Company Law · Mergers and Acquisitions

A research report on Inter-Corporate Loans and Investments


A research report on Inter-Corporate Loans and Investments


Manu Gupta


Saumya Parmarthi

Symbiosis Law School, NOIDA



LOANS It includes debentures or any deposit of money made by one company with another company, not being a banking company
FREE RESERVES The term means those reserves which, as per the 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.
PAID UP CAPITAL It is essentially the portion of authorized share capital that the company has issued and received payment for.




The concept of giving a corporate guarantee or security is also as good as giving a loan, because the person to whom guarantee or loan in given can decide to enforce it in certain conditions and in such situation, the company will have to pay the amount. Thus apart from loans and investments, restrictions are also placed on the guarantees which the company can give or security it can provide for a loan.[1]

The Securities that are purchased/ borrowed by corporations rather than individual investors are captioned under inter-corporate and advances. Inter-corporate investments allow a company to achieve higher growth rates compared to keeping all of its funds in cash. These investments can also be used for strategic purposes like forming a joint ventures or making acquisitions. Companies purchase securities from other companies, banks and governments in order to take advantage of the returns from these securities. Marketable securities that can readily be exchanged for cash, such as notes and stocks, are usually preferred for this type of investment.[2]

A ‘body corporate’ or ‘corporation’ is the appropriate term that can borrow loans and advances under these provisions (as per the respective act).

Though the law in enforce had shifted from the Companies Act’56 to the Companies act of 2013 with effect from 1st April 2014 with the initiation of a new Financial Year, the significant changes with respect to the topic has been discussed below.


Shareholders, investors and lenders invest funds in a company only after analyzing the returns, risk factors of the project and appraising the financial position, viability of the project, future prospects and other relevant factors. To keep a control on diversion of such funds, the following regulation has been made relating to making of loans and investments in any other company.

Under section 372A of the Companies Act, 1956, directors of companies are empowered to make investments and loans, give security and guarantees to other bodies corporate, up to specified percentage limits only. The board of directors has to obtain the consent of the members by means of a special resolution if these percentages are exceeded. There also exist exemptions to certain transactions from the operation of this section.




The said section of Companies Act, 1956 regulates the following transactions:

Making any loan to any body corporate.

Acquiring the securities of any other body corporate.

Giving any guarantee or providing any security to:

A person who gives a loan to any body corporate; or

A body corporate which gives a loan to any other person



Requirements of Approvals:


Board of Directors:

Approval of Board is to be made prior to making of loan, investment, guarantee or security. Unanimous consent of all directors present at the meeting is required. And, the approval of Board shall be obtained by passing a resolution at a Board meeting.

Company by Passing Special Resolution:

Special Resolution should be passed in a General Meeting if the amount of making loan, investment, guarantee or security is higher of the following:

60 per cent of the paid-up share capital + free reserves, or,

100 per cent of free reserves of the company

Public Financial Institutions:

If any term loan obtained from a PFI subsists a loan, the company, only with the prior approval of the PFI, can make investment, guarantee or security subject to the following exceptions:

If the amount of existing and proposed loan, investment, guarantee or security given does not exceed 60 per cent of the paid-up capital and free reserves.

No Default in Repayment of Loans or interests to the PFI.

No Default in Respect of Public Deposits is Subsisting

A company which has defaulted in compliance with the Section 58A (relating to public deposits) cannot make any loan, investment, guarantee, or, security, until such default is subsisting.

Register of Inter-corporate Loans and Investments

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.

Contravention of Other Provisions

The company and every officer of the company who is in default shall be punishable with imprisonment up to 2 years or a fine up to Rs. 50,000. However, if the loan is paid in full, no imprisonment shall be imposed, and where the loan is repaid in part, the imprisonment shall be proportionately reduced.





The Act has come up with a change in the concept of ‘Loan and Investment by Company. The 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions, which includes company incorporated outside India. Section 186 of the act of 2013 deals with it.



Restriction on layers[3]: Firstly this section prohibits investment through more than 2 layers of investment companies. However this restriction is not applicable for investment in company incorporated outside India which has investment subsidiaries beyond two layers as per laws of that country.

Limits: The limits are same as of 1956 act but these limits not only covers the transactions with bodies corporate but also transactions with any person.

Disclosure: This is a new requirement. Section 186(4) stipulates that a disclosure has to be made in the financial statement about the full particulars of loans given, investments made or guarantees or security given and the purpose for which the recipient is going to utilise the loans/guarantees/security.

Restriction on companies registered with SEBI:  This is also a new requirement to protect the shareholders interest. The central government may notify such class of companies which will be prohibited from taking inter corporate loans or deposits exceeding the prescribed limit and shall make a disclosure of loans or deposits taken in its financial statement.

Rate of Interest: The rate of interest on loans given cannot be less than the prevailing yield rate on 1 year,3 year, 5 year or 10 year government securities closest to the tenor of the loan.

Penalty: The fine for violation of Section 186 has been increased. Fine levied can be  any sum  between Rs.25,000 to 05 lakhs on defaulting company  and  every defaulting  officer  can be punished with imprisonment for a term  up to 2 years besides the  fine ranging from Rs.25,000 to 1.00  lakh.

Withdrawal of exemption: This section is applicable to both private and public Ltd while section 372-A is applicable only to public Ltd companies.


The Company while giving loan to any other body corporate may adopt following procedures, providing guarantee or security in connection with a loan or acquisition by way of subscription, purchase the securities of any other body corporate.

It is to be kept in mind that a company can give any loan or give any guarantee or provide security and acquire securities of any Body corporate through Board resolution up to 60% of its paid up capital, free reserves and security premium account or 100% of its free reserves and security premium whichever is more.

On the basis of aforesaid conditions and requirements of the company meeting of Board of Directors is to be convened after giving proper notice and proposals of giving loan or giving guarantee or providing security etc. are to be discussed.

No investment shall be made or loan 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.

It is to be checked whether there is any existing loan from any public financial institution, if so, prior approval of that public financial institution is also required for any subsequent loan from any other source. However, prior approval of Public Financial Institution shall not be required where the aggregate loan, investment, guarantee and security proposed is within the limits as specified under section 186(2) and there is no default in repayment of loan or interest thereon to the Public Financials Institution.

After deciding the source of fund and quantum of requirement, the Board may authorize one of the directors of the company or any other person to apply for the concerned public financial institutions for approval.

Arrange to convene a general meeting of shareholders after giving proper notice and to pass special resolution therein, where the giving of any loan or guarantee or providing any security or the acquisition exceeds the limits specified i.e. 60% of its paid up capital, free reserves and security premium account or 100% of its reserves and security premium whichever is more.

File the copy of special resolution in Form No. MGT-14 along with the fee as provided in Companies (Registration of offices and fees) Rules, 2014 with the Registrar within 30 days of passing the resolution. Necessary documents are required to be attached as per the requirements of the form.

Registers are to be maintained in Form MBP-2 by every company giving loan or giving guarantee or providing security or making an acquisition shall, from the date of its registration and the particulars of loan and guarantee given, securities provided and acquisition are to be entered therein.

Entries in the register shall be made chronologically in respect of each such transaction of making such loan or giving guarantee or providing security or making acquisition.

It is to be ensured that no loan shall be given at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan.

The company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.

Scrutinise the repayment history of the company with regards to repayment of any deposits or interest thereon. No company that is in default in the repayment of any deposits or in payment of interest thereon shall give any loan or give any guarantee or provide any security or make any investment through acquisition of another company till such default is subsisting.





Cairn Energy plc is a global oil and gas exploration company headquartered in Edinburgh, United Kingdom. It has operational interests in Albania, Bangladesh, Greenland, India, Nepal and Tunisia and produces around 33,000 barrels of oil equivalent per day. Its largest activities are in India, where it has made more than 20 discoveries in Rajasthan, including a major oil discovery in Mangala. As at 30 June 2010 it had total proven commercial reserves of 247.4 million barrels of oil equivalent. Its primary listing is on the London Stock Exchange and it is a constituent of the FTSE 100 Index. It has a secondary listing on the Bombay Stock Exchange.

Vedanta Resources plc is a global mining and metals company headquartered in London, United Kingdom. It is the largest mining and non-ferrous metals company in India and also has mining operations in Australia and Zambia. Its main products are copper, zinc, aluminum, lead and iron ore. It is also developing commercial power stations in India in Orissa (2,400 MW) and Punjab (1,980 MW). It is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.

Cairn India granted a loan of $1.25 billion to its parent Vedanta for a term of two years as a part of Cairn’s treasury operations. Cairn had committed $800 million loan in the first quarter of 2014-15. As per the loan agreement, Cairn India will be getting the interest of 300 basis points above the benchmark London Interbank offered Rate. The reason for this quoted by the company officials is that the company had a cash surplus and therefore it decided to extend loan to its parent company. The only problem it suffered was that the shareholders’ approval wasn’t taken (as they were required to take under Clause 49 of Listing Agreement).


Vedanta uses its stated strength of assets optimization and cost reduction to perhaps extract more profits creates cash flows.

First Sesa Goa is offering to buy minimum 20% from public. Then based on the response, Vedanta will buy 40-51% from Cairn India Ltd.

Then in this case Vedanta holds only 60% shares in Cairn India. If we suppose that they buy 51% from cairn and then float minimum 20% public buy tender, and they get more than 20%, they will end up holding more than 70% which is may be out of reach of Vedanta Resources.

The gravity of the Deal was so huge that it saw a rare move by Mr. James Cameron, Prime Minister of United Kingdom who wrote to Mr. Manmohan Singh, Prime Minister of India, specifically addressing the deadlock that the Deal encountered. Mr. Cameron highlighted the need for greater transparency  and  predictability  in  India’s  policy  environment  to  enhance  trade  and  investment.



“The new Act is now operational, having wide and far ranging impacts. It significantly raises the bar on governance. Companies have to start aligning their systems and processes to comply with the new Act. The final Rules have made some very significant changes and it is heartening to note that the ministry has taken into account several of the recommendations made by the corporate sector in finalizing these Rules, keeping in mind the practical difficulties that would have been faced by the corporate sector in implementation.”[4]

The changes in the final Rules address the concerns and genuine hardship that companies faced in financing their subsidiaries. The new requirement provides safe harbor with respect to both loans and guarantees given by a holding company to its wholly owned subsidiaries.

Excluding redeemable preference shares from the definition of total share capital is a positive development, especially since redeemable preference shares are more akin to debt than equity. However, it would have assisted if the MCA had specified the treatment of optionally convertible preference shares.

We welcome the MCA’s move permitting companies to align their depreciation policy for tangible assets in line with the useful life of the asset, as is the case internationally. Further, the requirement to disclose justification for deviation will also, in a transparent manner, provide reasons to the users of financial statements. Revenue-based amortization, will maintain status quo for companies having toll road projects.

Therefore, the 2013 Act is a culmination of several years of discussion on how to shape the corporate law in India. The 2013 Act provided a fillip to the governance environment in companies. The rationalization and reliefs provided in the final Rules will surely go a long way in assisting companies implement this new Act.




Company Law, Executive Programme, ICSI Module 2014

Dr. K.R. Chandratre, Corporate Restructuring, Edn. 2010, Bharat Law House

Majumdar on Company Law, Edn. 2013, Taxmann Publishing House

Handbook on Mergers, Amalgamation & Takeovers Law and Practise, 5th edition, CCH a Wolters kulwer (India) Pvt Ltd, Haryana




[1]  ICSI module


[3]LAYER can be explained as follows: If a holding company wants to invest funds, then it can invest directly in another two subsidiaries of it which are investment companies. This restriction is obviously for preventing siphoning of funds through subsidiaries which are investment companies. This could also be for easy tracking of funds and bring out transparency.

[4] Sai Venkateshwaran, Partner and Head, KPMG


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