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Mr. G.M. Ramamurthy
B.Sc., B.L, ACS, CAIIB, DCL, DTL and DLL
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Guest Profile
Mr. G.M.Ramamurthy, B.Sc., B.L, ACS, CAIIB, DCL, DTL and DLL, is a gold
medallist of Madras University in his law examination. He currently is a practising
advocate and legal consultant based in Chennai.
Mr. Ramamurthy has extensive practical experience as advocate before he
joined Industrial Development Bank of India (erstwhile principal All India financial
institution). He worked in IDBI, which later became IDBI Bank Ltd, for about 28
years. He gained vast experience in documentation of various types. He served
as a member of the High Powered Committee constituted by the Government of
India under the Chairmanship of retired Supreme Court Justice Balakrishna Eradi
to examine the “Law relating to Insolvency of Companies”. Many of the suggestions
of the Committee were incorporated in the Companies (amendment) Act, 2002.
He played vital role in the formation of Stressed Asset Stabilisation Fund for IDBI
(SASF), conversion of IDBI into IDBI Bank Ltd, merger of IDBI and IDBI Bank Ltd,
and amalgamation of United Western Bank Ltd with IDBI Bank Ltd.
Mr. Ramamurthy had been the Chairman of the Corporate Debt Restructuring
Empowered Group (CDREG) for over three years. He is also an independent
director in a few companies.
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Untitled Document - Section 185 of the Companies Act, 2013 (Act), was brought into force with effect from 12th September, 2013, while the Companies (Meeting of the Board and its Powers) Rules, 2014, inter alia, covering rules made in terms of section 185 of the Act, came into force with effect from April 01, 2014. This is one of the provisions most debated and resisted by the corporates. The Government did not budge to the high-pitched demands of the corporates to restore the status quo ante (i.e. maintaining the corresponding provisions contained in the Companies Act, 1956) and struck to its stand. The Rules (and prior to the notification of the Rules the clarification issued by the Central Government) to some extent assuaged the concerns of the corporates. The provisions of section 185 (1) curtailed the freedom of the group companies, at their own volition, to provide loans, or stand as a guarantor or provider of securities in connection with the borrowings of the any of the group companies for their financial needs except from banks and financial institutions. The extent of the impact and mitigation in built in the Rules or in the proposed amendment to the Act necessitates deciphering the provisions of section 185 (1) of the Act. Section 185 (2) contains penal provisions for non compliance of the provisions of sub-section (1).
- Sub-section (1) starts with the words “Save as otherwise provided in this Act”. This expression means that section 185 of the Act is a standalone provision and one has to examine the Act whether there is/ are any exception(s) to the applicability of section 185. An examination of the Act does not reveal any other provision carving out exception to section 185 than those contained in the proviso to sub-section (1) of section 185 itself.
- Structure of section 185 (1): Section 185 (1) has three components, namely: - (a) the main provision; (b) the proviso which carves out exceptions to the applicability of the main provision; and (c) an explanation to the expression “to any other person in whom director is interested”.
- Main provision: According to Section 185 (1) of the Act, a company shall not, directly or indirectly,
- advance any loan, including any loan represented by a book debt, (i) to any of its directors or (ii) to any other person in whom the director is interested; or
- give any guarantee in connection with any loan taken by him or such other person; or
- provide any security in connection with any loan taken by him or such other person.
- Exceptions: The position explained in paragraph 4 above is subject to certain exceptions. The exceptions are set out in the proviso to sub-section (1). In its terms, the prohibitions contained in sub-section (1) do not apply to: -
- the giving of any loan to a managing or whole-time director (i) as a part of the conditions of service extended by the company to all its employees; or (ii) pursuant to any scheme approved by a special resolution; or
- a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India;
- any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
- any guarantee given or security provided by a holding company in respect of any loan made by a bank or financial institution to its subsidiary company.
Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities. - Clauses (c) and (d) and the proviso thereunder are sought to be inserted into the Act through The Companies (Amendment) Bill, 2014 (Bill No. 185 of 2014) passed by the Lok Sabha in the winter session of Parliament in December 2014. These provisions are not part of the Act as on date. However, it is noteworthy that same exceptions were inbuilt in Rule 10 of the Companies (Meeting of the Board and its Powers) Rules, 2014. Hence the additional exceptions were available to any company even earlier through the Rules.
- Explanation: Meaning of the expression “to any other person in whom director is interested” has been provided by way of an explanation under sub-section (1) to section 185 of the Act. According to the Explanation, the expression means: -
- any director of the lending company, or of a company which is its holding company or any partner or relative of any sub director;
- any firm in which any such director or relative is a partner;
- any private company of which any such director is a director or a member;
- any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by such director, or by two or more such directors, together; or
- any body corporate, the Board of Directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.
What is a lending company? What is meant by “lending company” appearing in Explanation (a) and (e), has not been brought out explicitly in the Act. However, having regard to section 295 of the Companies Act, 1956 it must be taken to mean the company which is considering advancing any loan, giving any guarantee or providing any security in connection with the loan. - The explanation provides a complete meaning to the expression “to any person in whom director is interested”. Hence it is neither necessary to traverse beyond to ascertain what is meant by the expression nor limit the scope of the meaning given to the expression, other than that is contained in the Act. An elucidation of the explanation may be necessary for bring out the meaning of the explanation. Let A be the concerned director, B be an individual or entity (may be a company both public and private, firm or a body corporate) and C Ltd be the lending company.
- As per the explanation, B if he/it is either: -
(in the case of an Individual) - a director of C Ltd or its holding company; or
- a partner of a firm in which A is also a partner; or
- relative of A;
- (in the case of a firm) a firm in which A or A’s relative is a partner; or
- (in the case of a private company) a private company of which A is a director or a member; [The term “member” is defined in section 2 (55) of the Act to mean (i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company and on its registration, shall be entered as member in its register of members; (ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; and (iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository. It must be noted that A merely being a member of the private company (holding one share only) is sufficient to attract the applicability of this explanation]; or
(in the case of a body corporate) - a body corporate at a general meeting of which either A or two or more interested directors (of C Ltd) together may exercise or control not less than 25% of the total voting power; [a body corporate, which includes a company incorporated outside India, but does not include (i) a co-operative society registered under any law relating to co-operative societies; and (ii) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification, specify in this behalf]; or
- a body corporate, its Board of Directors, its managing director, or manager whereof is accustomed to act in accordance with the directions or instructions of the Board of C Ltd or of any director or directors of C Ltd.
In either of the circumstances mentioned in (i) to (vii) above, B will be the person in whom A is interested as per the explanation. - Relative: Section 2 (77) read with the Companies (Specification of definition details) Rules, 2014 defines relative with reference to any person. It means anyone who is related to another- (i) if they are members of a Hindu Undivided Family; (ii) they are husband and wife; or (iii) if he or she is related to another as: - (a) father (including step father); (b) mother (including step mother); (c) son (including step son); (d) son’s wife; (e) daughter; (f) daughter’s husband; (g) brother (including step brother); or (h) sister (including step sister).
- No distinction between a private company and a public company: It is also to be borne in mind that section 185 does not make any distinction between a private company and a public company. It is applicable to both.
- Same Independent director on the boards of lending company and borrowing company: By General Circular No. 14/2014 dated 9th June 2014, the Ministry of Corporate affairs has clarified the query relating to appointment of an independent director of a company as an independent director in the holding company, subsidiary company or associate of such company. After getting the query examined in consultation with the Securities and Exchange Board of India, the ministry clarified that pecuniary relationship provided in section 149 (6) (c) of the Act does not include receipt of remuneration from one or more companies, by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission approved by the members, in accordance with the provisions of the Act. Hence it is possible that the same person can be an independent director on the company and its holding company or subsidiary or associate company. There is no exemption from the applicability of section 185 of the Act when it pertains to advancing loans, giving guarantee or providing security by one of such companies to another. If an independent director is on the boards of the lending company and another company in the same group, the applicability of the prohibition will have to be determined by applying the provisions of section 185 of the Act. Such cases may be rate; but the interest aspect of such director should not be lost sight.
- Common directorship in the case of a public company alone is not a bar for the lending company to advance loan or give guarantee or provide security for the other company. The prohibition, if any, has to be ascertained keeping in view the explanation of the expression “to any other person in whom director is interested”. In the case of a private company common directorship will definitely attract the prohibition.
- Applicability of section 185(1) to Government Companies : The Central Government by notification GSR 581 (E) dated 16th July 1986 exempted the application of the provisions of section 295 of the 1956 Act to a Government subject certain condition. Section 295 of the 1956 Act was the corresponding provision of section 185 of the Act. In view of section 24 of the General Clauses Act, 1897 the exemption granted under the 1956 Act will continue to available to a Government Company unless the notification is rescinded or fresh notification is issued under the Act.
- Conclusion : Parent company acting as arranger or provider of funds of sister concerns now is limited to the wholly-owned subsidiaries. Sister companies which are not wholly-owned subsidiaries will have to resort to mobilising funds on the strength of their own balance sheets. A company is also prohibited from acting as a conduit and indirectly address the financial requirements of the group companies. The delay in making or receiving payments for the goods sold or purchased and services availed of from the other, grant of extra time than what is extended to other entities for similar acts, waiver of a portion of the loan or interest etc., may be considered as indirect funding.
- The Board and Audit Committee of a company while discharging their functions may as well have regard to the provisions of section 185 and ensure that the company remains compliant with them.
| Disclaimer: The views expressed in this article are solely the opinion of the author.
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