Inter-Corporate Loans: MCA’s New Proposal at a Glance

A recently released draft seeks to extend certain exemptions from the provisions relating to inter-corporate loans to finance companies in GIFT-IFSC.

The proposed amendment to the Companies (Meetings of Board and its Powers) Rules, 2014, follows a request from the International Financial Services Centres Authority (IFSCA) to extend the relaxation to finance companies registered with the IFSCA.

The Ministry of Corporate Affairs (MCA) has invited stakeholder comments by July 17, 2025.

Current Framework

Section 186 of the Companies Act, 2013, deals with loans and investments by a company. It restricts companies from (a) giving any loan to any person or other body corporate; (b) giving any guarantee or provide security in connection with a loan to any other body corporate or person; and (c) acquiring by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up share capital, free reserves and securities premium account, or 100% of its free reserves and securities premium account, whichever is more.[1]

If the aggregate of the loan, investment, guarantee, or security so far made, along with that proposed to be made, exceeds these limits, further investment, loan, guarantee, or security will have to be previously authorised by a special resolution passed in a general meeting.[2]

Such prior approval by way of special resolution will not be required if a loan or guarantee is given, or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company.[3] However, the details of such loans, guarantees, securities, or acquisitions have to be disclosed in the financial statement.[4]

The other requirements specified under Section 186 pertain to Board approval, disclosure in financial statements, rate of interest, maintenance of registers, and so on. Any contravention will result in fines for the company, and every officer of the company who is in default will face imprisonment as well.[5]

The provisions of Section 186 (except sub-section (1), which deals with layer restrictions) do not apply in circumstances covered under sub-section (11). Consequently, it exempts companies established with the object of and engaged in the business of financing industrial enterprises.[6]

Here, the expression “business of financing industrial enterprises” includes, with regard to NBFCs registered with the Reserve Bank of India, “business of giving of any loan to a person or providing any guaranty or security for due repayment of any loan availed by any person in the ordinary course of its business.” This is as per Rule 11(2) of the 2014 Rules.

Proposed Amendment

The Ministry has now proposed to expand the ambit of the above expression and extend the exemption to finance companies registered with IFSCA and engaged in the business of:

• carrying out activity of lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, financial lease, and sale and purchase of portfolios (as specified in Regulation 5(1)(ii)(a) of the IFSCA (Finance Company) Regulations, 2021); or
• carrying out the activity of a Global or Regional Corporate Treasury Centre (as specified in Regulation 5(1)(ii)(e)),

in the ordinary course of its business.

Concluding Thoughts

The proposed change is aimed at enhancing ease of doing business for finance companies in the IFSC jurisdiction. Its implementation and the shape the final amendment may take remain to be seen.

References:

[1] Section 186(2) of the Companies Act, 2013.

[2] Section 186(3) of the Companies Act, 2013.

[3] First proviso to Section 186(3) of the Companies Act, 2013.

[4] Second proviso to Section 186(3) of the Companies Act, 2013.

[5] Section 186(13) of the Companies Act, 2013.

[6] Section 186(11)(a) of the Companies Act, 2013.