Loan from Foreign Holding Company

[Sathyan Avinash]

Dear Experts, 

Our Company is proposing to borrow loan in the form of ECB from our Foreign Holding Company. 

We are not a wholly- owned subsidiary since there is yet another independent shareholder holding 20% in our Company. 

Section 185 regulates advancement of loan to companies in which directors are interested (exempting loan by a holding company to its wholly-owned subsidiary, thereby regulating loan from a Holding Company to its subsidiary).

In this juncture I would like to know whether the same can be availed or not ? Our Foreign holding Company is fully complying with their legislation in this behalf.

According to me Section 185 specifically states that "no Company shall advance any loan......". 

In our case the loan is provided by a Foreign Body Corporate (not a company as per CA, 2013). 

Hence, I think it is safe to proceed with the loan. 

Kindly correct me if I am wrong.

Awaiting your early response.

Thank you,

With regards,

Sathyan Avinash.

[Venkat Ragavan]

Dear Sathyan,

If there is a common director in both companies  or the body corporate  hold 25% voting rights the section will be applicable.  Kindly read the point (iv) 

“Person in whom the director is interested” would mean

(i) any other director of the lending company, or of the holding company of the lending company;

(ii) any partner or relative of such director; – definition of relative is spouse, lateral ascendants upto two levels i.e. father & grandfather, mother & grandmother and father includes step father, lateral descendants on the son’s side upto two levels i.e son and son’s children, daughter (including step daughter), her husband and siblings.

(iii) any private company of which director is a director or member

(iv) any body corporate at a general meeting of which such director exercises control of at least 25% of its voting power either singly or with other director(s) – which means basically the shareholding of such body corporate because presently in India voting power derives from shareholdings 

(v) any body corporate the Board of Directors, managing director or manager of which is accustomed to act in accordance with the instructions or directions of the Board of Directors or director(s) of the lending company.

Regards

V.Venkat

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[Sathyan Avinash]

Dear Venkat,

I agree with your opinion, but let me clarify.

In case we (The Indian Company) decide to lend a sum of money to our Foreign Subsidiary, then the provisions of Section 185 would apply to us. (i.e. we have to obtain consent from our shareholders in the form of a special resolution, the rate of interest should not be less than the prevailing yield on Government securities and so on..).

But in the instant case, the lender is the Foreign Body Corporate and the Indian Company is only the borrower. Now as per only the lender has to follow the rules prescribed in Section 185 of Companies Act, 2013 whereas the borrower needs only a Board Resolution to avail the loan. Again, the lender being a Body Corporate it will not get covered under the provisions of this section since it clearly starts by using the words:

" Section 185 - Loan to directors, etc.

(1) Save as otherwise provided in this Act, 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 or give any guarantee or provide any security in connection with any loan taken by him or such other person:"

From the above it is clear that this section is applicable only for "Companies" (and not body Corporates). Also a company registered under the acts of a Foreign nation is not a Company but a Body Corporate as per definitions contained in the Companies Act, 2013.

So, I still hold that we (the Indian Subsidiary) can borrow from our Holding Company (Foreign Body Corporate) without going through the procedure prescribed in Section 185 / 186 of the CA, 2013 but after duly following the procedure prescribed in Section 179/ 180 (Restrictions on Powers of Board).

Enlighten me if I am wrong.

Thank you,

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD

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[Venkat Ragavan]

Dear Sathyan,

Section 186 (2) No company shall directly or indirectly —

(a) give any loan to any person or other body corporate;

exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.

It means company can give inter corporate loan u/s. 186. And for the company taking such loan will be as INTER CORPORATE DEPOSIT. But as section 185 prohibits giving any loan to Director or any other person to whom the Director is interested, it is assumed no loan can be given when there are same management in both the companies. But READ FIRST LINE OF SECTION 185 as "Save as otherwise provided in this act, no company shall give give any loan............................."

Simple meaning of the line can be Read as If anywhere in this act, it is provided to give loan to other body corporate or directors, the company can give such loan/ guarantee and this is what which is allowed under as section 186 to provide loan without restricting director or their related corporate. 

But till the ministry give any clarification regarding it, for safe side, no loan should be given.

[Sathyan Avinash]

Dear Venkat,

Once again, the section 186 (2) starts as "No company shall directly or indirectly"

So, this is also applicable to an Indian Company (not a Body Corporate). 

Hence, as per my opinion these provisions do not restrict transactions wherein the lender is a Body Corporate. 

Views of other members are welcome.

Thank you,

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD

[CS Mohan Arumugam]

Dear sir

Please check the following:

A. 180(1)(c)
B. 179(d)
C. 117(g)
D. 76(vi)(viii)
E. 184(3)

Please check disinterested quorum in the board for obtaining approval from the board.

MOHAN ARUMUGAM
CHENNAI

Sent from my ASUS

[Ashish Gupta]

Dear Sathyan,

 As per my view, i think you can proceed with the loan in form of ECB, because as per deposit rules, any amount received from Foreign Collaborator is exempt under the purview of deposits. Please go through the deposit rules. Correct me if am wrong.

On Mon, Apr 21, 2014 at 12:18 PM, Sathyan Avinash <sathyan...@gmail.com> wrote:

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Thanking You,

Ashish Gupta

ARMS And Associates

Company Secretaries

24 Ka 1, Jyoti Nagar, Jaipur-302004

Telephone : 0141-3111777, 3263017

Tele Fax : 0141-2740924

Mobile: +91 95299 08404

         +91 94611 25367

 

Please consider the environment before printing this e-mail. Paper is made out of trees. Conserve, Reduce, Re-use, Renew and Recycle !

Thank you

“Good decisions come from experience, and experience comes from bad decisions.”

[Sathyan Avinash]

Dear Mohan,

Thank you for the response.

I have already and once again gone through the provisions listed out by you.

A. 180(1)(c) - Special resolution required in case loan amount exceeds Paid up Capital and Free Reserves.
B. 179(d) - Power to borrow money to be exercised in a Board Meeting
C. 117(g) - Resolution u/s. 179 (d) to be registered with the RoC
D. 76(vi)(viii) - Relating to acceptance of Deposits

E. 184(3) - Disclosure of Directors Interest.

Hence, can I get your consent that my opinion is correct ?

Awaiting your response.

Thank you,

With regards,

Sathyan G.  

[Sathyan Avinash]

Dear Ashish,

Thank you for the response.

Yes, I do agree that loan from a Foreign Equity Holder/ Body Corporate is outside the purview of deposits as prescribed in the Companies (Acceptance of Deposits Rules), 2014. The relevant part of the same is quoted below:

" 2. Definitions:

(c) “deposit” includes any receipt of money by way of deposit or 

loan or in any other form, by a company, but does not include 

(ii) any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development  Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under; "

Hence, it will not fall under deposits.

Also it will not get regulated by Section 185 of Companies Act, 2013 (since lender is a body corporate not governed by Indian Law).

So, can we conclude that we can proceed with availing of the loan ?

Awaiting your early response.

Thank you,

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD

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[Prakash M]

Hi sathyan,

I think your interpretation is correct 

[CS Chandru]

Dear Sathyan,

 As you rightly interpreted, provisions of Sec 185/186 regulate lending/guarantee/providing security, investment activities of Indian Companies and Not of body corporate. In fact, an Indian Co can also lend to a body corporate where there is common director as long as such director is not holding 25% of voting rights of such body corp. or controlling its Board of directors.

In your case, Indian company is a borrower hence outside the purview of Sec 185/186 of Act.

Further Sec 179 & 180 be complied with accordingly as pointed out by you

Thanks & Regards

CS Chandrashekhar

+91 9743148312

 

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[Sathyan Avinash]

Dear Mr. Chandru,

Thank you for endorsing my views.

So, in consonance with others can we conclude that the same can be done without infringing any of the provisions of the Companies Act, 2013 ?

Awaiting your response.

Thank you,

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD

[CS Chandru]

Hi,

 

As long as your porposed transaction not attracting Sec 185 1 (d) & (e), you may conclude so.  

[Prakash M]

dear chandru , 

can u specify what is section 185 1 (d) & (e)

[CS Chandru]

Hi Prakash, I mean Persons in which director is interested under (d) and (e)

[Sathyan Avinash]

​Dear Chandru,

Sorry but I feel provisions of Section 185 (1) (d) and (e) will be ​applicable if we (Indian Company) lend to the Body Corporate.

Since, in our case it is the exact opposite (Body Corporate lending to the Indian Company), it can be done without having any reference to the sub-clauses (d) and (e).

Enlighten me if I am wrong.

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD

[CS Chandru]

Hi Sathyan,

 

In fact there is inadvertence from my side while responding to you second time, I couldn’t realise that in your case Indian company is a borrower and money will be lent by Body corporate.

 

Pls ignore my statement of referring to (d) & (e). I reiterate that this transaction is  completely outside the scope of Sec 185 / 186

[Sathyan Avinash]

Dear Mr. CS. Chandru,

Thank you for once again for the prompt response.

With regards,

“THE PESSIMIST COMPLAINS ABOUT THE WIND; 

THE OPTIMIST EXPECTS IT TO CHANGE; 

THE REALIST ADJUSTS THE SAILS.”

~ WILLIAM ARTHUR WARD