Ministry of Corporate
Affairs (MCA) had notified 98 sections of Companies Act 2013 in September 2013.
These 98 sections included Section 185 of the Act also. The Section 372A of
Companies Act 1956 is still to be repealed and Section 186 of Companies Act
2013 is pending to be notified.
Under Companies Act
1956, the section 372A deals with the Inter-Corporate Loans and Investments by
Public companies. The section 186 under Companies Act 2013, regulates Inter-Corporate
Loans and Investments and since this section of the new act is pending to be
notified, its corresponding provision, Section 372A of the 1956 Act, continues
to be in force.
Section 185 of
Companies Act 2013 (replaces the old section 295 of the Companies Act, 1956) provides
for loans to directors, and is applicable to private and public companies,
while the old section 295 was not applicable to private companies, unless such
private company was the subsidiary of a public company.
Section 372A of the
Companies Act, 1956, specifically exempts any loans made, guarantee given or security
provided or any investment made by a holding company to its wholly owned
subsidiary.
As against section
372A, the new section 185 of Companies Act 2013, prohibits guarantee given or
security provided by a holding company in respect of loans taken by its
subsidiary company except in ordinary course of business.
The above situation of
contradiction between provisions of Sec 185 and Sec 372A lead to the confusion.
In light of this, MCA has vide its circular dated February 14, 2014 issued a
clarification regarding the applicability of Sec 372A till it is repealed and
notified. MCA has clarified that any guarantee given or security provided by a
holding company in respect of loans made by a bank or financial institution to
its wholly owned subsidiary company, exemption as provided in clause (d) of
sub-section (8) of Section 372A of the Companies Act, 1956 shall be applicable.
MCA has specifically added that this clarification will, however, be applicable
to cases where loans so obtained are exclusively utilized by the subsidiary for
its principal business activities.
The MCA circular on
clarification is available at :
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