Company Registration

How to Provide an Inter-Corporate Loan by one Private Company to another Private Company?

Whenever a company gives any loan, guarantee or security in favor of any other company or a person, then it is termed as inter-corporate loans. Under the Companies Act, 2013^[1], inter-corporate loan in India plays a vital role in the growth of industries. There is a continuous flow of funds for the group and other companies who are in the need of funds.

Keeping in view, the continuous industrialization in India, the corporation may require more funds. Hence, you may need the help of the inter-corporate loan.

In this blog, we will enrich your knowledge about the Inter-corporation loan.

What is the meaning of Inter-corporate loan?

The inter-corporate loan is a loan made by one unit of a corporation to another unit of the same corporation. The term Inter-corporate loan refers to a loan in which both the lender and borrower are divisions of the same corporation.

Generally, it is necessary to record the inter-corporate loan in the financial statements of individual business units.

What are the Objectives of the Inter-corporate loan?

There are various objectives of the inter-corporate loan. Inter-corporate loans are loans made from one business unit of a company to another. This is usually for the following reasons and objectives:

• To shift cash to a business unit to avoid the shortfall in cash.
• To shift cash into a business unit (usually corporate) where the funds are aggregated for investment purposes.
• Shifting cash within business units that use a common currency, rather than sending in funds from a foreign location that will subject to exchange rate

The requirement of Inter corporate loans

The inter-corporate loan is extremely useful for the following reasons.

• There is no requirement of any credit application
• On very short notice, cash is available to any corporate.
• The terms of repayment are much

Limit on Inter-corporate loan

According to the Companies Act, 2013, there are certain limits on inter-corporate loan. All the companies have following restrictions on the maximum amount of the inter-corporate loan.

• A company can give a loan, guarantee or security to any person or to a body corporate in excess of 60% of its paid-up share capital.
• If the aggregate of inter-corporate loan is not above than the specified limit, then incorporate loan and investment will process by passing board resolution.
• Board resolution will pass with the consent of all directors present at the board meeting.
• In case, the whole of inter-corporate loan is beyond the specified limit, then it is necessary to pass a prior special resolution.

Restriction on Inter-corporate loan

These are following restrictions that you must keep in mind while making arrangement for an inter-corporate loan.

• Where a company defaults in payment of interest, then as per the Companies Act, 2013, such company is prohibited from making any inter-corporate loans.
• Such prohibition will remain effective until the company completely addresses the default.
• There shall not be any inter-corporate loans at a rate below than the prevailing bank lending rate.

What is the rate of Interest applicable on Inter-corporate loan?

The rate of interest applicable to inter-corporate loans will be as follows:

• No corporation will get a loan at a rate of interest lower than the rate that prevails of the Government security closest to the tenor of the loan.
• However, the above rate of interest is not applicable if the loan is provided for industrial research and development projects, in which the government held 26% or more of the paid-up capital.

Disclosure of particulars of the loan in Financial Statement

Section 186(4) of the Companies Act, 2013, provides that the where a company made some inter-corporate loans, then that company must disclose the following details to the members in the financial statement

• Amount of loan provided
• The investment made/guarantee given
• Purpose of providing the loan
• The source of funding for meeting the proposal
• The particulars of the body corporate interested to make such loan

Approval of Board and Public Financial Institution

• In pursuant to the provision of section 186 (5) of the Companies Act,2013, every company shall take consent of all the directors before making any inter-corporate loans.
• In case a company already took a loan from any public financial institutions, then it is mandatory to take prior approval from such public financial institutions.

Inter corporate loan for the Companies registered under Securities Exchange Board of India (SEBI)

The companies must keep in mind the following requirement before taking inter-corporate loans:

• Those companies registered under section 12 of the SEBI Act,1992 shall not take inter-corporate loans in excess of the limits as specified under the regulations of such company.
• Those companies must furnish the details of loans in their financial audit report.

Which all companies cannot provide a loan under Section 186 of the Companies Act, 2013?

Section 186 of the Companies Act, 2013 does not apply to the following loans given by

• Non-banking company
• Insurance company
• A housing company
• Company framed for purpose of financing industrial enterprises or providing infrastructure facilities
• An organization that purchases the right of shares.
• A company whose primary business is the acquisition of shares.
• Government companies operating in defense production.
• Unlisted companies those legally authorized by the Ministry or Department of the State.

Procedure for providing Inter-corporate loans

Following is the procedure which must be kept in mind while providing inter-corporate loans:

• The company can give any loan or any guarantee through board resolution up to 60% of its paid-up capital and 100% of its free reserves and security premium, whichever is more.
• There must be a meeting of the Board of Directors after giving proper notice.
• Unless the board resolution passed, any company shall not make any investment.
• If there is an existing loan from any public financial institution, then it is necessary to obtain prior approval of that financial institution.
• However, where the aggregate loan amount is within the limits as specified under section 186(2) of the Companies Act, 2013, then there is no necessity of getting prior approval of that financial institution.
• After deciding the source of fund and quantum of requirement, the Company Board can authorize one of the directors or any other person to apply for the approval of financial institution.
• It is very important to arrange a general meeting of shareholders.
• It is compulsory to file the copy of the resolution in form No. MGT-14(Filing of resolution and agreements to the Register along with the fees prescribed in the Companies Rules, 2014 within 30 days of passing the resolution.
• As per the requirements of the resolution form, the company has to attach necessary documents.
• It is important for every company giving a loan or giving a guarantee to maintain registers in Form MBP-2 (Register of loans, guarantee, security, and acquisition)
• Entries in the register must be in respect of each transaction of making such loan.
• The company must make sure that it gives no loan at a rate of interest lower than the prevailing rate of Government security.
• The company is bound to disclose the full particulars of the loan in the Financial statement.

Conclusion

To run any business one of the important resource required is money. Source of funding for companies are share capital, loans etc. Loans are the major source of funding for most of the companies. Nowadays,  the inter-corporate loan is one of the best sources of funding amongst the companies. Inter-corporate loan satisfies all the need and necessity of a capital source of a company. A company only after getting consent and approval of the Board as well as shareholders entitles to provide an inter-corporate loans to another company or body corporate.

Read our article:Inter Corporate Loans and Investments According to Section 186 of the Companies Act 2013