Loans, investments, deposits, related parties under Companies Act 2013

THE COMPANIES ACT, 2013
IMPORTANT PROVISIONS RELATING TO
LOANS, INVESTMENTS, DEPOSITS
AND RELATED PARTIES
www.kalidasvanjpe.com
Disclaimer : This is for information purpose only. Readers are advised to seek professional help in respect of any issues
they have and should not rely on this presentation. Copyright with the author.
CS Kalidas Vanjpe
Practising Company Secretary

FEATURES
 No change in basic concepts.
 Emphasis on rules.
 Objective: to bring flexibility and adoption of
internationally accepted practices, self
regulation with more disclosures, stringent
punishment for violation etc.
CS Kalidas Vanjpe

FEATURES (Contd.)
 Most of the privileges, concessions and
exemptions of a private company will go.
e.g. Loans, Investments, Related parties.
Will be on par with public companies for most of
the matters.
CS Kalidas Vanjpe

LOANS
 Sec 185: Two categories : Loans to Directors and
Others.
 Loans to Directors - Exemption to Private
companies, banking companies gone.
 Virtually such loans banned with limited
exemptions.
 Restrictions on loans to Director or “any other
person in whom the Director is interested”
CS Kalidas Vanjpe

LOANS TO DIRECTORS
 Exemptions: a) Loan to MD/WTD as a part of
conditions of service to all employees or
 b) pursuant to any scheme approved by members by
a special resolution
 Loan, guarantee or security for repayment of loan in
the ORDINARY course of business and charging
interest at prevailing bank rate.
 C) Any loan, guarantee or security by a holding co to
WOS
 D) any guarantee or security by a holding co to its
subsidiary (loan not covered)
 For c and d, subsi to use the funds for its principal
business activities
CS Kalidas Vanjpe

EXPLANATION OF “ANY OTHER
PERSON”
 Any director of a lending co. or of a company which is
its holding co or any partner or relative of such
director
 Any firm in which such director or relative is a partner
 Any pvt company of which such director is a director
or member
 Any body corporate : 25% of the total voting power
exercised or controlled by such director or two or
more such directors
 Any body corporate : the BOD, MD or Manager is
accustomed to act in accordance with directions or
instructions of the Board of one or more directors of
the lending co.
CS Kalidas Vanjpe

LOANS AND INVESTMENTS
 Sec 186: Prohibition on making investments
through more than two layers of investment
companies.
 Investment company means the company whose
principal business is acquisition of shares,
debentures or other securities.
 Exemptions: a) acquisition of a company abroad
if such co is having more than two layers if
permitted under law there and b) a subsi co from
having any inv subsi co if required by law.
CS Kalidas Vanjpe

LIMITS ON LOANS/INVESTMENTS
 60% of puc, free reserves and securities premium
account or 100% of free reserves and securities
premium account whichever is more
 Limits applicable for giving any loan, guarantee,
providing security or acquisition of securities.
 Limits can be exceeded by a special resolution. Prior
approval. Approval not necessary in respect of loan,
guarantee by a co to WOS or joint venture co. Also
approval by special resolution not necessary for
investments by holding co in WOS
CS Kalidas Vanjpe

OTHER PROVISIONS
 Proposal to be approved at meeting of BOD with
the consent of all directors present. Interested
director not to participate.
 If any term loan from public fin inst is subsisting,
then prior approval of such inst. Exemption: if
the loan/inv/guarantee etc is within limits i.e
60% or 100% and no default in loan or int
 Disclosure in fin statement about the loan/inv etc
of full particulars including the purpose for which
it is to be utilised by recipient.
CS Kalidas Vanjpe

OTHER PROVISIONS (Contd.)
 Also disclosure in Board’s report.
 Particulars of loans, investments also in A/R
 Also in case of Companies where A/R certification
is compulsory, the PCS has to certify the
compliance. Scrutiny by Audit committee.
 Loan to carry interest not lower than the
prevailing yield of Govt security closer to tenor of
loan.
 Compulsory filing of resolution with ROC.
 Power to invest or giving of loans etc is
delegatable.
CS Kalidas Vanjpe

OTHER PROVISIONS (Contd.)
 No co registered under sec 12 of SEBI Act can
take inter corporate loan or deposits exceeding
the limits.
 If default in repayment of deposits or payment of
interest by a company, then prohibited to give
loan or guarantee or security or make acquisition
till such default continues.
 Every co to maintain register of loan/investments
etc at regd office. Open for inspection.
 Entries (manual or electronic) to be made within
7 days of transaction in the register and shall be
authenticated by CS or other authorised officer.
CS Kalidas Vanjpe

EXEMPTIONS
 Except provision of two layer investment
subsidiary, provisions of section will not apply to
a banking company or insurance company or a
housing finance company in ordinary course of its
business or a company engaged in business of
financing of companies or of providing
infrastructural facilities.
 Business of financing of companies shall include
(with regard to regd NBFCs) giving of any loan or
giving loan etc in the ordinary course of business.
CS Kalidas Vanjpe

EXEMPTIONS (Contd.)
 Specific exemption only for investment:
 A) Any acquisition by a regd NBFC whose
principal business is acquisition of
securities (proviso gives exemption only in
respect of investment and lending
activities [?])
 B) by a company whose principal business
is the acquisition of securities
 C) Acquisition of rights shares offered
under further issue of capital.
CS Kalidas Vanjpe

DEPOSITS
 In private company's definition, the clause of
prohibition of invitation or acceptance of deposits
from persons other than members, directors or their
relatives is gone
 Now private companies can accept deposits from
Directors under exempted category. Director cannot
take loan and place the same as deposit.
 They have to comply with the conditions and
procedure in case of deposits from members.
 The term deposit includes any receipt of money by
way of deposit or loan or in any other form by the
company but excludes such categories as may be
prescribed. CS Kalidas Vanjpe

DEPOSITS (Contd.)
 All cos can accept deposits from members.
Required to pass an ordinary resolution
 Limit 25% of the aggregate of the paid up
capital and free reserves. For sec 76
companies: limit 10%
 Period mini 6 m maxi 36 m. To meet short
term requirements they can accept
deposits of shorter tenure of not less than
3 m. such dep should not exceed 10% of
puc and free reserves.
CS Kalidas Vanjpe

DEPOSITS (Contd.)
 public companies having a net worth of
not less than one hundred crore rupees or
a turnover of not less than five hundred
crore rupees (eligible companies) can
accept deposits from public (sec 76
companies)
 Special resolution. Ordinary resolution will
do if aggregate of borrowings do not
exceed the aggregate of puc and free
reserves
CS Kalidas Vanjpe

LIMIT ON PUBLIC DEPOSITS
 Sec 76 cos can borrow up to 10% from
members and 25% from public.
 For Govt co., the limit is 35%
CS Kalidas Vanjpe

PROCEDURE
 Every co to issue a circular to members by
RPAD/Speed post or electronic mode
(form DPT1). In addition, advt of circular
in two newspapers (applicable to sec76)
 Credit rating must.
 In case of adverse change in rating,
depositors to be given exit option
 Sec 76 co to follow the procedure of advt,
filing the text with ROC etc
CS Kalidas Vanjpe

DEPOSIT INSURANCE
 Compulsory for all companies.
 at least thirty days before the issue of
circular or advertisement or at least thirty
days before the date of renewal. The
amount deemed to include principal and
int.
 maximum cover Rs. 20,000/-
 Premium to be borne by the Co and
cannot be recovered from depositors
CS Kalidas Vanjpe

DEPOSIT INSURANCE (Contd.)
 If defect in insurance due to non payment,
the Co to rectify the defect or enter into a
fresh contract within 30 days. If not , the
co to repay the deposits and int covered
by such insurance within next 15 days. If
not, int at 15% applicable for period of
default and also penal provisions.
CS Kalidas Vanjpe

SECURITY FOR DEPOSITS
 Concept of secured deposits introduced.
 Although the Act makes it optional, the
rules make it compulsory for companies
accepting deposits from members, if
shortfall in insurance cover.
 All companies accepting deposits from
members shall create a charge on their
assets excl intangible assets to the extent
amount remaining unsecured by
insurance.
CS Kalidas Vanjpe

DEPOSITS (Contd.)
 For sec 76 co., the provisions of creation
of security will apply only in case of
secured deposits
 In case of deposits which are secured, the
amount of such deposits and the interest
payable thereon shall not exceed the
market value of such assets as assessed
by a registered valuer
 Security to be created in favour of trustee
(similar to debenture trustee)
CS Kalidas Vanjpe

DEPOSITS (Contd.)
 Creation of Deposit Repayment Reserve
mandatory. This is in the form of liquid
assets. Amount equivalent to 15% of
deposits maturing during the year and
next year.
 Earlier Private companies were not
required to maintain liquid assets. Now
even for deposits from members, it is
compulsory.
 They also have to file return of deposits.
CS Kalidas Vanjpe

DEPOSITS (Contd.)
 In case of deposits held by existing
companies, they have to be repaid within
the due date or one year.
 National Company Law Tribunal can
extend time for repayment.
 Rules however have given respite to cos.
They can repay the deposit and interest as
per the terms on which they are accepted.
That will be sufficient compliance. But if
they fail, then penal provisions will apply.
CS Kalidas Vanjpe

DEPOSITS (Contd.)
 A statement of deposits to be filed with
ROC within 3 months of commencement of
Act or from the date on which such
payment is due.
 Practical problem for Pvt cos.
 Statement to be certified by auditor
 May lead to cash flow problems or
disputes among shareholders
CS Kalidas Vanjpe

DEPOSITS – EXEMPTION CRITERIA
 Some exemptions:
 Advance for supply of goods/services should be
appropriated within 365 days
 Advance for sale of property should be adjusted
against property
 Supply of capital goods exempted but if any of
the above all cases, if the company has to refund
money as the Co did not have necessary
permissions/approvals to deal in the goods etc,
then the amount will be treated as deposit.
 Security deposit for performance of contract.
CS Kalidas Vanjpe

EXEMPTION (Contd.)
 Unsecured loan from promoters/relatives in the
form of quasi equity.
 Security deposit from employee not exceeding his
annual salary and it should be non-interest
bearing.
 Govt loans or govt guaranteed loans
 Inter corporate deposits
 Bonds or debentures either secured or
compulsorily convertible into eq shares
 Bank or Institutions’ loans etc.
CS Kalidas Vanjpe

EXTREMELY IMPORTANT PENAL
PROVISION:
 If existing deposit is not repaid within due date or
one year or extended time, minimum penalty Rs.
1 cr., may go to Rs. 10 cr.
 Officer in default liable to imprisonment upto 7
years or fine (min Rs. 25 lakhs, Maximum Rs. 2
cr) or both.
 If fraud in acceptance is proved, every officer
accepting deposit, is personally responsible for
losses, damages.
CS Kalidas Vanjpe

RELATED PARTY
 Defined first time in the Act which is broader than
the Accounting standard.
 Related party with reference to a company
means:
a) A Director or his relative
b) A KMP or his relative
c) A firm in which a director, manager or his
relative is a partner
d) A private company in which a director or
manager is a member or director
CS Kalidas Vanjpe

RELATED PARTY (Contd.)
e) A public co. in which d or m is a d and holds along
with relatives more than 2% of puc
f) Any body corporate whose BOD/MD/M is accustomed
to act in accordance with the advice, directions or
instructions of a d or m.(excl professional capacity)
g) Any person under whose advice etc a d or m is
accustomed to act (excl Pro capacity)
h) Any co. which is a holding, subsidiary or asso co or a
subsi of a holding co to which it is a subsi
i) Such other person as may be prescribed: a director or
KMP of holding co or his relative
CS Kalidas Vanjpe

REALTED PARTY TRANSACTIONS
(RPT)
 Prior approval of the BOD at a meeting is required for
following RPTs:
 A) sale, purchase or supply of any goods or materials
 B) selling or otherwise disposing off or buying property
 C) Leasing of property
 D) availing or rendering of any services
 E) Appointment of agents for purchase or sale of any
goods, materials services or property
 F) such party’s appt to office/place of profit in co/subsi/asso
co
 G) underwriting of subscription of securities or derivatives
of co.
CS Kalidas Vanjpe

RPT (Contd.)
 Agenda of Board meeting should disclose:
 A) Name of Related party and nature of relationship
 B) Nature and duration of contract and particulars
 C) Material terms including value
 D) Advance paid or received, if any.
 E) Manner of determining pricing and other
commercial terms both included and not considered.
 F) Whether all relevant factors considered. If not,
rationale for not considering
 G) Other relevant /important info.
 Interested Director shall not be present during
discussions.
CS Kalidas Vanjpe

RPT (Contd.)
 Prior approval of the Company by special
resolution necessary: companies with following
criteria
 A) sale/purchase/supply directly or through
agents exceeding 10% of annual turnover or Rs.
100 cr whichever is lower.
 B) selling etc of property directly or through
agents exceeding 10% of net worth (NW) or Rs.
100 cr whichever is lower.
 C) leasing of property exceeding 10% of NW or
10% of turnover or Rs. 100 cr whichever is lower.
CS Kalidas Vanjpe

RPT (Contd.)
 D) availing or rendering of service directly
or through agents exceeding 10% of
turnover or or Rs. 50 cr whichever is
lower.
 E) office or place of profit –remuneration
exceeding 2.5 lakh pm
 F) remuneration for underwriting
exceeding 1% of NW
CS Kalidas Vanjpe

RPT (Contd.)
 Audit committee has to approve the
transactions with related parties.
 Also disclosure in Financial statements,
Board’s report.
 Particulars of RPTs also in A/R
 Also in case of Companies where A/R
certification is compulsory, the PCS has to
certify the compliance.
CS Kalidas Vanjpe

EXEMPTIONS
 A)Transactions entered into in the ordinary
course of business and at arm’s length.
 Arm’s length means a transaction between two
related parties that is conducted as if they were
unrelated, so that there is no conflict of interest.
Concept borrowed from excise.
 B) a contract with another partner of the firm in
which d or m or his relative is a partner
 C) transactions arising out of compromise,
arrangements and amalgamation.
CS Kalidas Vanjpe

CONSEQUANCES OF NON-COMPLIANCE
 Contract without approval may be ratified within
3 months by BOD or shareholders. If not ratified,
then voidable at the option of the BOD. If related
to a director, he shall indemnify the co agt losses
 Co can proceed agt the director or employee for
recovery of losses.
 Director or employee of listed co: imprisonment
upto one year or fine 25K to 500k. Other co :
only fine.
 Such director is disqualified for 5 years for appt
as director and also vacates his office u/s 167
CS Kalidas Vanjpe

OTHER POINTS
 Enhancement in penalty, appointment of
prosecutors for courts and adjudicating officers
for trying offences. This means enforcement of
the provisions would be done seriously.
 Hence, a change in mindset necessary. “Chalta
Hai” attitude needs to be abandoned.
Documentation needs to be perfect.
 Likely effects:
a) cost of compliance
b) increase in business of insurance co.
c) increase in litigation, cash flow problems for
private cos. CS Kalidas Vanjpe

THANK YOU.
CS Kalidas Vanjpe

Loans, investments, deposits, related parties under Companies Act 2013

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