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Whenever a company gives any loan, guarantee or security in favour of any other company or a person it can be termed as inter-corporate loans and guarantee or investment in other company. Inter-corporate guarantee means security or assurance given by one company for debt taken by another company or a person(s). The loan given by one company to another company shall are not to be treated as Deposits as per the provisions of Companies (Acceptance of Deposit) Rules, 2014.

There are certain restrictions under the Companies Act, 2013 on companies for making any investment or giving any loan to other persons. It is pertinent to note that loans may also include corporate guarantee or security because the person to whom the guarantee is given can enforce the guarantee and company shall become liable to pay the loan amount.

Section 186 of the Companies Act, 2013 shall be applicable in case of company giving any loan guarantee or security in favour of any person or making investment in any other body corporate, However, any loan or advances made by the companies to their employees (other than the managing director or whole time director which is governed by section 185 loan to director) are not governed by section 186. In case a company gives any advance to its employees, there is no obligation to repay the loan or giving any guarantee on behalf of the employees, hence, it cannot be termed as a loan. Even a sale on credit is also not a loan if it’s within the normal credit limit.  If a company gives any credit on sales beyond its limit, it will attract the provisions of section 186 of the Companies Act, 2013 and such credit amount shall be deemed to be a loan given to the purchaser.

Section 186(5) of the Companies Act, 2013 implies that in case a company wants to give any loan, guarantee, and security to any person or investment in any body corporate than the unanimous approval of the board of directors is required prior to it. The resolution has to be passed in duly convened board meeting only and not through circulation.

As per Section 186(2)(3) of the Companies Act, 2013, a company can give loan, guarantee or security to any person or makes investment in any body corporate in excess of  60% of the paid up share capital, free reserves and security premium account of the company OR 100% of the free reserves and security premium account, whichever is more, only with the prior approval of shareholder in general meeting by passing special resolution and approval of financial institution in case company has taken loan from a financial institution.

Example:

In case a company has a paid-up capital of Rs. 50 crore, reserves of Rs. 100 crore and existing loan of Rs. 25 crore and wants to give a further loan of Rs. 80 crore:

As the company already has a subsisting loan of Rs. 25 crore, it can give a loan of Rs 75 crore (Rs.100 crore – 25 crore) without any approval from shareholders. Therefore, in order to give a loan of Rs. 80 Crore, prior approval of shareholders is required.

In case a company has any subsisting loans from banks and financial institution, it has to take prior approval from bank in case loan given by the company exceeds 60% or 100% (as mentioned above) or company has made any default in payment or repayment of loan installment or its interest. Interest on these loans shall not be more than the closest rate of interest on government security with the maturity of 1, 3, 5 or 10 years. In other words, a company cannot give loan above the rate of interest prevailing for government security.

There are certain restrictions on a company making an investment in any other body corporate. As per Companies Act, 2013, a company cannot make an investment in any other company beyond two layers i.e more than 2 subsidiaries of that company. However, a company can make an investment in all the subsidiaries if a company acquires any company which has two or more subsidiaries.

In case any government company engaged in defense sector or unlisted government company giving a loan, investment, guarantee or security in excess of the limit, no prior approval of its members is required. If a holding company gives any loan guarantee or security to its wholly owned subsidiary company or a joint venture company, no prior approval of members is required. However, the disclosure of such loan or guarantee has to be made the board report by such companies.

As per Section 186(11), banking companies, insurance companies, housing finance companies and infrastructure companies are exempted from inter-corporate loans compliances as it’s in their ordinary course of business.