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Inter Corporate Loans and Investments U/s 372 A

Sections 370 and 372 have been made inoperative w.e.f. 31.10.1998 by the Companies (Amendment) Act, 1999. Instead section 372A has been introduced under which, provisions of section 370 and 372 relating to inter-corporate loans and investments etc. have been merged and a combined ceiling of 60 per cent of the aggregate of paid up share capital and free reserves or 100 per cent of the free reserves, whichever is higher, has been introduced, for exercise of powers by the Board of directors of a company.

Prescribed ceiling limit of 60% as above, also includes the amounts of corporate guarantees and securities provided under section 372A.

- No company shall make loans or investments or provide guarantee or security, if it has defaulted in complying with the provisions of Section 58A [ Section 372A(4)].

A private company which is not a subsidiary of a public company and other companies specified in sub-section (8) of section 372A are exempted from the provisions of this section.

Procedure and Documentation :

Case 1 : Where the aggregate of loans/investments/guarantees/securities is up to 60% of the company's paid up share capital and free reserves or 100% of its free reserves, whichever is higher :

1. A Board meeting shall be convened to approve the loan, investment, guarantee by passing a Board Resolution. It must be noted that unanimous consent of the Board is required for sanctioning the aforesaid resolution [Section 372A(2)]

2. If the company has taken any term loan from any of the financial institutions referred to in Section 4A , then prior approval of that financial institution shall be taken, provided the following conditions are fulfilled :

a) that term loan is subsisting, and

b) the company has defaulted in repayment of loan instalment or payment of interest to financial institution.

However, prior approval of financial institution will not be required if the company has not defaulted in repayment of loan instalment or payment of interest to financial institution.

Case II : Where the aggregate of loans/investments/guarantees/securities exceeds 60% of the company's paid up share capital and free reserves or 100% of its free reserves, whichever is higher :

1. A Board meeting shall be convened to approve the loan, guarantee, security and investment and also to approve the draft notice of the general meeting to be convened in this regard.

2. In case of a listed company, send three copies of the notice of general meeting to the stock exchange. ( Clause 31 (c) of listing agreement)

3. Notice of the general meeting shall be issued to the eligible members at least 21 clear days before the date of the meeting.

4. The General Meeting shall be held to pass the special resolution for inter corporate loans and investments. The aforesaid special resolution shall clearly specify the following (third proviso to Section 372A(1):)

a) specific limits,

b) particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee to be given.

c) the purpose of the investment, loan or security or guarantee.

d) specific sources of funding

e) other details .

5. In case of a listed company, send a copy of the proceedings of the general meeting to the stock exchange. ( Clause 31 (d) of listing agreement)

6. Form No. 23 of Companies General Rules and Forms shall be filed with the Registrar of Companies along with special resolution within 30 days of passing of the resolution along with requisite fee.

7. Take the approval from public financial institution where any term loan is subsisting with that financial institution.

8. Necessary entries shall be made in the register of intercorporate loans and investments within seven days of the making of such investments or loan or the giving of such guarantees or the provision of such securities :

Case III : Where corporate guarantee is given

1. The Board of directors may, in exceptional circumstances, give corporate guarantee without the authorisation of special resolution and in such a case :

a) a Board meeting shall be convened to pass a resolution authorising the giving of such guarantee  and

b) the said Board resolution shall be confirmed within 12 months in an extra-ordinary or Annual General Meeting held after passing the Board resolution, whichever is earlier. [ second proviso to Section 372A(1)]