India: Borrow, Lend Or Invest: Beware Of Companies Act 2013

  • Companies restricted from making investments through more than 2 (two) layers of investment subsidiaries.
  • Loans and investments to group companies made difficult.
  • Companies are not permitted to issue treasury stock to a trust with the company as a beneficiary in case of amalgamations.

The Government of India has recently notified Companies Act, 2013 ("CA 2013"), which replaces the erstwhile Companies Act, 1956 ("CA 1956"). In our series of updates on the CA 2013 ("NDA CA 2013 Series"), we are analyzing the key changes and their major implications for stakeholders, by setting out the practical impact of the changes introduced by CA 2013. For a quick look at our analysis so far on the changes brought forth by the CA 2013, please refer to our previous hotlines in this series through this link.

In this hotline, we shall analyse the provisions relating to loans, borrowings and investments under the CA 2013.


The provisions relating to loans and borrowings are set out in Chapter XII of the CA 2013 read with the Companies (Meetings of the Board and its Powers) Rules, 2014 ("Rules"). The key changes brought about are:

I. Restriction on investment through more than 2 (two) layers of investment subsidiaries

The CA 1956 did not impose any restrictions on companies which made investments through multiple layers of investment companies. However, Section 186 (1) of the CA 2013 restricts a company from making investment through more than 2 (two) layers of investment companies. An investment company has been defined to mean a company whose principal business is the acquisition of shares, debentures or other securities. These provisions, however, would not apply to (i) a company which acquires any other company in a country outside India, if such other company has investment subsidiaries beyond two layers as per the laws of such country; or (ii) a subsidiary company which has any investment subsidiary for meeting the requirements under any law.

Key Takeaways: The decision to impose a limit on number of investment subsidiaries was taken by the Ministry of Corporate Affairs ("MCA") in the wake of the Purti scam, which exposed the lacunae existing in the Indian corporate regime. Section 186(1) has been introduced with a view to increase transparency in corporate transactions. This restriction is set to significantly affect a variety of corporate transactions in India, especially with respect to companies that operate across multiple sectors with an investment company at the top; a structure common in the real estate and infrastructure sectors. However, since the CA 2013 seems to restrict investment through more than 2 layers of investment companies, it may still be possible to structure investments through companies other than investment companies.

An important concern that has arisen, is regarding the applicability of Section 186 (1) to existing investment structures set up under CA 1956. On plain reading of Section 186(1), it does not appear that the provision was intended to have retrospective operation. Since the CA 2013 does not provide any transitory provisions, it seems unlikely that this provision was intended to apply to existing structures.

II. Restriction on loans to directors and other persons: CA 2013 has made significant changes to the restrictions relating to provision of loan by a company to its directors. The key changes are as follows:

  1. Under CA 1956, loans made to or security provided or guarantee given in connection with loan given to the director of the lending company and certain specified parties required previous approval of the Central Government. However, section 185 of the CA 2013 which has by far been the most debated section of CA 2013, imposes a total prohibition on companies providing loans, guarantee or security to the director or any other person in whom the director is interested.
  2. Whilst the restriction contained in the CA 1956 applied only to public companies, CA 2013, has extended this restriction to even private companies.

Key Takeaways: On plain reading of CA 2013, the restriction on providing loans to any other person in whom a director is interested is worded broadly and would apply to subsidiaries and other companies within the same group with common directors. Such restriction would create significant difficulties for companies which provide loans, or guarantee/ security to their subsidiaries or associate companies for operational purposes. The MCA attempted to address this concern by issuing various circulars which complicated the matters further on account of ambiguous language of the circulars. However, with the enactment of the Rules, companies are now permitted to give loans, guarantee or security with respect to a loan taken by a wholly owned subsidiary, if the loan is utilized by such subsidiary for its principal business activities. This has to be contrasted with the position under the CA 1956, which permitted companies to give loans, guarantee or security to any of its subsidiaries which may be utilized by the subsidiary for any purpose. Further, the CA 2013 does not provide any indication as to what activities would amount to principal business activities of the subsidiary. In view of the above, the ability of associate companies and other subsidiaries to access capital from their parent company shall be restricted. However, CA 2013 permits holding companies to give guarantees or provide security for a loan provided by any bank or financial institution to any of its subsidiaries.

III. Loans and borrowings of the company

Inter corporate loans: Section 186 of the CA 2013 restricts a company from providing loans, giving any guarantee or security, or acquiring any securities of a body corporate, exceeding (i) 60% of its paid up share capital, free reserves and securities premium account or (i) 100% of its free reserves and securities premium account, whichever is more. However, a company may overcome such restrictions by passing a special resolution at a general meeting. These provisions are substantially the same as contained in Section 372A of the CA 1956. However, the following changes have been made in this regard:

  1. Section 372A of the CA 1956 was applicable only to public companies. Section 186 of CA 2013 additionally applies to private companies.
  2. While CA 1956 restricted a company from giving any loans to other body corporates, the CA 2013, restricts companies from providing loans to any person or any other body corporate and hence loans to individuals and other non-corporate entities are also covered.
  3. The CA 2013 requires companies to disclose its loans, investments made, guarantee given or security provided and its purpose, to its members in the financial statement.

The Rules however, prescribe that where loan or guarantee is given, or a security has been provided by a company to its wholly owned subsidiary, or a joint venture company, or an acquisition is made by a holding company, of the securities of its wholly owned subsidiary, the company need not pass a special resolution.

Key Takeaways: The restrictions imposed on inter corporate loans is viewed largely as a move to usher in accountability in corporate transactions. The MCA has attempted to bring the Indian corporate legal regime in line with global best practices, by increasing shareholder participation in affairs that directly affect the finances of the company. CA 2013 also mandates increased disclosure norms to increase transparency in commercial dealings.

The CA 2013 does not indicate that the provisions of Section 186 are retrospective. Rule 13 (1) of the Rules, however, provides that a special resolution would have to be passed within 1 (one) year from the date of notification of these provisions. The true intent of Rule 13 (1) seems unclear, since public companies were already required to pass a special resolution before providing any loans in excess of the specified limits. It is possible to interpret Rule 13 (1) to mean that private companies would be required to pass a special resolution within a period of 1 (one) year if the loans advanced by them exceed the specified limits, even if such loan was taken prior to the enactment of CA 2013. A clarification from MCA would be required to clarify the true import of Rule 13 (1).

Deposits: The provisions relating to deposits are set out in Chapter V of the CA 2013 read with the Companies (Acceptance of Deposits by Companies) Rules, 2014 ("Deposits Rules"). CA 2013, like the CA 1956, provides that a public company can accept deposits from its members and other persons, while private companies can accept deposits only from its members (it should be noted that CA 1956 permitted a private company to accept deposits from members, directors or their relatives also). The definition of "deposit" as provided under the CA 2013 and the Rules specifically indicate that loans obtained by a company shall also be considered to be a deposit.

While the CA 1956 permitted public companies to accept deposits only in compliance with the Companies (Acceptance of Deposits) Rules, 1975, it did not include elaborate requirements for acceptance of deposits by private companies. However, the CA 2013 now states that a company may accept deposits from its members only on fulfillment of certain detailed requirements. Some of the requirements include issuance of a circular to the members of the company, filing of the circular with the Registrar of Companies ("RoC"), maintenance of a separate bank account (deposit repayment reserve account) etc. Every loan made by a member to the company shall be subject to the requirements set forth in Chapter V and the Deposit Rules. However, the Deposits Rules specifically exempt loans provided by directors of a company from the definition of "deposit", if such director furnishes a declaration to the effect that the loan is not being given out of borrowed funds. For more details on the provisions relating to deposits under the CA 2013, please refer to our previous hotline through this link.

Key Takeaways: Private companies would be severely restricted in accepting deposits from its members. While the elaborate requirements under the CA 2013 shall ensure greater accountability and ensure more credibility on the company regarding repayment of deposits, it may be counterproductive as private companies may be unable to easily access capital from their members.

Restriction on companies on giving loans for purchase of its shares: The provisions in the CA 2013 restricting a public company from giving any financial assistance for purchase of its own shares are set out in Chapter IV of the CA 2013 and the Companies ("Share Capital and Debenture") Rules, 2014 ("Debenture Rules"). The following key changes have been made in this regard:

  1. CA 1956 permitted public companies to provide loans for the purchase of fully paid up shares by trustees for and on behalf of the company's employees (employee share scheme). The CA 2013 also permits companies to do so, however subject to a special resolution, and certain other requirements, including the requirement that shares have to be valued by a registered valuer.
  2. Unlike the CA 1956, the CA 2013 does not permit directors holding salaried office or employment to be the beneficiaries of the trust holding the company's shares funded by way of loan from the company.
  3. Voting rights not exercised directly by employees in respect of the employees share scheme is required to be disclosed in the report of the board of directors.
  4. The penalty for non-compliance with these provisions has been substantially increased. The CA 2013 states that an officer in default shall be liable for imprisonment up to 3 (three) years and shall be subject to a fine ranging between INR 100,000 (Rupees one hundred thousand) and INR 2,500,000 (Rupees two million five hundred thousand only);

Key takeaways: The restriction imposed on companies for purchase of its own shares is a basic principle of company law. The object is to prevent a permanent reduction of liquid assets caused due to payment for shares being made from the accumulated assets of the company itself. The CA 2013 has recognized the importance of this provision in protecting the rights of shareholders, and has increased the requirements for transparency in the functioning of the company, by ensuring greater disclosure requirements and enhanced penalties. Further, Section 67 of CA 2013 has also plugged the loophole that existed under Section 77 of CA 1956 on issuance of treasury stock to a trust with the company as a beneficiary in case of amalgamations. Such trusts cannot be created under the CA 2013 since such trusts can only have employees as the beneficiaries.

Debentures: Provisions relating to debentures are set out in Chapter IV of the CA 2013 and the Debenture Rules. CA 2013 has introduced the following key changes to the provisions relating to debentures:

  1. Secured debentures may only be issued by a company subject to the conditions set out in the Debenture Rules. Some important conditions that a company is required to fulfill include:
    • The date of redemption of the secured debentures should not exceed 10 (ten) years from the date of its issue; however, with respect to infrastructure companies, secured debentures may be issued for a term of up to 30 (thirty) years;
    • The charge on the assets or properties should have a value sufficient for repayment of amount of debentures and the interest;
    • A debenture trustee must be appointed before issue of prospectus or letter of offer for subscription of debentures;
    • A debenture trust deed must be executed within 60 (sixty) days of the date of allotment;
  2. CA 1956 made the appointment of a debenture trustee mandatory in every public offer regardless of the number of persons to whom the offer was made. Under the CA 2013, appointment of debenture trustee is compulsory only when the prospectus is issued to more than 500 persons for subscription of debentures.

Key takeaways: The CA 2013 has consolidated the various provisions under CA 1956 regarding the issue of debentures of a company. Secured debentures have become subject to a variety of rules, indicating the shift towards protecting the rights of debenture holders.


CA 2013 demonstrates the systemic move towards greater regulation of corporate transactions in India with a view to facilitate increased accountability. CA 2013 has introduced greater disclosure and compliance requirements in regulating access of capital by companies via loans and borrowings. The enhanced standards aim at protecting the rights of the all stakeholders, specifically by facilitating greater shareholder participation when companies obtain / provide loans. However, the move towards increased regulation of corporate loans and borrowings under CA 2013 shall significantly affect the ability of companies (specifically private companies) to access funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.