Inter-Corporate Loans: No Cap Likely On Broking Firms

New Delhi: Stock-broking companies may soon be able to receive or make inter-corporate loans or deposits without any specific restriction on their investment. The revamped Company Law, which is likely to allow public companies to self-regulate inter-corporate loans and investments, is silent on caps, if any, on such class of companies.

Sources told Business Line that the Ministry of Corporate Affairs is likely to retain the current provisions of the Companies Act pertaining to inter-corporate loans/deposits instead of what was proposed in the draft Company Law (based on the Concept Paper).

The draft proposal stipulated that the Government may prescribe limits on inter-corporate loans/deposits for a class or classes of companies registered as stockbroker or any other intermediary.

Safeguards

However, to prevent misuse of this provision for price-rigging or funds diversion, the revamped law is likely to propose some safeguards.

These include stipulating that no company will directly or indirectly make any loan or guarantee to any other body/corporate exceeding 60 per cent of its paid-up share capital and free reserves, or 100 per cent of free reserves, whichever is more.

If the amount exceeds the prescribed percentage then the entity should get it authorised by a special resolution passed in a general meeting and approved by its Board.

Prior approval of the public financial institution, if the amount exceeds 60 per cent, may also be proposed.

Companies that have defaulted on repayment of loans or deposits will not be allowed to extend any loans. It is also likely that no loan would be allowed at a rate of interest lower than the prevailing bank rate.

Self-regulation

“Necessary checks and balances were required to be put, so that the purpose of self-regulation is not defeated. Besides, Indian corporates should not be placed at a disadvantage vis-À-vis companies incorporated in other jurisdiction in any international competitive bidding situation for acquisition,” sources said.

The misuse of inter-corporate loans came to the forefront during the stock market scam of 2001.

It was found that large amounts of corporate funds were being diverted to the stock market for price rigging. The Joint Parliamentary Committee on Stock Market Scam had recommended that a suitable mechanism be devised to check the same.

The JJ Irani Committee on Company Law had proposed that the provisions of the current Act, which prescribes for such loans, may be strengthened to ensure that there is no misuse of these exemptions by corporates.

It had also suggested a prohibition on companies making such loans to stockbrokers and stock-broking firms/companies subject to exemptions currently provided in the Act.