What are Inter Corporate Loans and Advances?

Inter corporate loans and advances refer to financial transactions between two or more corporations where one lends money to another for a specified period and interest rate. These transactions are common in the corporate world, facilitating liquidity management, investment opportunities, and financial support among businesses. Let’s delve deeper into the concept, significance, and examples of inter-corporate loans and advances.

Significance of Inter-Corporate Loans and Advances: Inter-corporate loans are crucial in managing cash flows and meeting short-term financial needs. They provide flexibility to corporations in terms of borrowing and lending funds based on their financial requirements and market conditions. Moreover, these transactions can help optimize tax planning and maximize returns on surplus funds.

Example: Consider a scenario where Corporation A, a large manufacturing company, has surplus funds that are not immediately required for its operations. On the other hand, Corporation B, a tech startup, needs capital to expand its business operations. In such a situation, Corporation A can extend an inter-corporate loan to Corporation B at a mutually agreed interest rate and repayment terms. This enables Corporation B to access the necessary funds while Corporation A earns interest income on its idle funds.

What are Corporate Loans?

Corporate loans are financial instruments provided by financial institutions such as banks, credit unions, or other lending entities to corporations for various purposes, including expansion, working capital, debt refinancing, or other business needs. These loans are tailored to meet the specific requirements of corporate borrowers and are typically structured with predefined terms, interest rates, and repayment schedules.

Significance of Corporate Loans:

1. Business Expansion: Corporations often require additional funds to expand their operations, invest in new projects, or enter new markets. Corporate loans provide the necessary capital to fuel growth initiatives and seize business opportunities.
2. Working Capital Management: Maintaining adequate working capital is essential for the smooth functioning of businesses. Corporate loans can bridge short-term funding gaps, allowing corporations to manage their day-to-day operations efficiently.
3. Debt Refinancing: Corporations may opt for corporate loans to refinance existing debt obligations, especially if they can secure more favorable terms or lower interest rates, thereby reducing overall borrowing costs and improving financial flexibility.
4. Capital Expenditure: Large-scale capital expenditure projects such as infrastructure development, technology upgrades, or machinery purchases often require substantial financial investment. Corporate loans enable corporations to finance such capital-intensive projects over an extended period.

Example: Let’s consider Corporation X, a manufacturing company experiencing rapid growth in demand for its products. To meet the increased production needs, Corporation X decides to expand its manufacturing facilities by investing in new machinery and infrastructure. However, the company lacks sufficient internal funds for this expansion. In this scenario, Corporation X approaches a bank for a corporate loan to finance the capital expenditure required for the expansion project. The bank assesses Corporation X’s creditworthiness, evaluates the viability of the expansion plan, and offers a loan with suitable terms and conditions. With the loan proceeds, Corporation X completes the expansion project, increases its production capacity, and meets growing market demand.

Benefits of Inter-corporate loans and advances

Inter-corporate loans and advances offer a multitude of benefits for corporations, ranging from liquidity management to tax optimization. Let’s delve into each of these advantages in detail, explaining them in easy terms.

1. Liquidity Management: Inter-corporate loans serve as a valuable tool for managing the flow of cash within a corporation. Imagine your company has surplus funds sitting idle in its accounts. Instead of letting that money sit idle, you can lend it to another corporation in need. By doing so, you not only put your surplus funds to work but also earn interest on the loan provided. This ensures that your company’s money is being utilized effectively, rather than just sitting idle and potentially losing value over time.Additionally, if your company suddenly requires additional funds for a new project or to cover unexpected expenses, having the option to lend out excess cash provides a quick and flexible solution. Instead of going through the lengthy process of applying for a new loan, you can utilize the funds from inter-corporate loans, ensuring smooth operations without any liquidity crunch.
2. Diversification of Investment Portfolio: Inter-corporate loans enable corporations to diversify their investment portfolio beyond traditional avenues like stocks and bonds. When your company lends money to other corporations, it’s essentially investing in them. This diversification reduces the overall risk in your investment portfolio because if one investment performs poorly, it may be offset by the performance of others.Moreover, lending to other corporations can potentially yield higher returns compared to more conservative investment options. While the risk may be slightly higher, the interest rates on inter-corporate loans can often be negotiated to reflect this risk, potentially resulting in greater profitability for your company.
3. Strategic Partnerships: Inter-corporate loans can pave the way for strategic partnerships and collaborations between corporations. Let’s say your company extends a loan to another corporation that operates in a complementary industry. This loan not only provides financial support to the other corporation but also fosters a relationship between the two companies.Over time, this relationship can evolve into a strategic partnership where both companies collaborate on projects, share resources, or even explore joint ventures. By leveraging each other’s strengths and expertise, both corporations can create mutual benefits and unlock new opportunities for growth and innovation.
4. Tax Optimization: Structuring inter-corporate loans in a tax-efficient manner can help corporations optimize their tax liabilities. For example, interest income earned from inter-corporate loans may be subject to lower tax rates compared to other forms of income. Additionally, if structured properly, corporations may be able to deduct the interest paid on inter-corporate loans from their taxable income, reducing their overall tax burden.Furthermore, inter-corporate loans can be utilized as a tool for tax planning. By strategically timing the disbursement and repayment of loans, corporations can manage their taxable income more effectively, potentially lowering their tax liabilities and improving their overall financial performance.

In essence, inter-corporate loans and advances offer a range of benefits that go beyond just financial gain. From efficiently managing liquidity to fostering strategic partnerships and optimizing tax liabilities, these transactions play a crucial role in the financial management and growth strategy of corporations. By understanding and leveraging these benefits, corporations can enhance their financial performance and position themselves for long-term success in the competitive business landscape.

Have you ever embarked on a journey through the intricate labyrinth of corporate law, only to stumble upon a fascinating revelation? Section 186 of the Companies Act, 2013 unveils a captivating exception, a hidden gem amidst its dense legal prose. Picture this: it’s a realm where the rules bend, where the conventional norms falter.

In this realm, the formidable Section 186 extends its protective cloak over certain entities, shielding them from its regulatory grasp. Behold! Banking companies, insurance juggernauts, and housing finance titans stand tall, immune to the clutches of Section 186 in the ordinary rhythm of their business operations. Their fortress, built upon the foundation of public trust, is impervious to the laws that govern the corporate landscape.

But wait, there’s more to this saga! Even investment companies, the vanguards of wealth multiplication, find solace in the sanctuary of exemption. Their strategic maneuvers in the realm of shares and securities remain untouched by the dictates of Section 186. And lo and behold! Non-Banking Financial Companies (NBFCs), the silent architects of financial stability, emerge unscathed, their investments in corporate securities sheltered from the prying eyes of regulatory scrutiny.

As we journey deeper into the realm of corporate lore, the tale takes a curious turn. A transition from the old guard of the Companies Act, 1956, to the dawn of a new era with the Companies Act, 2013, marks a pivotal moment in the narrative. The new Act, heralded as a beacon of corporate rejuvenation, sought to streamline business operations, ease compliance burdens, and navigate the treacherous waters of corporate governance.

In this grand evolution, Section 372A of its predecessor found itself reshaped and rechristened as Section 186. Gone were the days of stringent regulations; the new era embraced a nuanced approach to inter-corporate transactions. No longer shackled by the constraints of excessive layers of investment companies, the revised Section 186 ushered in an era of transparency and accountability.

Indeed, the spirit of Section 186 transcends mere legal jargon; it embodies the essence of corporate integrity and prudence. Its provisions, though intricate, serve as the cornerstone of a robust corporate ecosystem, safeguarding against the shadows of financial malpractice and ensuring a fair and equitable playing field for all stakeholders.

As we navigate through the labyrinthine corridors of corporate law, let us heed the lessons of Section 186 – a testament to the ever-evolving landscape of corporate governance and the enduring quest for transparency and accountability.

What if it exceeds the prescribed limit for Inter Corporate Loans and Advances?

Special Resolution

Next step would be-If the aggregate amount loan, guarantee, security, and investment the company exceeds the limit as prescribed in section 186(2) in such a case no investment or loan shall be made or guarantee shall be given or security shall be provided unless its authorized by special resolution passed in a general meeting.

The requirement of section 186(3) shall be applying, in case if Loan, Guarantee or security has provided by a Company- Special Resolution

a. to its wholly owned subsidiary Company; or

b. a Joint venture Company;

or acquisition made by holding company by any mode, of securities of its wholly owned subsidiary Company.

Few Important point to keep in mind while giving Loans, providing securities or making Investment:

1. The word “person” does not include any individual who is in the employment of the company
2. Company shall disclose the details of such loan, Guarantee, Security, acquisition in the financial statement
3. Company shall disclose to the member in financial statements-
4. the full details of the Loan, Investment, Guarantee,
5. Purpose of the providing and usage of the same,
6. The rate of interest chargeable should be more than the prevailing yield of Government Security closest to the period of the loan.
7. It is to be checked whether there is an existing loan from any public financial institution if so, the prior approval of that public financial institution is also required for any subsequent loan from any other source. However, prior approval of the Public Financial Institution would not be needed where the aggregate loan, investment, guarantee and security that is proposed within the limits as mentioned under section 186(2).
8. The company which is in default in the repayment of any deposits accepted before or after the commencement of this Act or in payment of interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.
9. Filing of form -MGT14 in case special resolution is passed by the company within 30 days of General Meeting.

Non-Applicability of Section 186 of the Companies Act, 2013

1. Loan Made, guarantee given or security provided or investment made by:

• Banking Company, or
• Insurance Company or
• Housing Finance Company
• in the ordinary course of its business or whose principal business is of lending of money to the general public.

2. To any Investment:

• made by an investment company;
• made in shares allotted by way of rights issues made by a body corporate;
• Investment made by an NBFC company whose main business is to invest in the securities of the Company.

“Investment company” means a company whose principal business is the acquisition of shares, debentures or other securities.

3. With respect to Government Company

• A Government company engaged in defence production.
• A Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of CG which is administratively in charge of the company or State Government, as the case may be.

Registers for Loan, Investment, Guarantee or Security

Here comes the role of Company Secretary to update Statutory registers Promptly, every company giving loan or giving a guarantee or providing security or making an acquisition under this section shall keep a register in Form MBP 2 at the registered office of the company.

1. The register shall be kept at the registered office of the company.
2. The register shall be opened for inspection at the registered office of the company.
3. The Copies of the register may be obtained by any member on payment of prescribed fees.
4. Also, the extracts may be taken out from the register by any member on payment of prescribed fees
5. The register shall be maintained with effect from the date of its incorporation.
6. The register shall be preserved permanently.
7. Company secretary of the company or any other person authorized by the Board is required to maintain the register under its custody.
8. The register shall be maintained either manually or in electronic mode.

Penalty for Contravention of Section 186

If a company contravenes any of the provisions of this section, the punishment would be as follows:

DRAFT BOARD RESOLUTION TO BE PASSED UNDER SECTION: 186

CERTIFIED TRUE COPY OF THE RESOLUTION PASSED AT THE MEETING OF THE BOARD OF DIRECTORS OF (COMPANY NAME) HELD AT THE REGISTERED OFFICE OF THE COMPANY AT (ADDRESS) ON (DATE) AT (TIME).

“RESOLVED THAT” the consent of the Company be and is hereby accorded to the Board of Directors in terms of the provisions of Section 186 of the Companies Act, 2013 and the Board including any Committee of Directors be and is hereby authorized, subject to the approval of the Bank of India, if any, and other applicable Rules, Regulations, Guidelines (including any statutory modifications or re-enactment thereof for the time being in force) and such conditions as may be prescribed by any of the concerned authorities, notwithstanding that the aggregate loans and guarantees to any bodies corporate and persons and investment in securities of any bodies corporate exceeds the limits specified under Section 186 of the Companies Act, 2013,

(a) to invest/acquire from time to time by way of subscription, purchase, conversion or otherwise Equity Shares, Preference Shares, Debentures (whether convertible or non-convertible) or any other financial instruments of one or more bodies corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force), to the extent of the following limits:

Investments into Subsidiaries and other Bodies Corporate:Rs.___(Rupees ________________only).

(b) to make/give from time to time any loan or loans to anybody or bodies corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company or to any persons as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force) to the extent of the following limits:

Loans to Subsidiaries, other Bodies Corporate or Persons: Rs.___(Rupees ______only).

(c) give from time to time any guarantee(s) and/or provide any security to any person(s), any Body Corporate, Bank, Financial Institutions or any other institution in India or outside in respect of or against any loans to or to secure any financial arrangement of any nature by, any other person(s), any Body(ies) Corporate, whether in India or outside, which may or may not be subsidiary(ies) of the Company, as the Board may think fit, in pursuance of Section 186 of the Companies Act, 2013 (including any ordinance or statutory modification or re-enactment thereof, for the time being in force) to the extent of the following limits:

Guarantees against Loans/Financial arrangements in favor of Subsidiaries, other Bodies Corporate and Persons: Rs.___(Rupees ______only).

“RESOLVED FURTHER THAT” the consent of the Company, be and is hereby accorded to the Board including any Committee of Directors, pursuant to Rule No.ll of the Companies (Meetings of Board and its Powers) Rules, 2014 and Section 186 and other applicable provisions of the Companies Act, 2013, to give any loan to or guarantee or provide any security on behalf of, or acquire securities of, the Wholly Owned Subsidiaries of the Company, for such sums as may be decided by Board/Committee of Directors as permitted or subject to the provisions specified therein.

“RESOLVED FURTHER THAT”the Board/Committee be and is hereby authorized to agree, make, accept and finalize all such terms, condition(s), modification(s) and alteration(s) as it may deem fit including the terms and conditions within the above limits upto which such investments in securities/loans/ guarantees, that may be given or made, as may be determined by the Board or the Committee thereof, including with the power to transfer/dispose of the investments so made, from time to time, and the Board/Committee is also hereby authorized to resolve and settle all questions, difficulties or doubts that may arise in regard to such investments, loans, guarantees and security and to finalize and execute all agreements, documents and writings and to do all acts, deeds and things in this connection.

Can a private limited company (India) accept inter corporate loans or deposits for working capital? Will it be in accordance with Companies Act 2013?

Yes, a private limited company in India can accept inter-corporate loans or deposits for working capital purposes, but it must adhere to specific provisions of the Companies Act, 2013. Let’s explore the regulations and conditions under which this is permissible.

Acceptance of Inter-Corporate Loans

Under Section 186 of the Companies Act, 2013, companies are allowed to make inter-corporate loans, but certain conditions and limitations apply:

1. Board Approval: The company’s board of directors must approve the loan. This decision must be documented in the board meeting’s minutes.
2. Special Resolution: If the loan amount exceeds the limits specified under Section 186 (i.e., 60% of the paid-up share capital, free reserves, and securities premium account or 100% of free reserves and securities premium account, whichever is higher), the company must obtain approval from its shareholders via a special resolution.
3. Disclosure Requirements: Full disclosure of the loan must be made in the financial statements.
4. Interest Rate: The interest rate on the loan must not be lower than the prevailing yield of one, three, five, or ten-year government securities closest to the loan’s tenure.
5. Purpose: The loan must not be used for purposes that are prohibited under the Act, ensuring it is for legitimate business needs such as working capital.

Acceptance of Deposits

For deposits, private companies have more stringent regulations under Sections 73 to 76 of the Companies Act, 2013. Private companies can accept deposits from their members subject to the following conditions:

1. Members’ Deposits: Private companies can accept deposits from their members if they meet certain conditions, including issuing a circular to members, obtaining deposit insurance, and creating a deposit repayment reserve account.
2. Non-Members’ Deposits: Private companies cannot accept deposits from the public. They are restricted to accepting deposits only from their members and specified relatives.
3. Compliance with Rules: They must comply with the Companies (Acceptance of Deposits) Rules, 2014, which include detailed procedural and compliance requirements.

Key Conditions for Private Companies:

• No Default: The company must not have defaulted in the repayment of deposits or interest thereon in the past.
• Limits on Borrowing: The total amount of deposits does not exceed 25% of the aggregate of the paid-up share capital, free reserves, and securities premium account.
• Repayment Reserve: The company must deposit at least 20% of the amount of its deposits maturing during the following financial year in a scheduled bank account.

Practical Example:

Consider XYZ Pvt. Ltd., a private limited company needing additional funds for working capital. They can approach another company, say ABC Ltd., for an inter-corporate loan. XYZ Pvt. Ltd. must ensure that:

• The board approves the borrowing.
• If the borrowing exceeds the specified limits, shareholder approval through a special resolution is obtained.
• The loan details, including interest rate and purpose, are clearly disclosed in their financial statements.
• The loan is used strictly for legitimate business purposes like managing working capital.

If XYZ Pvt. Ltd. decides to accept deposits from its members to raise funds, it must:

• Issue a circular to its members.
• Ensure compliance with all the deposit rules under the Companies Act and related regulations.
• Not exceed the prescribed limits for deposit acceptance.
• Maintain a repayment reserve to ensure timely repayment of deposits.

Conclusion:

While a private limited company in India can accept inter-corporate loans and deposits for working capital, it must carefully navigate the regulatory framework established by the Companies Act, 2013. Adhering to these regulations ensures legal compliance and maintains the company’s financial health and integrity.