Intercorporate Loans-Inv & RPT

 Relevant Sections
 Sec 185
 Sec 186
 Sec 188
 Connected Sections
 Sec 166
 Sec 177
 Sec 184
 Sec 2 (76) and 2 (77)
Sec 166 Duties of the Director
 (4) A director of a company shall not involve in
a situation in which he may have a direct or
indirect interest that conflicts, or possibly may
conflict, with the interest of the company.
 (5) A director of a company shall not achieve
or attempt to achieve any undue gain or
advantage either to himself or to his relatives,
partners, or associates and if such director is
found guilty of making any undue gain, he
shall be liable to pay an amount equal to that
gain to the company.
Sec 184 Disclosure of interest

Disclose interest
 1st BM after appointment
 1st BM in FY
 Any change in disclosure: 1st meeting
 If a Director directly or indirectly is
interested in a Contract
 BC :He is a Dir/Holds > 2 % shares/Promoter/ CEO
 Firm or entity where he is a partner or member

 Disclose the interest & Not to participate in such

meeting
 Exemptions- Pvt Co: Director can participate after disclosure
 LOANS BY COMPANY TO:

Directors or Interested Any other person

Persons as per as per
S. 185 of the Act S. 186 of the Act
185. Loan to directors etc.
To prevent:
 Diversion of Funds by the company (IPO)
 Siphoning of Public funds lent by FIs and Banks
 Misuse by transferring funds to private
businesses owned by the Director
 Providing corporate guarantees and securities to
financial institutions to secure personal gains for
the Director
 185(2) covers
Loans to Directors – Section
185(1)
The expression “to any other
person in whom director is
interested” means –
Sec 185 (1)
 Can a Company give loan to a
Director?
Sec 185 (3)
 Any exemptions ?
 Loan to a MD or WTD—
 (i) as a part of the conditions of
service extended by the company to
all its employees; or (Eg:Sal advance)
 (ii) pursuant to any scheme approved
by the members by a special
resolution; or (Eg:Housing loan subsidy)
 Co gives loan in its ordinary course of
bus. & collects interest at prevailing
yield (1/3/5) of Govt security
 Loan or Guarantee by a holding
company to its WOS
 Guarantee by Holding co to its
subsidiary (Bank loan)
Exemptions to a Private Company [Notification No.
GSR 464(E), dated 05.06.2015]
 MCA has provided exemption from section 185 to a
private company and has specified that the section 185 shall
not apply to a private company—
 (a) in whose share capital no other body corporate
has invested any money; or
 (b) if the borrowings of such a company from
banks or FIs or any body corporate is less than twice of
its paid up share capital or Rs.50 crore, whichever is
lower; or
 (c) such a company has no default in repayment of
such borrowings subsisting at the time of making
transactions under this section.
Sec 185 (2)
 How can a Company give loan/ give
Guarantee to any person whom
Director is interested?
 Can give loan/ G to a person interested
 Special resolution/ Expl. Statement
 loans are utilised by borrowing company
for its principal business activities
Sec 185 (4) Penalty
 Company
 Every officer in Default
 Director to whom the loan is
disbursed
 Penalty of Min 5 lakhs upto 25 lakhs
 Imprisonment upto 6 months
Compliance Action points for CS in Employment providing loan/guarantee to Director
under S. 185(1) :

No loan to Director or his Partner or relative

If given – only to MD/ WTD as part of employment or scheme approved in GM

Compliance Action points for providing loan/guarantee to persons under S. 185(2) :

is passed by the company as per S 185(2)

. the explanatory statement to the notice of AGM/EGM shall disclose the
of the loans given
Ensure the loans are for its principal business
activities.
•Filing of from the date of general
meeting & updation in ;
•Full disclosure in the
Secretarial Audit Checklist for Compliance of Section 185
 Sec 186
 Transactions Covered
 GILS (Guarantee/ Invest/ Loans/ Security)
 Approvals required
 Board/ Shareholders/ PFI
 Limits
 60 % of PUC, FR & Sec. Premium or
 100 % FR & Sec. Premium whichever is
higher
Restrictions on making Investment through not more than 2 Layers [Section
186(1)]
A company shall unless otherwise prescribed, make investment through not
more than 2 layers of investment companies:

Provided that the provisions section 186(1) shall not affect,—

(i) acquiring any other company incorporated in a country outside India if such
other company has investment subsidiaries beyond 2 layers as per the laws
of such country;

(ii) a subsidiary company from having any investment subsidiary for the
purposes of meeting the requirements under any law
Restrictions on Providing Loan, Investments, Guarantee & Security
Restriction on Providing Loans, Guarantee and investment to other Body Corporate or
Person [Section 186(2)] GILS
No company shall directly or indirectly —
(a) give any guarantee
(b) Invest/ acquire by way of subscription, purchase or otherwise, the securities of any
other body corporate,
(c) give any loan to any person or other body corporate;
(d)or provide security in connection with a loan to any other body corporate or person;
and

exceeding 60% of its paid-up share capital, free reserves and securities premium or
100% of its free reserves and securities premium account, whichever is more.

The Explanation to section 185(1) w.e.f. 7-5-2018, provides that the word "person" does
not include any individual who is in the employment of the company.
Exemptions from the Limits as Prescribed u/s 186(3)
Exemptions from the Limits Prescribed u/s 186(3) [Rule 11(1)]
Where a loan or guarantee is given or where a security has been provided by a company to;
• its WOS company; or
• a joint venture company, or
• acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the
securities of its WOS company, the requirement of section 186(3) shall not apply:
Provided that the company shall disclose the details of such loans or guarantee or security or
acquisition in the financial statement as provided u/s 186(4).
Exemptions to a Gov. Company [Notification No. GSR 463(E), 05.06. 2015]
Has provided exemptions from section 186 to a Govt. company and has provided that section 186
shall not apply to—
(a) a Govt. company engaged in defence production;
(b) a Govt. company, other than a listed company, in case such company obtains approval of the
Ministry before making any loan or giving any guarantee or providing any security or making any
investment under the section.
Other Requirements needs to be Complied u/s 186
Unanimous consent of all the directors at the Board meeting is required [Section 186(5)]
No investment shall be made or loan or guarantee or security given by the company
unless the resolution sanctioning it is passed at a meeting of the Board with the consent
of all the directors present at the meeting and the prior approval of the PFI concerned
where any term loan is subsisting, is obtained:

No requirement for prior approval of PFI within the limits subject to no default of repayment of
loans and interest thereon [The proviso of section 186(5)]
Prior approval of a PFI shall not be required where the aggregate of the loans and
investments so far made does not exceed the limits of 60% of its paid-up share capital,
free reserves and securities premium or 100% of its free reserves and securities premium
account, whichever is more and there is no default in repayment of loan instalments or
payment of interest thereon as per terms and conditions of such loan to the PFI.
Restrictions on the Powers of the Board u/s 186
Restriction on providing loans on lower rate of interest payable on the Loans
[Sec. 186(7)]
No loan shall be given under this section at a rate of interest lower than the
prevailing yield of 1 year, 3 year, 5 year or 10 year Govt. Security closest to the
tenor of the loan.

Restriction on providing loan, guarantee or security in case of default

Committed [Section 186(8)]
No company which is in default in the repayment of any deposits accepted or
in payment of interest thereon, shall give any loan or give any guarantee or
provide any security or make an acquisition till such default is subsisting.
Register of Loans, Investments, Guarantee or Security
Register of Loans, Investment, Guarantee or Scurity Provided by the Company [Sec.186(9)
Rule 12(1)]
Every company giving loan or giving a guarantee or providing security or making an
acquisition of securities shall, maintain a register in the Form MBP-2 and enter therein
separately, the particulars of loans and guarantees given, securities provided and
acquisitions made as aforesaid.

Entries to be made in the register within 7 days [Rule 12(2)]

Entries in the register shall be made chronologically in respect of each such transaction
within 7 days of making such loan or giving guarantee or providing security or making
acquisition.

Place of keeping and preservation of the Register [Rule 12(3)]

The register shall be kept at the regd. office. The register shall be preserved
permanently and shall be kept in the custody of the CS of the company or any other
person authorised by the Board for the purpose.
Register of Loans, Investments, Guarantee or Security
Authentication of the Register [Rule 12(4)]

The entries in the register [either manual or electronic] shall be

authenticated by the CS of the company or by any other person
authorized by the Board.

Inspection of the Register Shall be kept at the regd. office and

(a) shall be open to inspection at such office; and

(b) extracts may be taken there from by any member,
and copies thereof may be furnished to any member of the
company on payment of such fees not exceed Rs.10 for each page.
Exemptions from Applicability of Section 186
Exemption for the Applicability of Section 186 [Section 186(11) w.e.f. 7-5-2018]
Provides that nothing contained in this section, except Section 186(1), shall apply—
(a) to any loan made, any guarantee given or any security provided or any investment made by a
banking company, or an insurance company, or a housing finance company in the ordinary
course of its business, or a company established with the object of and engaged in the business
of financing industrial enterprises, or of providing infrastructural facilities;
(b) to any investment—
(i) made by an investment company;
(ii) made in shares allotted in pursuance of section 62(1)(a) or in shares allotted in pursuance of
rights issues made by a body corporate;
(iii) made in respect of investment or lending activities, by a NBFC registered with RBI and whose
principal business is acquisition of securities.
There is a general presumption that transactions reflected in financial statements
are consummated on an arm’s length basis between independent parties.
However, this presumption may not be valid when related party relationships
exist.

Whenever or wherever there is a transaction with a ‘Related Party’ there is a

scope to give benefit or undue advantage and the same is presumed to be given,
unless established otherwise

Transactions with related parties need not always be disadvantageous to the

parties concerned, but the only concern is when they are abused Therefore,
transparency in case of related party transaction is essential and crucial.
MEANING OF RELATED PARTY: SECTION 2(76) OF COMPANIES ACT, 2013
1. A DIRECTOR or his RELATIVE.
2. A KMP or his RELATIVE.
3. A FIRM – in which Director or Manager of the Company or their relative – is a Partner.
4. A PVT CO– in which Director or Manager of the Company or their relative – is a member or
director.
5. A PUBLIC CO– in which Director or Manager of the company – is a Director & holds along with
relatives 2 % of shares.
6. ANY PERSON– On whose advice/ instructions/ directions – A Director or Manager of the
company is accustomed to act. (Exception: The person shall not be related party, if advice/
instructions/directions is given in a professional capacity. )
7. ANY BODY CORPORATE – whose BOD/ MD/ MANAGER – is accustomed to act with the
advice/directions/ instructions of a director or manager of the company. (Exception: The BODY
CORPORATE shall not be related party, if advice/ instructions/ directions is given in a
professional capacity.)
8. ANY BODY CORPORATE Which is:
A HOLDING, SUBSIDIARY OR AN ASSOCIATE COMPANY of such company;
 RELATED PARTY TRANSACTIONS: SECTION 188 OF COMPANIES ACT, 2013
PRIOR APPROVAL OF SHAREHOLDERS THROUGH ORDINARY RESOLUTION
EXCEEDING THE LIMIT FOR THE FOLLOWING TRANSACTIONS:
S. No. Particulars Exceeding
Limit
a. Sale, purchase or supply of any goods or materials 10% of T/O
b. Selling or otherwise disposing of, or buying, property of any kind 10% of Networth
c. Leasing of property of any kind 10% of Networth
d. Availing or rendering of any services 10% of T/O
e. APPT. of any agent for purchase or sale of goods, materials, services or 10% of Networth
property
f. Such related party’s appointment to any office or place of profit in the Rs. 2.5 Lakhs of
company, its subsidiary company or associate company; and (holding CO is not monthly remun.
covered)
g. Underwriting the subscription of any securities or derivatives thereof, of the CO 1% of Networth
 Deemed Related Party –
2(1)(zb) of LODR

any person or entity

forming a part of the
promoter or promoter
Deemed Related Deemed Related group
party
any person or any entity, In the listed entity either
directly or on a beneficial
holding equity shares interest as per sec 89 CA
>10% 2013, at any time, during the
immediate preceding FY
 Various Related Party Transactions

Resources
RPTs

LODR Transfer of Services

Obligation
 Various Related Party
RPTs Transactions
from April 1,
LODR 2023 also
(from April 1,
2022)
Transaction regardless of
between
whether a price
Transfer of
Transaction is charged and a
between One hand Other hand “transaction”
with a related
Resources any other party shall be
a listed person
Other hand entity or or entity construed to
One hand
any of its include a single
Services subsidiaries transaction or a
the purpose
and effect of group of
which
a listed entity Related party of transactions in a
or any of its listed entity or contract
to benefit a
Obligation subsidiaries its Subsidiaries related
party

of the listed
Anshul Ja i n , Company Secretary, Mumbai entity or
any of its
subsidiaries
 Not Related Party
Transaction..

Issue of Acceptance of
securities on a Corporate
actions by the Fixed deposits
preferential listed entity
basis

payment of subdivision or issuance of by Non-

consolidation of securities by way buy-back of by Banking
dividend securities of a rights issue securities banks Finance
or a bonus issue Companies

at the terms uniformly

uniformly applicable/offered to all
applicable/offered to all
shareholders in proportion to their
shareholding shareholders/public, subject to
disclosure of the same along with the
Anshul J a i n , Company Secretary, Mumbai disclosure RPT
Approval Mechanism of RPT
Section 188 – approval of the Board of directors – applicable to both
Public and Private companies
Section 188 – approval of shareholders – once the threshold limits are
crossed
Listed Co- 1000 cr or ten per cent of the annual consolidated turnover; Brand
and Roytalty – 5 %)

Section 177 – approval of Audit committee – applicable to all listed

companies and certain class of companies, which have to constitute Audit
Committees

Regulation 23 of Listing Regulations – For listed Companies

SHAREHOLDERS’ APPROVAL
RPT cross the prescribed threshold limits – Sh approval required & it
should always be prior approval
In case of listed companies, for material related party transaction
shareholder approval is required (1000 cr or ten per cent of the
annual consolidated turnover; Brand and Roytalty – 5 %)
In case of a WOS, the resolution passed by the holding company
shall be sufficient for entering into transactions between the WOS
and its holding company
Where subsidiary accounts are consolidated with the holding
company and placed before AGM, prior approval of shareholder is
not required
VOTING RIGHTS OF RELATED PARTY
The interested director shall not be present at the meeting during discussions on
such related party contract or arrangement

No member of the company shall vote on such resolution, if such member is a

related party

This provision shall not be applicable to a private company

A company in which 90% or more members, in number, are relatives of

promoters or are related parties this provision is not applicable

However under Regulation 23 of the Listing Regulations, all related parties shall
not vote
 Who can
Can RP Vote? vote?

Listed Companies Unlisted

Companies

No RP can vote >90% in nos. Other Companies

Interested director
not to present in the
meeting during the
Irrespective Relative of
whether party to promoters or RP is not party to discussions
transaction or not related parties transaction
In case of AC:
Only members who
are IDs can vote
Yes, can vote Yes, can vote (effective from
January 1, 2022)
 Ratification of Related
Party Transactions
Ratification

Companies Act, LODR

2013

Audit
Committee Board Shareholders Not Possible

Up to 1 crore
within 3 months within 3 months within 3 months
EXEMPTIONS TO RPT In case of a PVT CO the restriction that
•Board and shareholders approvals are not related parties shall not vote on a resolution
required for transactions entered in the approving the RPT is not applicable
ordinary course of business & In case of wholly owned subsidiary,
•Regularly done business not one off bus. the resolution passed by the HOLD CO shall
•Directly connected to bus. Objects in MOA be sufficient for the purpose of entering into
•Transactions are common in the industry the transaction between the WOS and the
HOLD CO
•on arm’s length basis (Charged to anyone/ Shareholders’ approval is not required in
Burden of establishing on company) case of the following transactions
•Transactions between two GOVT CO
•Transaction between the HOLD CO &
•There is no exemption from obtaining the
WOS, provided the accounts of WOS
approval of the audit committee
are consolidated with that of the
holding company and placed before the
general meeting for approval
•In case of listed companies only material
related party transaction requires
shareholders approval
DISCLOSURES PENAL PROVISONS
1. Form MBP-1 by Directors (S. 184(1)) 1. Disqualification for
2. Form AOC-2 appointment as a director
• Materaial & Arms Length Basis u/s164(g)
• Materail & Not on Arms Length 2. Director/Employee who
Basis
violated this provision
3. Financial Statement (As per Ind AS
24 or AS 18 format) Listed Co ->
4. Form MBP-4 (Register of RPT • Penalty – Rs. 25 Lakhs
contracts) Other Co ->
5. Quarterly Corporate Governance • Penalty – Rs. 5 Lakhs
Report (Only for Listed Co)