You are on page 1of 5

INVESTORS BEWARE- A guide to Investors to invest in companies which raise finance

thorough inter corporate loans and borrowings

The importance of inter-corporate loans and investments cannot be understated, especially in the
context of emerging economies like India, which don’t have well-developed capital markets.
While it provides the benefits of cheap capital and the potential to support weaker members of a
group of companies, it comes with the risk of being the mechanism which has been used in
several scams. Consequently, inter-corporate loans and investments are subject to several
The Companies Act, 2013 has brought in several changes to these restrictions in order to strike a
balance between the need to be competitive in a globalized economy and the desire to prevent
further scams. This paper attempts to examine whether this balance between allowing inter-
corporate loans and investments for legitimate financial benefits while preventing misuse has
been achieved in the Companies Act, 2013 or the proposed amendments to it.
The paper begins by obtaining a working definition for inter-corporate loans and investments,
and examining its use as a mechanism for financial benefits, propping and the concomitant risks
of tunneling and economic concentration. It then goes on to analyse the provisions under the
Companies Act, 1956 and the subsequent amendments to it in 1999, before proceeding to the
provisions introduced under the Companies Act, 2013. It argues that the Indian legislature has
failed to strike the necessary balance between allowing for easier capital and propping and
preventing scams and tunneling.

Statement of Problem:
The paper aims to examine the provisions with respect to inter-corporate loans and investments
in India. The paper seeks to examine the way the mechanism is used by companies and
controlling shareholders, and whether the various provisions since 1956 to the recently proposed
amendments have managed to strike a balance between the need to allow easier capital through
such instruments and the need to prevent misuse.
The scope of the paper extends to examining the provisions of the Companies Act of
1913, 1956 and 2013, along with relevant amendments made or proposed to each
of these. The paper also extends to examining the relevant experiences across
jurisdictions. The paper is limited by the fact that there is a lot of judicial
pronouncements1 on the issue of understanding the relevant provisions relating to

1 Refer Bibliography

1 | Page

1Introduction to the new Inter Corporate loans and investment and reforms 2. What are inter-corporate loans and investments? 1. 1956 in order to ensure that it reflected the needs of the time. given the passage of time and the reforms brought about by economic liberalization in 1991.2 PURTI Scam – The trigger for changes in 2013 3.2 CLC Boards report 2.2 Introduction to the new ICLI reforms 1. utility and need for regulation 1.1 ICLI under Companies Act 1956 1.2013 2. This Working Group was set up to recommend amendments to the Companies Act.3 Exemption to wholly owned subsidiaries 2. books and principles of statutory interpretation Research Questions: This paper attempts to answer the following questions: 1. Conclusion Bibliography 1. It was used to analyse the amendments brought about in 1999 to ensure a greater flow of inter-corporate loans and investments. Proposed amendment and resulting position.3Key changes under the Companies Act. Inter corporate loans and investments.Scope. Report of the Working Group on the Companies Act.1 Layering restrictions 2. What are the proposed amendment’s to this section? 2. (1997).2 What was the position in this regard in India under various Acts? 2.4 Interest rate to foreign companies Tentative Chapterization: 1.1 Why do companies use inter-corporate loans and investments? 1.ICLI thereby limiting interpretation to articles. 2 | Page .An analysis 2.

Bennion on Statutory Interpretation. provisions of loan and investment by company. 3. 4. Investments. 2013. Specifically.. 2. This report was instrumental in recognizing the fact that inter corporate loans can pose as much of a risk and be used for the same purposes as inter corporate investments and the same merit regulation to the same extent. 18th edn. 2008). (A. Datar ed. 2016. Report of the Companies Law Committee. This report was instrumental in drafting of the Central Government Guidelines on the approval of applications under Section 370 BOOKS 1. 2. This is an official report on the inter corporate loans. it was relied upon in the paper in order to understand the rule of expressio unius est exclusio alterius. This report examined the various issues in implementing the Companies Act. Procedure for inter corporate loans and investments. (2016). 5. It has been relied upon in order to understand the reasons underlying the proposed changes attempted to be brought in by the Companies (Amendment) Bill. II. 2013 along with providing necessary clarification to ambiguous provisions. procedures involved in giving loans to directors etc. Ramaiya... can be interpreted. Vivian Bose Committee Report. which has an outline on provisions of loan to directors. Report on Inter Corporate. Guarantee and Security. This book has been relied upon in order to explore the various ways in which the provisions of the Companies Act. (2014). Fifth Annual Report on the Working and Administration of the Companies Act. 2015). GUIDE TO THE COMPANIES ACT Vol. (5th edn. (1962). 1956. Ministry of Corporate Affairs. which haven’t been interpreted by either the judiciary or executive order. A. 3 | Page . loans.

A. 1956 and allied statutes and examine various aspects of corporate governance and corporate finance. 331 (2007). CASES REFERREED 1. v.. They provide an understanding of the manner in which the statutes have been or should be understood and interpreted. 2013 and the Companies Act. 2012). S. Assistant Commissioner of Income Tax. Singh. [2008] SOT 711 (Delhi). 3. Business Groups in Emerging Markets: Paragons or Parasites?. (2014). COMMENTARY ON COMPANIES ACT. they fall within the scope of securities. 2. R.. Sahara India Real Estate Corporation Ltd. 112(2) Journal of Financial Economics190. These books are commentaries on the Companies Act. CORPORATION FINANCE: PRINCIPLES AND PROBLEMS. The Internal Capital Markets of Business Groups: Evidence from Intra- Group Loans. (6th edition. along with providing an insight into their practical application. 45(2) Journal of Economic Literature. CORPORATE LAW. 4 | Page . MANU/SC/0735/2012. Securities and Exchange Board of India. v. Khanna and Yafeh. 4. Poysha Oxygen (P) Ltd. 2008). This case held that a deposit being referred to by any term would continue being an inter- corporate loan. Kuchhal.C. given the dearth of judicial decisions dealing with the same. In this paper they have been relied upon to supplement the statue in understanding the interpretation of the statutory provisions dealing with inter-corporate loans and investments. This case held that even when debentures are offered to specific investors and not to the public. Datta. (6th edition. 1996). 2. Articles 1. (21st edn. as what is essential is the nature of the instrument and not the nomenclature applied to it. 5. C. which has been used to show that regardless of form of debentures they would be securities and thus. investments for the purpose of Section 186. Buchuk et al.

In this case it was held that deposits would not count in calculating the aggregate amount of loan for which the limit is prescribed under Section 370. Registrar of Companies. CLB (1979) 49 Com Cases 371 This Calcutta High Court Decision held that Central Government approval under Section 372 can be obtained after the investment was made. Maharashtra. 4. Re. Pennwalt India Ltd. 1956 could be a ground for oppression and mismanagement. (1977) 47 Com Cases 185 This case emphasized the fact that the limits and requirements posed in Section 372 are mandatory in nature and violations cannot be subsequently regularized 6. Mannalal Khetan v Kedarnath Khetan. (1987) 62 Com Cases 112 (Bom DB). v. 3. Mathura Prasad Saraf v. 7. East Indian Practice Ltd. v. Naresh Acharya Bhandari (1988) 64 Com Cases 259 (Cal) (DB) This Calcutta High Court Decision held that Central Government approval under Section 372 has to be obtained before such investment is made and cannot be post facto 5 | Page . 5. Bagri Cereals P Ltd. (1994) 15 Corpt LA 1 (Cal) This case decided by the Calcutta High Court held that any instance of violation of safeguards under Section 370 of the Companies Act.