| 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. |
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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;-
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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:-
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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?
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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.
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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.