the present section is to cover loans given to those companies which although registered as public companies, are really private companies. A director of the lending Company may not be ostensible be associated with the management of the borrowing company but he may be the moving spirit behind it.

Restrictions on providing loan to a director or to a person connected with a director: Section 295 put restrictions on a public company or a private company being a subsidiary of a public company intending to make any type of transaction with a director of the company or partner or relative of a director, etc. whether, directly or indirectly to make any loan, or to give any guarantee, or to provide any security in connection with a loan made by any other person to, or to any other person by, and it calls for obtaining the previous approval of the Central Government.

Section 295 (Loan to Directors)

Section 295 provides that:

(1) Save as otherwise provided in sub-section (2) no company (hereinafter in this section referred to as "the lending company") without obtaining the previous approval of the Central Government in that behalf shall, directly or indirectly, make any loan to, or give any guarantee, or provide any security in connection with a loan made by any other person to, or to any other person by,—

(a) any director of the lending company, or of a company which is its holding company, or any partner, or relative of any such director;

(b)   any firm in which any such director or relative is a partner;

(c)   any private company of which any such director is a director or member;

(d)  any body corporate at a general meeting of which not less than twenty-five per cent of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e)  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.

(2)  Sub-section (1) shall not apply to—

(a)   any loan made, guarantee given, or security provided—

(i) by a private company unless it is a subsidiary of a public         company, or (ii) by a banking company;

(b)   any loan made by a holding company to its subsidiary company;

(c)    any guarantee given, or security provided by a holding company in respect of any loan made to its subsidiary company.

3.Where any loan made, guarantee given, or security provided by a lending company and outstanding at the commencement of this Act could not have been made, given or provided, without the previous approval of the Central Government, if this section had then been in force, the lending company shall, within six months from the commencement of this Act or such further time not exceeding six months as the Central Government may grant for that purpose, either obtain the approval of the Central Government to the transaction or enforce the repayment of the loan made, or in connection with which the guarantee was given or the security was provided, notwithstanding any agreement to the contrary.

4. Every person who is knowingly a party to any contravention of sub-section (1) or (3), including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given, or the security is provided, shall be punishable either with fine which may extend to fifty thousand rupees or with simple imprisonment for a term which may extend to six months:

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 lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed under this sub-section; and where the loan has been repaid in part, the maximum punishment which may be imposed under this sub-section by way of imprisonment shall be proportionately reduced.

(5) All persons who are knowingly parties to any contravention of sub-section (1)

 or (3) shall be liable, jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given or the security provided by such company.

(6) No officer of the lending company or of the borrowing body corporate shall be punishable under sub-section (4) or shall incur the liability referred to it sub-section (5) in respect of any loan made, guarantee given, or security provided after the 1st day of April, 1956 in contravention of clause (d) or (e) of sub-section (1) unless at the time when the loan was made, the guarantee was given, or the security was provided by the lending company, he knew or had express notice that clause was being contravened thereby.

3.      Applicability

Section 295 is applicable to a public company or a private company, which is a subsidiary of a public company. Therefore, a private company shall be exempted from the provisions of section 295 of the Act.

Section 295 applies to the loans, etc. given by a company 'directly or indirectly'. Indirect loan means that the company shall not give a loan through the agency of one or more intermediaries; the word 'indirectly' in the section cannot be read as converting what is not a loan into a loan. As such, a debt, which is not in the nature of loan cannot be said to be the case of an indirect loan. Fredie Ardeshir Mehta (Dr.) v Union of India (1989) 2 CLA 244 (Bom): (1991) 70 Comp Cas 210 (Bom): (1991) 1 Comp LJ 437 (Bom)]

3. Exemption

Following companies are exempted from provisions of section 295 and these companies can give loan to their directors without the approval of Central Government:

(a) Private Company which is not a subsidiary of public company; (b) Banking Company;

(c)   Government Company'

(d)   Loan made by holding company to its subsidiary company;

(e) Guarantee given or security provided by holding company in respect of any loan made to its subsidiary company.

4. Persons covered under section 295

The section has wider scope and any transaction with the following types of persons by a public company or a private company which is a subsidiary of a public company shall be within the purview of section:—

(a) any director of the lending company; (b) any director of the holding company; (c) any partner of any such director; (d) any relative of any such director;

(e)   any firm in which any such director is a partner;

(f) any firm in which a relative of such a director is a partner; (g) any private company of which any such director is a director; (h) any private company of which any such director is a member;

(i) any body corporate of which not less than 25% of the total voting power may be exercised or controlled at a general meeting by any director or by two or more directors together; and

(j) 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.

5. Non-applicability of the provisions of section 295

Any transaction of making any loan or giving any guarantee or providing any security in connection with a loan made by any other person to, or to any other person will not apply on:—

1.     any loan made to an employee of the company, who is not a relative of any director;

2.     any loan or advance made to a trust in which directors are trustees;

3.     any quasi-loan;

4.     any advance or deposit made in connection with leasing/hire-purchase transaction;

5.     any advance payment of salary given to an employee who is a relative of a director as per the rules of the company; [M.R. Electronic Components Ltd. v Asst. Registrar of Companies (1987) 61 Comp Cas 8 (Mad)]

6.     any investment made in acquiring residential accommodation for director(s) (whether by way of purchase or entering into a lease agreement);

7.     house building loan given to a director subject to the guidelines issued for that purpose by the Central Government;

8.     any loan made to a Registered Co-operative Society;

9.     any loan given by a holding company to any director of its subsidiary company;

10.    advance given for services to be rendered or goods to be supplied provided it is reasonable and commensurate with the services to be rendered or goods to be supplied;

11.    section 295(1) does not apply to a government company provided that such company has obtained the approval of the Ministry or Department of the Central Government, which is administratively in charge of the company, or as the case may be or the State Government.

6. Requirement for obtaining previous approval of the Central Government

Previous approval of the Central Government (Ministry of Corporate Affairs) is required before making any loan or giving any guarantee or providing security in connection with any loan.

security was provided by the lending company, he knew or had express notice that clause was being contravened thereby.

Department clarification:

The issue relating to applicability of section 295/370, in respect of inter corporate deposits has been reconsidered in this department in consultation with the law ministry that deposit kept by one Company with another company is “Loan” as envisaged under section 295/ 370 (Section 370 is substituted by section 372A) of the Companies Act, 1956, and therefore the provision of section 370 of the Companies Act,1956 are attracted in such a case. In this connection, your attention is invited to the decision of the Rajasthan high court in Totalal v.State, AIR 1963 Raj {press note dated 04.06.1985 ;( 1986)59 com cases (St) 8}