Pinnacle Seminar

7/5/2014
LOANS, ADVANCES,
INVESTMENTS &
DEPOSITS
Organised By:
SIRC of ICAI
Pinnacle One Day CPE Seminar on
the Companies Act, 2013
Sunday, 6th JULY, 2014
Presented By:
CS. S. DHANAPAL
FLOW OF PRESENTATION
Borrowings
Loans to
director etc
Loans and
Investments
CS. S. DHANAPAL
Deposits
Loans, Advances, Investments & Deposits
Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries
7/5/2014
BORROWINGS
Sec 180 - The Board of Directors of a company shall with the consent of
the company by a special resolution, borrow money, if
Money to
be
borrowed
Money
already
borrowed
Exceeds aggregate of its paid-up

share capital and free reserves,
apart from temporary loans obtained
from the companys bankers in the
ordinary course of business
CS. S. DHANAPAL
BORROWINGS
Debt incurred by the company in excess of the limit

imposed shall be valid or effectual, if the lender
proves that he advanced the loan in good faith and
without knowledge that the limit imposed by that
clause had been exceeded
Every special resolution passed by the company in

general meeting shall specify the total amount up to
which monies may be borrowed by the Board of
Directors
CS. S. DHANAPAL
7/5/2014
TEMPORARY LOANS MEANS

Explanation.For the purposes of this clause, the
expression temporary loans means
loans
repayable on demand or
6 months from the date of the loan
such as short-term,
cash credit arrangements,
the discounting of bills and
the issue of other short-term loans of a seasonal
character, but
does not include loans raised for the purpose of
financial expenditure of a capital nature;
within
CS. S. DHANAPAL
DEFAULTS IN REPAYMENT
Company if defaults in repayment of loan and
advances, its restricts to
Buy back its own shares
issue equity shares with differential rights as to

dividend, voting
CS. S. DHANAPAL
7/5/2014
LOAN FROM DIRECTOR / EMPLOYEE

As per COMPANIES (ACCEPTANCE OF DEPOSITS)
RULES, 2014, the company can avail loan from director or
employee on following conditions
any amount received from director will not be considered
as Deposits, if the director furnishes to the company, a
declaration in writing to the effect that the amount is not
being given out of funds acquired by him by borrowing or
accepting loans or deposits from others
any amount received from an employee of the company
not exceeding his annual salary under a contract of
employment with the company in the nature of noninterest bearing security deposit owing or accepting loans
or deposits from others
CS. S. DHANAPAL
Loan to Shareholder
Loan given to shareholder holding more than 10% of voting power
could be deemed to be dividend. Section 2(22)(e) of IT Act reads as
under:
In this Act, unless the context otherwise requires
(22) dividend includes:
(e) any payment by a company, not being a company in which the
public are substantially interested, of any sum (whether as
representing a part of the assets of the company or otherwise)
[made after the 31st day of May, 1987, by way of advance or loan
to a shareholder, being a person who is the beneficial owner of
shares (not being shares entitled to a fixed rate of dividend whether
with or without a right to participate in profits) holding not less
than ten per cent of the voting power, or to any concern in which
such shareholder is a member or a partner and in which he has a
substantial interest (hereafter in this clause referred to as the said
concern)] or any payment by any such company on behalf, or for
the individual benefit, of any such shareholder, to the extent to
which the company in either case possesses accumulated profits ;
CS. S. DHANAPAL
7/5/2014
LOAN TO DIRECTORS, ETC Sec 185

Companies shall not, directly or indirectly,
Advance any loan (including any loan represented by
a book debt)
1.to any of its directors
2.to any other person in whom the director is
interested
give any guarantee
provide any security in connection with any loan
CS. S. DHANAPAL
to any other person in whom director is interested
Individual
director of the
lending company,
Firm
Company
any firm in which

any such director
is a partner
any private
company of which
any such director
is a director
Any firm in which

relative of such
director is partner
any private
company of which
any such director
is member
Director of the
holding company
any partner of
director
relative of any
such director
CS. S. DHANAPAL
Body
corporate
any body corporate, the
Board of directors,
managing director or
manager, whereof is
accustomed to act in
accordance with the
directions or
instructions of the
Board of any director or
directors of the lending
company
any body corporate at
a general meeting of
which not less than
25% of the total voting
power may be
exercised or controlled
by any such director, or
by two or more such
directors, together;
7/5/2014
LOAN TO DIRECTORS, ETC - EXEMPTIONS

(a) the giving of any loan to a managing or whole-time
director
(i) as a part of the conditions of service extended by
the company to all its employees; or
(ii) pursuant to any scheme approved by the
members by a special resolution; or
CS. S. DHANAPAL
LOAN TO DIRECTORS, ETC - EXEMPTIONS

(b) a company which in the ordinary course of its
business provides
loans or
gives guarantees or
securities for the due repayment of any loan and
in respect of such loans an interest is charged at a
rate not less than the bank rate declared by the
Reserve Bank of India.
CS. S. DHANAPAL
7/5/2014
EXEMPTIONS FOR SECTION 185 PROVIDED UNDER

COMPANIES (MEETING OF BOARD AND ITS POWERS)
RULES 2014
(1) Any loan made by a holding company to its wholly owned
subsidiary company or
(2) any guarantee given or security provided by a holding
company in respect of any loan made to its wholly owned
subsidiary company
(3) Any guarantee given or security provided by a holding
company in respect of loan made by any bank or financial
institution to its subsidiary company
Provided that such loans made under sub-rule (1) and (2) are
utilized by the subsidiary company for its principle business
activities.
CS. S. DHANAPAL
In case of Contravention
the company with fine Rs.5 Lakh -25 Lakh
the director or the other person to whom any
loan is advanced or guarantee or security is
given or provided in connection with any loan
taken by him or the other person, shall be
punishable with imprisonment Upto 6 months or
with fine which with fine Rs.5 Lakh -25 Lakh or
both
CS. S. DHANAPAL
7/5/2014
LOAN AND INVESTMENT (Sec 186)

A company shall unless otherwise prescribed, make
investment through not more than two layers of
investment companies:
Exemptions provided if:
a company from acquiring any other company
incorporated in a country outside India if such other
company has investment subsidiaries beyond two layers
as per the laws of such country;
a subsidiary company from having any investment
subsidiary for the purposes of meeting the requirements
under any law or under any rule or regulation framed
under any law for the time being in force.
CS. S. DHANAPAL
LOAN AND INVESTMENT (Sec 186)

Companies shall
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan
to any other body corporate or person; and
(c) acquire by way of subscription, purchase or otherwise, the
securities of any other body corporate,
Not exceeding
60% of its paid-up
share capital, free
reserves and
securities premium
account
100% per cent of

its free reserves
and securities
premium account
whichever
is more
CS. S. DHANAPAL
7/5/2014
LOANS & INVESTMENTS other requirements

Prior approval by members by passing special
resolution with specifying If exceeds specified
limit
Disclosure in financial statement regarding full
particulars of loan given, investment made or
guarantee or security given
to make investment
Board approval with consent of all directors

present
Prior approval of the public financial

institution (not required if limit not exceeds
and installments made properly)
CS. S. DHANAPAL
Providing Loans - Restrictions

Loan shall not be given
at a rate of interest lower than the prevailing
yield of 1yr, 3 yr, 5yr or 10yr Govt Security
closest to the tenor of the loan
If defaults in repayment of deposit / interest
thereon
CS. S. DHANAPAL
7/5/2014
Register
Register to be maintained in Form MBP 2 for
Loan given
Guarantee provided
Securities given
Acquisitions made
Entries to be made within 7 days
Entries to be made in chronological order
Shall be authenticated by CS or any authorised person
Can be maintained electronically
CS. S. DHANAPAL
Contravention
If a company contravenes the provisions of
section 186, shall be punishable
Company - with fine of Rs. 25000 to 5 Lakh
Every officer - imprisonment for a term - Upto 2
years and with fine of Rs. 25000 to 1 Lakh
CS. S. DHANAPAL
10
7/5/2014
EXEMPTION FROM SEC 186 Under Rules
If loan / guarantee / security - provided to its

wholly owned subsidiary company or a joint
venture company, or
If securities of wholly owned subsidiary
company is acquired by holding company
Company shall disclose such details of loan or
guarantee in financial statement
CS. S. DHANAPAL
APPLICABILITY BASED ON OUTSTANDING

LOANS AND BORROWINGS
Internal
Audit
Mandatory internal audit for following class of companies:

(a) every listed company;
(b) every unlisted public company having(i) paid up share capital of Rs. 50 Crores or more during the preceding financial year; or
(ii) turnover of Rs. 200 Crores or more during the preceding financial year; or
(iii) outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 Crores or more
at any point of time during the preceding financial year; or
(iv) outstanding deposits of Rs. 25 Crores or more at any point of time during the preceding financial year; and
(c) every private company having(i) turnover of Rs. 200 Crores or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 Crores or more at
any point of time during the preceding financial year
To be complied within 6 months of commencement of such section
Independent
Director
Listed Companies Atleast 1/3rd of Directors

Other unlisted Public Companies as listed below Atleast 2 independent Directors
Paid up share capital of Rs. 10 Crores or more; or
Turnover of Rs. 100 Crores or more; or
Outstanding loans, debentures and deposits, exceeding Rs. 50 Crores
Nomination And Listed Companies, and

all public companies
Remuneration
Committee
(i) with a paid up capital of Rs. 10 Crores or more;
(ii) all public companies having turnover of Rs. 100 Crores or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits
exceeding Rs. 50 Crores or more.
as existing on the date of last audited Financial Statements shall be taken into account for the purposes of this
rule.
CS. S. DHANAPAL
11
7/5/2014
APPLICABILITY BASED ON OUTSTANDING LOANS

AND BORROWINGS
Audit
Committee
Listed Companies, and

all public companies
(i) with a paid up capital of Rs. 10 Crores or more;
(ii) all public companies having turnover of Rs. 100 Crores or more;
(iii) all public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits exceeding Rs. 50 Crores or more.
As existing on the date of last audited Financial Statements shall be taken into account for the
purposes of this rule.
Mandatory
auditor
rotation
Every Listed Company and the class of companies shall mean the following classes of companies
excluding one person companies and small companies:(a) all unlisted public companies having paid up share capital of rupees ten crore or more;
(b) all private limited companies having paid up share capital of rupees twenty crore or more;
(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b)
above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty
crores or more.
Establishm Every listed company and

ent Of vigil (a) the Companies which accept deposits from the public;
mechanism (b) the Companies which have borrowed money from banks and public financial institutions in excess
of fifty crore rupees.
CS. S. DHANAPAL
Investment to be held in own name

Sec 187
All investments of the company shall be made
and held by it in its own name
company may hold shares in its subsidiary
company in the name of any nominee or
nominees of the company, if number of
members of the subsidiary company is not
reduced below the statutory limit
CS. S. DHANAPAL
12
7/5/2014
Exemptions Sec 187

With any bank for
collection of dividend and
interest thereon
with SBI or scheduled

bank to facilitate the
transfer
DEPOSITING
SHARES OR
SECURITIES
With any person by way
of security for the
repayment of loan /
performance of any
obligation
With depositories if such

securities held by the
company as beneficial
owner
CS. S. DHANAPAL
Register U/S - 187

Register to be maintained in the form of MBP-3
Particulars of investment not held in its name
with reason to be entered
Details Relationship and contract with another
person holding its shares to be entered
Entries to be authorized by the Board
CS. S. DHANAPAL
13
7/5/2014
DEPOSITS
CS. S. DHANAPAL
Applicability of Section and Rules

Shall apply to a company other than
a banking company
a NBFC registered with RBI
a housing finance company registered
with the National Housing Bank
A company specified by RBI
CS. S. DHANAPAL
14
7/5/2014
MEANING OF DEPOSIT
Deposit includes any receipt of money by way of

deposit or loan or in any other form by a company,
but does not include such categories of amount as
may be prescribed in consultation with the Reserve
Bank of India
CS. S. DHANAPAL
Exempted amounts
Any amount received
From Government & Foreign Government & Foreign Banks
as a loan or financial assistance from Bank / Public Financial Institutions
against issue of commercial paper or any other instruments as per RBI guidelines
by a company from any other company
as share application money

If shares not allotted and not refunded within 75 days from the date of receipt of
money, shall be treated as deposits
any adjustment of the amount for any other purpose shall not be treated as refund.
from a person who, at the time of the receipt of the amount, was a director of the company
CS. S. DHANAPAL
15
7/5/2014
Exempted amounts contd

contd
raised by the issue of bonds or debentures
convertible)
received from an employee of the company

annual salary
(Secured or
not exceeding his
any non-interest bearing amount received or held in trust
in the course of, or for the purposes of, the business of the
company:
As advance for goods/services, provided it is appropriated
within 365 days
As advance for property provided it is appropriated as per
terms of agreement for property
Security deposit for performance of contracts
As advance received under long term projects for supply of
capital goods
CS. S. DHANAPAL
Exempted amounts contd

contd
brought in by the promoters of the company by way of

unsecured loan in pursuance of the stipulation of any
lending financial institution or a bank
the loan is provided by the promoters themselves or by
their relatives or by both; and
the exemption under this sub-clause shall be available
only till the loans of financial institution or bank are repaid
and not thereafter
any amount accepted by a Nidhi company in

accordance with the rules made under section 406 of
the Act
CS. S. DHANAPAL
16
7/5/2014
Classification of Companies
for purpose of Deposits
Eligible
Company
Other
Company
CS. S. DHANAPAL
Eligible Company
eligible company means a public company as referred to in sub-section
(1) of section 76,
having a net worth of not less than Rs. 100
Crores or a turnover of not less than Rs. 500
Crores and
which has obtained the prior consent of the
company in general meeting by means of a
special resolution and (ordinary resolution
sufficient if within limit under sec 180)
also filed the said resolution with the Registrar of
Companies
before making any invitation to the Public for
acceptance of deposits
CS. S. DHANAPAL
17
7/5/2014
Quantum of permissible Deposit

DEPOSIT
Government
Company being
eligible company
Other
Company
Eligible
Company
From
Members
From
Public
From
Member
From
Public
From
members
and public
Not exceeding
10% of aggregate
paid-up capital
and free reserve
Not exceeding
25% of aggregate
paid-up capital
and free reserve
Not exceeding
25% of aggregate
of paid-up capital
and free reserve
Cannot accept
any deposit from
public
Not exceeding
35% of aggregate
paid-up capital
and free reserve
CS. S. DHANAPAL
CONDITIONS TO BE SATISFIED FOR

ACCEPTING DEPOSITS
Resolution to be passed in general meeting.
Circular/advertisement to be issued in form DPT 1 to
members showing financial position of the company, the
credit rating obtained, details of outstanding deposits, if
any, etc.
Eligible companies to issue advertisement by means of
newspaper publication in English and Vernacular
language.
Other companies to circulate by RPAD, Speed post or
electronic means. Newspaper publication may be made
additionally.
CS. S. DHANAPAL
18
7/5/2014
CONDITIONS TO BE SATISFIED
FOR ACCEPTING DEPOSITS
Atleast 30 days prior to circulation, copy to be filed with
ROC signed by majority of directors.
Deposit insurance to be taken atleast 30 days prior to
issue of circular/advertisement.
Circular/Advertisement valid only for 6 months from
close of FY or till AGM. Every year fresh circular to be
issued.
Company to provide application form to the depositors
for applying for deposit.
Company to provide no default certification.
CS. S. DHANAPAL
CONDITIONS TO BE SATISFIED FOR

ACCEPTING DEPOSITS
In
case
of
unsecured
circular/advertisement to clearly
unsecured deposits.
deposits,
the
quote them as
Deposit
repayment
reserve
account
to
be
created/maintained and atleast 15% of deposits
maturing during current financial year and ensuing
financial year to be transferred latest by 30th April of the
financial year.
Deposit receipt to be issued within 21 days of receipt of
money.
Register of deposits to be maintained and entry to be
made within 7 days of issuance of receipts.
CS. S. DHANAPAL
19
7/5/2014
Return of Deposit
Return in Form DPT 4
For existing Last date 30.06.2014

deposit as on or due date w.e.
01.04.2014
earlier
Annual Return Return in Form DPT 3

for deposit On or before 30th June
of every year
CS. S. DHANAPAL
PROHIBITED DEPOSIT FOR ALL COMPANIES
No company shall accept or renew any deposit

Which is repayable on demand, or
Repayable on receiving a notice within a
period of less than 6 months from the date of
acceptance or renewal of deposit, or
(Some exemption is available in form of short term deposit)
Repayable on receiving a notice more than

36 months from the date of acceptance or
renewal of deposit.
CS. S. DHANAPAL
20
7/5/2014
SHORT TERM DEPOSIT

Companies can take short term deposits
repayable earlier than 6 months, provided:
Quantum
Does not exceed
10% of the
aggregate of
paid up share
capital and free
reserves
Repayable
not earlier than 3
months from the
date of deposit
or renewal
CS. S. DHANAPAL
Penal Provisions
Failure to repay deposit or interest thereon accepted
before commencement of this Act
Company:
In addition to the payment of the amount of deposit or
part thereof and the interest due, be punishable with fine
which shall not be less than one crore rupees but
which may extend to ten crore rupees
every officer of the company who is in default:
imprisonment which may extend to seven years or with
fine which shall not be less than twenty-five lakh
rupees but which may extend to two crore rupees, or
with both.
CS. S. DHANAPAL
21
7/5/2014
Penal Provisions
Failure to repay deposit or interest thereon accepted
before commencement of this Act
Penalty for fraud
Every officer of the company who was responsible for the

acceptance of such deposit shall, without prejudice to the
penalty as stated in previous slide and liability under
section 447, be personally responsible, without any
limitation of liability, for all or any of the losses or
damages that may have been incurred by the depositors.
Any suit, proceedings or other action may be taken by any

person, group of persons or any association of persons
who had incurred any loss as a result of the failure of the
company to repay the deposits or part thereof or any
interest thereon.
CS. S. DHANAPAL
Penal Provisions
Failure to repay deposit or interest thereon
accepted after commencement of this Act
Depositor may apply to Tribunal seeking order for
repayment
CS. S. DHANAPAL
22

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7/5/2014

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Exceeds aggregate of its paid-up

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Debt incurred by the company in excess of the limit

Every special resolution passed by the company in

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

TEMPORARY LOANS MEANS

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Buy back its own shares

issue equity shares with differential rights as to

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN FROM DIRECTOR / EMPLOYEE

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN TO DIRECTORS, ETC Sec 185

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

to any other person in whom director is interested

any firm in which

Any firm in which

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN TO DIRECTORS, ETC - EXEMPTIONS

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN TO DIRECTORS, ETC - EXEMPTIONS

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

EXEMPTIONS FOR SECTION 185 PROVIDED UNDER

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN AND INVESTMENT (Sec 186)

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOAN AND INVESTMENT (Sec 186)

100% per cent of

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

LOANS & INVESTMENTS other requirements

Board approval with consent of all directors

Prior approval of the public financial

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Providing Loans - Restrictions

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries

EXEMPTION FROM SEC 186 Under Rules

If loan / guarantee / security - provided to its

Loans, Advances, Investments & Deposits

Partner, S Dhanapal & Associates, A firm of Practising Company Secretaries