MSB's Views on Loans, Investments and deposits (definition of deposits)

MSB’S VIEWS
ON
LOANS, INVESTMENTS
AND
DEPOSITS
(DEF. PART)
UNDER THE COMPANIES ACT, 2013
OCTOBER 09, 2015
Manoj Singh Bisht
Company Secretary
csmanojsbisht@gmail.com
8527790322
PERSONAL VIEWS. Not for private circulation.

NEXT 1.30 to 2 Hours.
 Not only Inter corporate.
 Section 185
 Introduction, analysis and discussion
 Section186
 Introduction, analysis and discussion
 Deposits – If time permits !
 Definition – The show stopper ! – Analysis and
discussion.
Copyright @ MSB / Personal Views – Loans and Investments under the Companies Act, 2013

INTRODUCTION TO SECTION 185
 Interpretation of the phrase “Save as otherwise
provided in this Act “ (General Provision Vs. Special
Provision)
Very important rule of construction - generalia
specialibus non derogant, which means that when
there is a conflict between a general and a special
provision, the latter shall prevail.
Section 185 is a special provision.
Copyright @ MSB / Personal Views – Board’s Report under the Companies Act, 2013Copyright @ MSB / Personal Views – Loans and Investments under the Companies Act, 2013

INTRODUCTION TO SECTION 185
Contd.
 Loan
 "imports a positive act of lending coupled with an
acceptance by the other side of the money as loan.”
Direct vs. Indirect
 Direct loan means loan given in a direct way
whereas Indirect loan means loan given by indirect
action, means or connection; through an
intervening person or thing.
Loan Represented by Book Debt
 A genuine trade debt is out of purview of Section
185 of the Act.

 ‘Guarantee’ is an undertaking to answer for the payment or
performance of another person's debt or obligation in the
event of a default by the person primarily responsible for it.
 Section 126 of the Indian Contract Act, 1872 - Contract of
guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’
A ‘contract of guarantee’ is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.
The person who gives the guarantee is called the ‘surety’;
the person in respect of whose default the guarantee is given is
called the ‘principal debtor’, and
the person to whom the guarantee is given is called the
‘creditor’. A guarantee may be either oral or written.

 ‘Security’ means a thing deposited or pledged as a
guarantee of the fulfilment of an undertaking or the
repayment of a loan, to be forfeited in case of default.
 As per Black’s Law Dictionary, ‘security’ means
protection; assurance; Indemnification. The term is
usually applied to an obligation, pledge, mortgage,
deposit, lien, etc., given by a debtor in order to make sure
the payment or performance of his debt, by furnishing the
creditor with a resource to be used in case of failure in
the principal obligation. The name is also sometimes
given to one who becomes surety or guarantor for
another.

Guarantee / Security in connection with a loan.
Whether letter of comfort covered under section
185?
Bond for excise/customs – standing as surety for a
group company– covered under Sec 185 ?
agreement(s) between the parties – Need/
Importance.
Copyright @ MSB / Personal Views – Loans & Investments under the Companies Act, 2013Copyright @ MSB / Personal Views – Loans and Investments under the Companies Act, 2013

1. DIRECTOR of L/H
any director of the lending company;
any director of the holding company of the lending
company;
2. RELATIVES OF D of L/H
Relatives of Director of lending Company;
Relatives of Director of holding Company;

3. PARTNER of D of L/H
any partner of any director of the lending company/
holding company
any partner of any director of the holding company of
the lending company;
4. FIRMS in which D of L/H is Partner
any firm in which any director of the lending company is
a partner;
any firm in which any director of the holding company of
the lending company is a partner;

PERSONS IN WHOM THE DIRECTOR IS INTERESTED
Contd.
5. PVT COMPANY IN WHICH D OF L/H IS D OR M
any private company of which any director of the
lending company is director or member
any private company of which any director of the
holding company of the lending company is director or
member;

Contd.
6. any body corporate at a general meeting of which not
less than 25% of the total voting power may be
exercised or controlled by any such Director by two or
more such directors, together; or
 Exercised or controlled by Director(s). Relatives not
covered specifically.
 Control is defined in Section 2(27). Inclusive definition.
 “control” shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by
virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;

Contd.
7. Any Body Corporate, the Board of Directors,
Managing Director or manager, whereof is
accustomed to act in accordance with the directions
or instructions of the Board, or of any director or
directors, of the lending company.
Subsidiary can not be deemed to be accustomed to act. Question
of facts. Every case to be tested.
Vodafone Case. Separate Legal Entity. Shadow Director. Usual /
Habitual.
Duties of Directors u/s 166 – Independent Judgment.

Loan to MD/WTD:
as a part of the conditions of service extended by the company to all its
employees; or
pursuant to any scheme approved by the members by a special resolution;
 Same loan amount for all employees ? Or policy (as part of
conditions of service ) for all employees?
Loan given by a company which in the ordinary course of its
business provides :
loans or gives guarantees or securities for the due repayment of any loan
AND
interest is charged at a rate not less than the bank rate declared by RBI.

 Loan/ Guarantee/ Security made by holding company to its wholly
owned subsidiary company or any guarantee given or security
provided by a holding company in respect of any loan made to its
wholly owned subsidiary company.
 Guarantee/ Security provided by holding company in respect of loan
made by any bank or financial institution to its subsidiary
company.
 Condition for both : Loan made under the above two cases, shall be
utilised by the subsidiary company for its principle business activity.
o Loan made vs loan made by any bank or financial institution !
o What is ‘Principle Business Activity’. Main object(s) ?

 private company (loan/ guarantee/security provider) if its fulfill the following
below mention conditions :
a) in whose share capital (equity or preference) no other body corporate has
invested any money;
b) if the borrowings of such a company from banks or financial institutions or any
body corporate is less than twice of its paid up share capital or Rs. 50 Crore,
whichever is lower; and
c) such a company has no default in repayment of such borrowings subsisting at the
time of making transactions under this section.
 Government Company in case the company obtains approval of the Ministry or
Department of the Central Government which is administratively in charge of the
company, or, as the case may be, the State Government before making any loan
or giving any guarantee or providing any security under the section.
 Nidhi Company if the loan is given to a director or his relative in their capacity as
members and such transaction is disclosed in the annual accounts by a note.
.
EXEMPTED U/S 185 AS PER EXEMPTION NOTIFICATION
DATED 5TH
JUNE 2015

 the company shall be
punishable with fine which
shall not be less than Rs. 5 lakh
but which may extend to Rs. 25
lakh, and
 the director or the other person
to whom any loan is advanced or
guarantee or security is given or
provided in connection with any
loan taken by him or the other
person, shall be punishable with
• imprisonment which may
extend to 6 months OR
• with fine which shall not be
less than Rs. 5 lakh but which
may extend to Rs. 25 lakh, OR
• with both.

 Not more than 2 layers of Investment Companies.
Without prejudice to the provisions contained in this Act, a
company shall unless otherwise prescribed, make investment
through not more than two layers of investment companies
Investment Company is defined.
 Operating Companies are not covered under 186(1). Also, No limit
prescribed under 2(87) as yet.
 Exemption under sub-section (1) of Section 186 : Sub-section (1)
does not apply to :
 a company from acquiring any other company incorporated in a country
outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country;
 a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

Illustration 1

Illustration 2

 Section 186(2): No company shall directly or
indirectly :-
a) give any loan to any person or other body corporate;
b)give any guarantee or provide security in connection with
a loan to any other body corporate or person; and
c) acquire by way of subscription, purchase or otherwise,
the securities of any other body corporate,
 exceeding : 60% of its paid-up share capital + free
reserves + securities premium account or
 exceeding : 100% of its free reserves and securities
premium account,
whichever is more.

KEY POINTS FOR DISCUSSION U/S 186(2)
Person
MCA Circular dated 10th
March 2015.
 Section 186 not applicable in case of loan made to
employees.
 Effective date ? Circulars are clarifications and not
exemptions. It is MCA’s interpretation. Effective
since 1st
April 2014 !
 Binding only on MCA.
Or otherwise

 Upto 60% / 100% : Unanimous approval of Board of
Directors present in the Board Meeting.
 Exceeding the limits of 60% / 100%: Unanimous
approval of Board of Directors present in the Board
Meeting + Special Resolution at General Meeting. {Not
applicable in case of L/G/S to WOS or JV OR
Acquisition of securities of WOS by way of
subscription, purchase or otherwise} +condition of
reporting in FS.{Rule 11} [postal ballot , if applicable]
 Consider Aggregate – Rule 13(1) [Mistake in S186,
corrected by inserting Rule 13(1) !]
 Special Resolution shall specify total amount up to which
board is authorized to give loan/guarantee/provide
security or to make acquisition. {Rule 13 (2)]

RISTRICTED (Section 186(6)
 No company, which is registered under section 12 of
the SEBI Act, 1992 and covered under such class or
classes of companies as may be prescribed, shall
take inter-corporate loan or deposits exceeding the
prescribed limit (i.e. 60% / 100%, whichever is more )
and such company shall furnish in its financial
statement the details of the loan or deposits. (sub-
section (6) of Section 186)
 Stock brokers/sub brokers/merchant bankers etc
registered u/s 12 of the SEBI Act.

 Public Financial Institution is defined under Section 2(72).
 Prior approval of Public Financial Institutions, where
any term loan is subsisting is not required if following
two conditions are satisfied:
 Condition 1: Aggregate of existing + proposed loans /
investments / guarantee / security so far made/provided
to or in all other bodies corporate, does not exceed the
limit of 60% / 100% as specified in 186(2), and
 Condition 2: there is no default in payment of loan
installments / interest thereon as per the terms and
conditions.

Sub Section Condition
Sub-Section (7) of Section 186 Interest rate not lower than the
prevailing yield of 1, 3, 5 or 10 year
Government Security closest to the
tenor of the loan.
Sub-Section (8) of Section 186 No default in the repayment of any
deposits and interest thereon (under
old or new act)
Sub-Section (9) of Section 186 Maintenance of Register
Sub-Section (10) of Section 186 Registered to be kept at the
registered office + open to
inspection at such office + extract
can be taken by any member + copies
thereof may be furnished to any
member on payment of such fee as
may be prescribed.

Section 186 shall not apply to :
(a) a Government company engaged in defence production;
(b) a Government company, other than a listed company, in
case such company obtains approval of the Ministry or
Department of the Central Government which is
administratively in charge of the company, or, as the case
may be, the State Government before making any loan or
giving any guarantee or providing any security or making any
investment under the section.
SECTION 186 DOES NOT APPLY TO SPECIFIED GOVT.
COMPANIES
[Notification F No 1/2/2014-CL.V dated 5th June 2015]

 No Exemption w.r.t. Limits on Layers of Investment Companies.
Exemption except under sub-section (1) ETC. :
(a)a loan / guarantee / security provided by a banking or insurance or
housing finance company in the ordinary course of its business or a
company engaged in the business of financing of companies or of
providing infrastructural facilities(as specified in Sch VI); [Sec 186 is
Applicable in case of Investment made by these entities]
(b)Acquisition by NBFC registered under Chapter IIIB of the Reserve Bank
of India Act, 1934 and whose principal business is acquisition of
securities. [Provided that - exemption shall be in respect of its
investment and lending activities only. ];
(c) Acquisition by Company whose principal business is acquisition of
securities.
(d)Acquisition of shares under Section 63(1)(a) of the 2013 Act. [ only
India]

PUNISHMENT PROVISIONS U/S 186
SUB-SECTION (13)
OFFICER IN DEFAULT
every officer of the company who
is in default shall be punishable with
imprisonment for a term which may
extend to two years and with fine
which shall not be less than Rs.
25000/- but which may extend to Rs.
1,00,000/-. [‘AND’ – draconian]
COMPANY
If a company contravenes the
provisions of this section, the
company shall be punishable with
fine which shall not be less than
Rs. 25,000/- but which may extend
to Rs. 5,00,000/-.
WHAT ABOUT NON-COMPLIANCE OF RULES MADE THEREUNDER !
OBSERVE - RELEVANT SECTION - SECTION 469 OF THE COMPANIES ACT,
2013 (CORRESPONDING TO SECTION 642 OF THE COMPANIES ACT 1956)

 Section 2(31) read with Rule 2(1)(c):
 Deposit includes any receipt of money by way of
deposit or loan or any other form, by a company, but
does not include such categories of amount as may be
prescribed in consultation with RBI.
 Ejusdem Generis Rule – of the same kind, class, or
nature.
 Deposit/loan – Specific
 any other form – General.
 Intention of the parties.

 Old deposits vs. New Deposits
 MCA Circular dated 30th
March 2015 , is issued for private companies. what
about public companies ? Applies equally.
 Deposit Rules amendment dated March 31, 2015 - Impact on share
application money – allotment or refund by 1st
June 2015 !
 Amendment Rule is trying to make sense !
 Contradicts with circular.
 Why two views on same concept ? Corporate Governance mixed with
Interpretation resulted in Interpretation Governance!
 Any rule which overrides the act stands powerless. However, it continues to
remain valid and binding as long as it is not struck down by judiciary of this
country.
 However, Pragmatic view should be taken. Abide by Rule. If you are still late,
abide by Rule, quickly or challenge the said rule in court of law. Choice is
yours !
 Pragmatic view is different from conservative view !
Analysis of Circulars dated 30th
March 2015 & Deposits
Amendment Rule dated 31st
March 2015
Copyright @ MSB / Personal Views – Board’s Report under the Companies Act, 2013
31

Any amount received from Foreign or international
banks / multilateral financial institutions/Foreign
Government owned development financial institutions /
foreign export credit agencies / foreign collaborators/
foreign body corporate /foreign citizens / foreign
authorities / persons resident outside India subject to the
provisions of Foreign Exchange Management Act,1999.
Any amount received from any other Company.

 Any amount received against subscription to any
securities including share application money provided
the securities are allotted within 60 days from the date of
receipt of the application money or advance. If the
securities are not allotted within 60 days then the same
should be refunded within 15 days else the same shall be
treated as deposit after completion of 15 days.
 Any amount for subscription. Not necessarily named as
“share application money”. Name change wont lead to
change in character.

 Any amount received from a person who at the time of
receipt was a director provided the director furnishes a
declaration that the amount given is not out of borrowed
funds.
 Whether declaration is the basis for exclusion ?
 What will be the fate of this loan if declaration is not
given by the Director ?
 Can we take declaration on plain paper/letterhead of
the Director ?
 Can we take loan from person who is a Director &
Shareholder ?

14 EXCLUSIONS CONTD.
 Any amount brought in by the promoters themselves or
their relatives by way of unsecured loan in pursuance of
a stipulation of any lending institution on the promoters.
Such exemption shall be available only till the loans of the
Financial Institutions are not repaid and not thereafter. (I
call it a “ 5 STAR EXCLUSION”)
 Section 2(69) defines Promoter as person:
 Named as such in prospectus or in AR filed u/s 92
 Who has Control over affairs of the Company – Direct/indirect, as
shareholder/director OR OTHERWISE. (Control defined u/s 2(27)
 In accordance with whose advice, directions, instructions, the BOD of
the Company is accustomed to act.

 Any amount received as a Non- interest bearing amount received or
held in trust.
 Any amount received in the course of or the purpose of the business for
the following :-
a. As advance for the supply of goods or provision of services
provided such advance is appropriated against supply of goods or
provision of service within 365 days from the receipt of such
amount, [What is the intent of law]
b. As advance received in connection with consideration for property under an
agreement or arrangement, (conditional)
c. As security deposit for the performance of the contract for supply of goods or
provision of services. (conditional)
d. As advance received under long term projects for supply of capital goods.
(conditional)
If any amount received under clause (a),(b) and (d) becomes refundable due to the
reasons that the company accepting money does not have necessary
permission or approval to deal with the goods or services then the amount
received shall be deemed to be a deposit after the expiry of 15 days from the date
they become due for refund.

 Any amount raised by issue of bonds or debentures secured by first charge
on any assets referred to in Schedule III of the Act excluding intangible assets.
 Any amount received from an employee of the company not exceeding his
annual salary in the nature of non interest bearing security. {CASE: Director
who is also an employee, policy in place. Possibility ?}
 Any amount received from Central Government /State Government/ local
authority/statutory authority constituted under an Act of Parliament or State
legislature /any other source whose repayment is guaranteed by Central
Government or State Government.
 Any amount received as a loan from a Banking Institution including co-operative
banks notified under Banking Regulation Act.
 Any amount received as a loan from Public Financial Institution /Regional
Financial Institutions / Insurance Companies / Scheduled Banks.
 Any amount received against commercial paper or any other instruments issued
in accordance with the guidelines of Reserve Bank of India.
 Any amount accepted by a Nidhi Company in accordance with rules made u/s
406 of the Act.

THANK YOU
CS MANOJ SINGH BISHT

MSB's Views on Loans, Investments and deposits (definition of deposits)

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