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Introduction
The importance of inter-corporate loans and investments cannot be understated, especially in the
context of emerging economies like India, which dont 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
restrictions.
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.
SCOPE AND OBJECTIVES
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
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ICLI thereby limiting interpretation to articles, books and principles of statutory
interpretation
Research Questions:
This paper attempts to answer the following questions:
1. What are inter-corporate loans and investments?
1.1 Why do companies use inter-corporate loans and investments?
1.2 What was the position in this regard in India under various Acts?
3. Conclusion
Bibliography
1. Report of the Working Group on the Companies Act, (1997).
This Working Group was set up to recommend amendments to the Companies Act, 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. It was used to analyse the amendments
brought about in 1999 to ensure a greater flow of inter-corporate loans and investments.
2 | Page
2. Ministry of Corporate Affairs, Report on Inter Corporate, loans, Investments, Guarantee
and Security, (2014).
This is an official report on the inter corporate loans, which has an outline on provisions of loan
to directors, procedures involved in giving loans to directors etc, provisions of loan and
investment by company, Procedure for inter corporate loans and investments.
5. Fifth Annual Report on the Working and Administration of the Companies Act, 1956.
This report was instrumental in drafting of the Central Government Guidelines on the approval
of applications under Section 370
BOOKS
2. A. Ramaiya, GUIDE TO THE COMPANIES ACT Vol. II, (A. Datar ed., 18th edn., 2015).
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3. S.C. Kuchhal, CORPORATION FINANCE: PRINCIPLES AND PROBLEMS, (21st edn., 1996).
4. A. Singh, CORPORATE LAW, (6th edition. 2012).
5. C. R. Datta, COMMENTARY ON COMPANIES ACT, (6th edition, 2008).
These books are commentaries on the Companies Act, 2013 and the Companies Act, 1956 and
allied statutes and examine various aspects of corporate governance and corporate finance. They
provide an understanding of the manner in which the statutes have been or should be understood
and interpreted, along with providing an insight into their practical application. 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, given the dearth of
judicial decisions dealing with the same.
Articles
CASES REFERREED
1. Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India,
MANU/SC/0735/2012.
This case held that even when debentures are offered to specific investors and not to the public,
they fall within the scope of securities, 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.
2. Poysha Oxygen (P) Ltd. v. Assistant Commissioner of Income Tax, [2008] SOT 711
(Delhi).
This case held that a deposit being referred to by any term would continue being an inter-
corporate loan, as what is essential is the nature of the instrument and not the nomenclature
applied to it.
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3. Bagri Cereals P Ltd, Re, (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, 1956 could be a ground for oppression and
mismanagement.
4. Pennwalt India Ltd. v. Registrar of Companies, Maharashtra, (1987) 62 Com Cases 112
(Bom DB).
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.
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
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