MCA clears the air on investments in subsidiaries

Written by Ashish Sinha | New Delhi | Updated: Nov 28 2013, 18:56pm hrs
Giving India Inc some more months to grant loans to directors or make fresh investments in their step-down subsidiaries, the ministry of corporate affairs (MCA) has clarified that provisions of inter-corporate loans as per the old Company Act of 1956 will remain in force till the corresponding section of the new law is notified.

According to MCA officials, the clarification became a necessity after the ministry received a number of representation from companies seeking clarity on two sections Section 185 and Section 186 of the new Companies Act, 2013, one of which was notified on September 12 along with the 97 sections leading to the confusion.

Section 185, which has been notified, states that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested. However, companies could give loan to managing director or their whole-time directors provided such a move was backed by a special resolution.

Section 186 of the new law bars Indian companies from making more than two layers of investments.

In its clarification, MCA said the provisions of inter-corporate loans as per the old Company Act of 1956 will remain in force till the corresponding section of the new law (Section 186) is notified. Since Section 186 of the new law is yet to be notified therefore the provisions of the old company laws continue to be in effect, a senior official in the corporate affairs ministry said. "It is clarified that Section 372A of the Companies Act, 1956 dealing with inter-corporate loans continue to remain in force till Section 186 of the Companies Act, 2013 is notified," MCA said in a circular.

Experts, however, termed the language of the circular "rather strange" as it has led to many interpretations. Dolphy DSouza, senior partner in a member firm of Ernst & Young Global said: "To be honest, the clarification raises more questions and does not resolve any." This is because one prominent view that has emerged from the circular is that until Section 186 is notified, Section 372A dealing with inter-corporate loans under the Company Act of 1956 will be in force.

"Then why bring in Section 185 that bars loans to directors. As per the circular, Section 186 seems to be the prominent one which once notified will prevail over all relevant sections of both old and new company law. Therefore, the circular raises more questions," said another company law expert.

However, according to Lalit Kumar, partner in law firm J Sagar and Associates, this may not be a correct interpretation of the MCA circular. "In my view, it is just clarifying the industrys doubt whether Section 185 has repealed Section 372A. This is because Section 185 does not correspond to Section 372A, it corresponds to Section 295 which has been repealed. Since Section 372A corresponds to Section 186 it will only be repealed once Section 186 is notified. Any reading of this circular beyond this understanding in my view is not correct," Kumar told FE.