Section 372 A is applicable to an Indian Company giving loan to a any Body Corporate (Indian & Foreign)
Steps of Compliance:
1. An unanimous Board Resolution (URM) has to be passes at Board Meeting. By URM it means all the Directors present and voting must agree to the resolution.
2. Sometimes prior consent by Special Resolution in General Meeting is required if:
Present Inter Corporate Loans, Investments and Guarantees + Proposed Inter Corporate Loans, Investments and Guarantees exceed
the higher of the following-
i. 60% of (Paid up share capital + Free Reserve)
ii. 100% of Free Reserve
Paid Up capital doesn't include calls-in-arrear, calls-in-advance and share application money.
Free Reserve for this purpose include Profit & Loss A/c, General Reserve, Securities Premium, Dividend Equalization Reserve.
3. Sometimes prior approval of Public Financial Institutions (PFI) (e.g., LIC, IDBI, UTI, etc.) are required
- Case 1: If a Term Loan is taken from PFI and the company is a defaulter in repaying the loan;
- Case 2: A Term Loan is taken from PFI, the company is not a defaulter and the present and proposed inter corporate loans, investments and guarantees exceed 60% of (Paid up Share Capital + Free Reserves).
4. Entry has to be made in the statutory register of Inter Corporate Loans, Investments and Guarantees within 7 days of such investment.
5. The Inter Corporate Loan will be at a rate of interest, not lower than prevailing Bank Rates.
6. No company shall make Inter Corporate Loans, Investments and Guarantees if it has defaulted in complying with Section 58A (relating to Public Deposits) and till such default is subsisting, the loan cannot be made.
7. The Board may give guarantee in connection with a loan , in excess of the prescribed ceiling limits if the following three conditions are satisfied:
- UBR is passed.
- Some exceptional circumstances prevented the Board from obtaining prior authorization by SR.
- The Board Resolution is confirmed, within 12 months immediately after passing the Board Resolution, in a GM or AGM whichever is earlier.
Exceptions:
1. Loan made, investment made or guarantee given by a Banking Company, Insurance Company, Housing Finance Company in the ordinary course of business or a company established with the object of financing industrail enterprises or of providing infrastructure facilities.
2. Company whose principal business is acquisition of shares, stocks, debentures etc.
3. Any investment made in shares alloted in pursuance of Section 81 (1) (a) - Investment in Right Shares.
4. Loan made by a Holding Company to its 100% subsidiary company.
5. Guarantee given or security provided for a loan given to its 100% subsidiary company.
6. A private company which is not a subsidiary of public company.
Consequences of Non-Compliance:
The company and every officer in default shall be punishable with imprisonment which may extend upto 2 years or fine which may extend upto Rs. 50,000.
Failing to maintain register of inter corporate loan, investment and guarantee will attract a fine of Rs.5,000 and further fine of Rs. 500 per day. Penalty under this section is compoundable.
