Thursday, 27 February 2014

MCA clears air on inter-corporate loans

In little relief to India Inc which is grappling with issues arising out of simultaneous implementation of two sets of company laws (old law of 1956 and partial rollout of 2013 laws), the ministry of corporate affairs (MCA) has said that all exemptions to firms over granting of loans (by a holding company to its subsidiaries) will continue till the relevant section (Section 186) of the new Companies Act, 2013, is notified.

MCA, however, has said that these exemptions will only be valid if the loans availed by the subsidiaries were "exclusively utilised" in the principal business activity.

According to MCA officials, the clarification became a necessity after the ministry received a number of representation from companies seeking clarity on two sections — Section 185 and Section 186 — of the new Companies Act, 2013, one of which was notified on September 12 along with the 97 sections leading to the confusion.

Section 372A of the Companies Act of 1956 (old law) specifically exempts "any loans made, any guarantee given, security provided or investments" made by a holding company to its wholly owned subsidiary.

However, Section 185 of the Companies Act of 2013 (now notified) states that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested.

Section 186 (yet to be notified) of the new law bars Indian companies from making more than two layers of investments. However, a section of India Inc and company law experts are still not satisfied with the current clarifications issued by the MCA.

"A combination of what is allowed and what is not under the two different laws has created a number of issues for the corporates. MCA has been flooded with queries. This clarification is second one in the last three months and it raises some more questions," said a senior corporate lawyer.

"One prominent view that has emerged is that until Section 186 is notified, Section 372A dealing with inter-corporate loans under the Company Act of 1956 will be in force. Then why bring in Section 185 that bars loans to directors. As per the circular, Section 186 seems to be the prominent one which once notified will prevail over all relevant sections of both old and new company law. Therefore, the circular raises more questions," he said.

Experts said now India Inc may need to ensure whether its subsidiaries fully utilised the loans to further the principal business activity or not. "It is not clear as to who will enforce the exemption and how. Also, we do not know when Section 186 will be notified and till which date these exemptions are valid. So there are many questions that still remain unanswered," said a chief financial officer of a Gurgaon-based firm.
Source : Financial Express

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