A Brief Analysis of MCA Circular clarifying the applicability of section 372A

Ministry of Corporate Affairs has issued a Circular dated 19th November, 2013,clarifying that section 372A of the Companies Act, 1956 (hereinafter referred to as Act) dealing with inter-corporate loans and advances is still operative. While section 186 of the Companies Act, 2013 (hereinafter referred to as New Act) which was the corresponding section to Section 372A of the Act was still not notified, it was more of less clear that the section was operative.

The need of the hour somehow was to relax the restriction posed by section 185 of the New Act dealing with loans to Directors etc. since its notification from September 12, 2013 onwards from its applicability on wholly owned subsidiaries and private limited companies. This circular seems to convey different opinions, as on one hand,it seems that the Ministry has tried to meet the requirement of the Industry by attempting to convey that Section 372A is applicable in toto thereby exempting the Wholly owned Subsidiaries and Private Limited companies from the purview of Section 185 of the New Act; while on the other hand situation remains that anyhow the said relaxation cannot be applied as the charging section to such relationship and loan transaction was Section 295 (section corresponding to the notified section 185 of the New Act) and not Section 372A of the Act.

It seems now that there is a requirement to seek further clarification from the Ministry on various issues being faced with reference to the interlinking and interpretation of Section 185 and Section 186 of the New Act;-

• Whether the intent of this circular is just to further clarify that section 372A of the Act is still operative pending notification of Section 186 of the New Act (as is mentioned in the circular) not anyhow trying to grant any sort of relaxation to Wholly owned subsidiaries and Private Limited companies from the provisions of Section 185 of the Act. or
• Is the intent actually to exempt the transactions of the company with its wholly owned subsidiaries and private limited companies in which the director is otherwise interested; i.e. which otherwise qualify to the restraining criteria of Section 185 of the New Act which is already notified? Anyhow if the charging section to such transactions was section 295 of the Actand exemptions thereto for specified parties was given in such section itself; then how such purpose can be achieved with the circular? It is noteworthy to mention that Section 372A of the Act is only a procedural section with reference to inter-corporate loans and investments while transactions of loans with Directors and other specified parties were governed by Section 295 of the Act. As it is, there is no exemption provided to such parties in Section 185 of the New Act which is the corresponding to Section 295 of the Act.

While these issues still need to be addressed; the other factors which may also require clarification with the implementation of Section 185 of the New Act and Section 186 at later point of time are:-

• Whether with the notification of Section 186 of the New Act, parties otherwise restrained to carry out loan transactions by virtue of Section 185 of the New Act, may also undertake such transactions as Section 185 of the New Act starts with the words 'Save as otherwise provided in the Act'. If that is so, what at all is the intent behind framing of both the sections in law?
• With the restraining of loan represented by book debt in Section 185 of the New Act, is a restrain on the Trade advances or business advances also required under the section. Though specifically it is mentioned that it has to be a loan represented by book debt.
• Transactions relating to providing of loans, guarantees and securities in ordinary course of business are not prohibited under the provisions of Section 185 of the New Law if the repayment and interest rate criteria are met. But what exactly is the intent of 'ordinary course of business' in here is not clarified.

The new law has posed new opportunities and at the same time there are new challenges. Some of the interpretational challenges which the Industry is facing right now would perhaps be clarified with the passage of time as the intent of law would be made more clear.