February 18, 2002
‘7’
DCA IMPOSES STRINGENT NORMS FOR COMPANY LOANS TO DIRECTORS AND THEIR RELATIONS
The Government in the Department of Company Affairs (DCA) has issued guidelines providing stringent norms for loans or corporate guarantee or furnishing security under Sections 295 and 372A of the Companies Act, 1956 to the directors of the companies or their relations. The application for such loan is required to be addressed to the Secretary, DCA, Fifth Floor, "A" Wing, Shastri Bhawan, New Delhi, after meeting stiff conditionalities . The application for such loans or corporate guarantee is to be accompanied by the prescribed fee of Rs. 500 for company with authorized share capital of less than Rs. 25,00,000/-, Rs. 1000 for company with Rs. 25 lakhs or more but less than Rs. 5 crores of authorized share capital and Rs. 2000 fee for company with Rs. 5 crore or more authorized share capital by demand draft payable to Pay and Accounts Officer, DCA.
The other conditions provide that the rate of interest proposed on the loan must not be less than the four per cent above the prevailing bank rate as the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934 and the quantum of loan along with other loans taken, if any, should not exceed 25 times of gross salary drawn in the preceding six months prior to making of the application. Besides, no guarantee commission shall be allowed to anyone in respect of the proposals.
In addition, the application is required to be accompanies by proposal duly approved at the meeting of the Board with a certified copy of such a resolution indicating the proposal of the company, terms and condition, interest of directors or their relatives, if any, clearly specifying the rate of interest chargeable, the schedule and terms of repayment, stating that the loan not being made out of borrowed funds of the company and any other major or important condition with a bearing on the loan or financial position of the company. The application is required to be accompanied by members’ specific approval, along with explanatory statement containing all the relevant details and a certified copy of the resolution with explanatory statement so passed.
In the area of protecting the interest of investors, such application is required to be accompanies by a declaration that the company has not defaulted in making repayments to the investors as and when their deposit amounts become due for payment. It requires a certificate from the statutory auditors or a Company Secretary in whole time practice stating that the proposal is in conformity with the provisions of Section 372A of the Companies Act and the company has not defaulted in the repayment of any fixed deposits accepted by the company under Section 58A of the Companies Act, 1956 or part thereof or interest thereon, payment of dividend, redemption and repayment of debenture and timely payment of interest thereon, redemption preference shares, and regularity of company in filing all forms and returns as per the provisions of the Companies Act. Besides, a no objection certificate or prior approval of public financial institutions or banks in case any term loan subsisting is required.
Other conditions require the company to attach to the application a certified copy of the Memorandum and Articles of Association of applicant company, shareholding pattern of the applicant and borrower companies, common interest and controlling interest especially stating the interest of director along with his or her relative for applications under Section 372A of the Companies Act. The other requirements include list of directors of the Board or both the applicant and borrower companies wherever applicable and disclosing inter-se interest, if any, financial position of net worth of both the companies for three years along with copies of annual reports, certified copy of draft loan agreement, the name and particulars of the guarantor with their consent if the loan is backed by any guarantee, details of the loan given, corporate guarantee given or security provided to any company, person, firm and so with proof of compliance of Section 372A, wherever applicable, details of the loan given, corporate guarantee given or security provided to any company, person, firm under Section 295, with a declaration to the effect that funds proposed to be loaned are not required for its working capital requirements at least for a year. The other requirements include a certified copy of the loan scheme for the employees of the company, if any, and justification for quantum of loan, guarantee for furnishing security by the company.
These guidelines are intended to protect investors from being defrauded by companies by resorting to loans for their directors, their relations and other employees from companies’ funds and for their employees to the detriment of the shareholders, debenture holders, investors, skate holders and financial institutions and other investors in order to avoid prosecution under the Companies Act. This also forms part of the corporate governance through the process of compliance of legal and statutory requirements which the Government has incorporated in the Companies Act by the Companies (Amendment) Act, 2000 increasing the responsibilities of directors and their accountability.