Borrowings of Private Companies under the Companies Act, 2013

Introduction

Every company needs to raise finances in order to grow and sustain in the market, which may be raised through various methods such as issuing shares and debentures to the public, borrowing from banks and other financial institutions, etc.

Here we discuss 5 ways by which a private company may borrow to raise finances under The Companies Act, 2013 (‘Act’) and Companies (Acceptance of Deposits) Rules, 2014 (‘Rules’).

Private Company

The Parliament of India in 2013, partially replaced the Companies Act, 1956 with The Companies Act, 2013 to make changes according to the country’s current economic needs and adhere to international business standards. However, it is important to note that few provisions of the 1956 Act are still in force. The Act tends to govern all the companies registered under it and largely emphasizes on corporate governance.

A private company, owned by private individuals is incorporated under the Act with 2-200 members and at least 2 directors. It may commence business after obtaining certificate of incorporation.

According to Section 2 (68) of the Act, a private company does not issue shares to public, its members are restricted from transferring shares and there is no requirement of minimum capital to start the company.

Permissible borrowings under the 2013 Act

A private company’s borrowings are regulated by u/s 73, 179(3), 186 of the Act and Companies (Acceptance of Deposits) Rules which are regularly amended.

A private company is prohibited from accepting loans from third parties to obtain loans. Nevertheless, in the event that a private company accepts any monies from third parties, it will be considered as a Deposit. In such case, it has to mandatorily comply with all the significant provisions under the Act.

The Companies (Acceptance of Deposits) Second Amendment Rules, 2015 and other subsequent Rules have made significant changes.

1. Bank Loan and financial institutions.

A bank loan is one of the main sources for obtaining monies. Any private company may borrow a term loan or a working capital loan against its assets. Bank loans are the most convenient option for the companies to borrow sums to invest and expand the business, as it provides fixed interest rate for a fixed term. The main advantage to obtaining a bank loan is that the ownership of the company remains with the company.

2. Director

Private companies also have the option to obtain loans from their directors, given that the director makes a written declaration stating that the sum he lent to the company is not borrowed under Rule 2(1)(vii) of Chapter V. The same shall be declared in the Financial Statements and Board’s Report. Same condition applies to director cum shareholder and to director’s relatives if they lend monies to the Company, which was provided by the Rules (2015).

This transaction is regulated u/s 179(3), where the private company is required to obtain a resolution passed by the Board of Members to obtain loan from its director of the Act. The Director may charge interest or provide interest-free loan to the Company. It may also be secured or unsecured loan, as the unsecured loans are deemed as exempted deposits.

3. Employee

Surprisingly, private companies may borrow from its employee, the condition being the sum borrowed should not exceed the employee’s annual salary and interest free.

4. Members

Members of a private company may also lend monies by making a written declaration stating that the sum he lent to the company is not borrowed under Rule 2(1)(vii) of Chapter V.

However, the company is permitted to borrow only up to 100 % of the aggregate Paid-up Share Capital, free reserves of the company. The company is mandated to hold a Board meeting u/s 179(3), Shareholders’ meeting u/s 73(2) to obtain approval of loan by an ordinary resolution. The resolution must also provide for repayment of loan details, collateral, charge on assets and decide upon interest rate of 12.5% or above.

It is also mandated by the Act that such information of loan must be registered with the registrar of companies.

5. Inter-corporate loan

The Companies (Acceptance of Deposits) Second Amendment Rules, 2015 paved way for companies to lend/borrow from another, i.e., inter-corporate loan.

It is a loan rendered to another unit of the same company by one unit of a company, where the lender and the borrower are the same business divisions. Such loans are mandated by the Act to report the details of the loans in company’s financial statements. u/s 186(4). The company must seek approval from its Board of Directors u/s 186(5) in order to provide or obtain inter-corporate loans.

By the virtue of Companies (Acceptance of Deposits) Second Amendment Rules, 2017, the Act lays out certain restrictions to inter-corporate loan transactions. A company that has failed to pay interest dues, will be prohibited from inter-corporate loan unless the company makes an arrangement to resolve the issue. The Act prohibits lending company from lending monies less than the lending rate provided by the Indian banks.

It is important to note that if the company already borrowed monies from a public financial institution, it must seek prior approval from it to obtain inter-corporate loans.

Conclusion 

In response to changes and developments in the corporate environment, the Companies Act, 2013 and Companies (Acceptance of Deposits) Rules is being periodically revised by the Ministry of Corporate Affairs.

The Act aims for transparency by implementing certain compliance requirements for acquiring debts and protects the stakeholders of the company. However, the regulations of Act significantly impact the ability of private companies to borrow monies.

Private companies are maybe permitted to take loan from State, Central or foreign Government and banking companies. They are strictly prohibited under the Act from acquiring loans from general public, Sole Proprietorship company, Partnership firms and Hindu Undivided Family.

REFERENCES

1. Ministry of Corporate Affairs - The Companies Act, 2013 <http://www.mca.gov.in/MinistryV2/companiesact2013.html> accessed 19 August 2020

2. Lawyered Team, ‘Permissible Loan by Private Companies - as per Companies Act, 2013’Lawyered (3 October 2019) <https://lawyered.in/legal-disrupt/articles/permissible-loan-private-companies-companies-act-2013/> accessed 19 August 2020

3. Neha Verma, ‘How can a Private Limited company raise finances?’ IPleaders <https://blog.ipleaders.in/how-can-a-private-company-raise-finance/> accessed 19 August 2020

4. CA. Promod Jain, ‘Loans & Deposits under the Companies Act 2013’ Lunawat & Co. (26 November 207) <http://lunawat.com/Uploaded_Files/Presentation/Loans&depositundercompaniesAct2013-CICASA,Ranchi.pdf> accessed 19 August 2020

5. Rishi Mehra, ‘Different types of business loans that you can go for’ Economic Times (23 April 2018) <https://economictimes.indiatimes.com/small-biz/money/different-types-of-business-loans-that-you-can-go-for/articleshow/63875573.cms> accessed 19 August 2020

6. ‘Companies Act 2013 - Summary Note on Borrowings by Private Companies’ RSM India <https://www.manupatrafast.in/NewsletterArchives/listing/RSM%20India/2016/Feb%202016/09.02.2016%20COMPANIES%20ACT%202013%20SUMMARY%20NOTE%20ON%20BORROWINGS%20BY%20PVT%20COMP.pdf> accessed 19 August 2020

7. Harshal Katre, ‘5 Important Compliances for Private Limited company in India’ <https://www.profitbooks.net/5-compliances-for-private-limited-companies-can-attract-huge-fine-ignored/> accessed 19 August 2020

8. Nikhil Joseph , Ruchir Sinha and Sangeeta Rana, ‘Companies Act 2013 Amended: Private Company Exemptions Reinstated’ Modaq (3 July 2015) <https://www.mondaq.com/india/shareholders/409358/companies-act-2013-amended-private-company-exemptions-reinstated> accessed 19 August 2020

9. Gaurav N Pingle, ‘Compliance Checklist for Acceptance of Unsecured Loans from Directors and Shareholders of Private Company’ SCC Online (12 August 2019) <https://www.scconline.com/blog/post/2019/08/12/compliance-checklist-for-acceptance-of-unsecured-loans-from-directors-and-shareholders-of-private-company/#:~:text=The%20unsecured%20loans%20accepted%20by,of%20such%20%E2%80%9Cexempted%20deposits%E2%80%9D.> accessed 19 August 2020