PROVISION OF LOAN BY A COMPANY TO AN INDIAN COMPANY

Company is an ARTIFICIAL PERSON created by law and can acquire and hold property on its own.
It can sue and be sued under the law.
(i.e., it can initiate legal proceedings against others and legal proceedings can be initiated against the company)In the same way it will have power to borrow and to give loan to others.

By whom the company functions/ who executes the contracts on behalf of the company?The day to day activities of the company are taken care by the Board of Directors of the company

What powers does the board of directors have?The powers and functions of the board of directors are given in the Companies Act, 1956, Memorandum and Articles of Association of the company.

How does the board of directors execute these powers?The board of directors enjoys the powers mentioned in the Companies act, MOA, AOA through the resolutions passed at the board meeting.

Lending by a company:

As we saw above, the company can lend money to others, be it a body corporate or any other form of  entity.The provisions relating to lending by a company is contained in section 292 and section 372A.

Section 292:

The provisions relating to section 292 is applicable to all companies. It talks about the powers of the board of directors to be exercised only at a meeting. It authorizes the board to perform certain activities on behalf of the company. 
The provisions of this section can be performed by the board or can be delegated to a committee of the board, delegated to any officer of the company. 
The following are the powers to be exercised by the board only at a meeting.

• The power to make calls on shareholders in respect of money unpaid on their shares;
• The power to authorise the buy-back referred to in the first proviso to clause (b) of sub-section (2) of section 77A;
• The power to issue debentures;
• The power to borrow moneys otherwise than on debentures;
• The power to invest the funds of the company; 
• The power to make loans :

Sub section (1)(e):

This sub section gives power to the board to make loans on behalf of the company. 

Subsection (4) requires that the board resolution delegating the power to specify the total amount upto which loans may be made by the delegatee, the purpose and the maximum amount which may be made for each such purpose.

Section 372A:
The provisions of this section are exclusively for provision of loans and investments to be made in another body corporate.

This section is applicable for a public company and is inapplicable for a  private company which is not a subsidiary of public company.

The following transactions are regulated by this section:

1. Providing Loan to Any Body Corporate
2. Acquiring the securities of any other body corporate.
3. Giving any guarantee or providing any security to:

A person who gives a loan to anybody corporate; or
A body corporate which gives a loan to any other person.

Approvals required under Section 372A:   

Board approval:

• The company can provide loan/ give guarantee/ acquire securities of another body corporate by passing a unanimous Board Resolution at a duly convened Board Meeting and not through Circular Resolution.
• The company can provide loan within the ceiling limit mentioned in this section simply by passing a Unanimous Board Resolution. The Ceiling limit is 

60% of the aggregate of paid-up share capital and free reserves of the company or
100% of free reserves of the company.

 Shareholders approval:

• If the aggregate loan exceeds ceiling limit mentioned above then the company must pass a special resolution of the members of the company in the following manner:
• Unlisted Public Company: at duly convened General Meeting.
• Listed Public Company: only by way of Postal Ballot. (as per Companies passing of resolution by postal ballot, 2011)

Notice to be issued for the shareholders meeting:

1. The specific limits upto which loans or guarantee can be given
2. The particulars of other body corporate in which investment is proposed to be made or loan, guarantee, or security is proposed to be given.
3. Purpose of making loan, investment, guarantee, or security.
4. Specific sources of funding.
5. Other relevant details. 

Financial Institutions approval:

1. If the company has taken any term loan from a Public Financial Institution, then it must obtain the approval of the institution.
2. Such an approval of financial institution is not required if the company provides loan within the specified limit and there is no default in repaying the interest or repayment of installment amount.

Restrictions:

—  Any public company which has defaulted in repaying the public deposits under Section 58A if the default still continues.  Only after the default is made good the company can provide loan to another body corporate.

The rate of interest chargeable on any inter-corporate loan shall not be less than the prevailing bank rate. ‘Bank rate' means the rate at which RBI lends money to commercial banks.

Exemption:

1. This section is not applicable for any investment/ loan /guarantee provided by a holding company to its subsidiary company.
2. Investments made in Rights shares. (i.e, further shares issued to the holding company by the subsidiary company)
3. Loan/guarantee/security provided by a banking company, insurance company, Housing finance company in the ordinary course of business or whose business is acquisition of share and debentures of other companies .

Non-compliance of the provisions of Section 372A:

1. The Company and every Officer in default shall be punishable with imprisonment  upto 2 years, or with fine upto Rs.50,000. Where repayments of loans have been made in full, imprisonment shall not be imposed, and where part payments are made, imprisonment shall be proportionately reduced.
2. All persons who are knowingly parties to any contravention shall be liable jointly and severally to the Company for

a. Repayment of the loan, orb. Making good the sum which the Company may have been called upon to pay on account of the guarantee given or the securities provided by such Company.

Maintenance of register under Section 372A(5)

A register showing following particulars of the transaction must be entered within 7 days of making investment:

a. Name of the Body Corporate.

b. Amount, terms and purpose of the investment / loan / security / guarantee.

c. Date on which the investment / loan has been made, and

d. Date on which the guarantee has been given or security has been provided in connection with a loan.

   The Company and every Officer in default shall be punishable with fine upto Rs.5, 000 and with a further fine upto Rs.500 for every day after the first day during which the default continues.

These are the provisions relating to Provision of loan by a company as per the provisions of Companies Act, 1956.