How the Companies Act, shapes borrowing rules for Private Companies.

The Companies Act outlines borrowing regulations. Chartered Accountants Udaipur explains how much can be borrow, from where to borrow, and legal processes involved.

INTRODUCTION:

Most of the company requires capital for its business which can be obtained either by issue of share capital or by availing loans from banks.

The Companies Act, 2013 (“Act”) regulated the system of borrowing i.e. how much can be borrowed, from where it can be borrowed, the manner of borrow and legal compliances to be completed etc. Various provisions under that Act which regulates borrowings by private companies have been discussed herein

2. BORROWINGS BY PRIVATE COMPANIES:

Section 179(3) of the Companies Act, 2013 read with Rule 8 of the Companies (Meetings of Board and its Powers), Rules, 2014 and Companies (Meetings of Board and its Powers), Amendment Rules, 2015, deals with the powers of the Board of Directors to borrow monies  which are required to be passed by means of resolutions at board meetings.

1. Types of borrowing by Private Company:

1. Borrowings in the form of Exempted Deposits;
2. Issue of Debentures pursuant to section 71 of the Act;
3. Issue of Deposits pursuant to section 73 of the Act.

1. Borrowings in the form of Exempted Deposits:

“Deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

1. any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature ;
2. any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 (42 of 1999) and rules and regulations made there under;
3. any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949 (10 of 1949), or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970) or in clause (b) of section (2) of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980) , or from a co-operative bank as defined in clause (bii) of section 2 of the Reserve Bank of India Act, 1934 (2 of 1934) ;
4. any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this behalf in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934 (2 of 1934);
5. any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India;
6. any amount received by a company from any other company;
7. any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;
   • Explanation.- For the purposes of this sub-clause, it is hereby clarified that –
     • (a)   Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.
     • (b)  any adjustment of the amount for any other purpose shall not be treated as refund.
8. Any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company:
   • Provided that the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s report
   • any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within  ten years
     • Provided that if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer;
     • ixa. any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit;
9. any amount received in the course of, or for the purposes of, the business of the company,-
10. any non-interest bearing amount received and held in trust
11. any amount received in the course of, or for the purposes of, the business of the company,-
12. • as an advance for the supply of goods or provision of services accounted for in    any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from the date of acceptance of such advance:
    • Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty five days shall not apply:
    • as advance, accounted for in any manner whatsoever, received in connection with consideration for property under an agreement or arrangement , provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement;
    • as security deposit for the performance of the contract for supply of goods or provision of services;
    • as advance received under long term projects for supply of capital goods except those covered under item (b) above:
    • as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;
    • as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;
    • as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications vide notification dated 20.09.2016.
      • Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules:
      • Explanation.- For the purposes of this sub-clause the amount referred to in the first proviso shall be deemed to be deposits on the expiry of fifteen days from the date they become due for refund.
    • the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
    • the loan is provided by the promoters themselves or by their relatives or by both; and
    • the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
13. any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfilment of the following conditions, namely:-
    • the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance;
    • the loan is provided by the promoters themselves or by their relatives or by both; and
    • the exemption under this sub-clause shall be available only till the loans of financial institution or bank are repaid and not thereafter;
14. any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act
    • Explanation. – For the purposes of this clause, any amount.-
    • received by the company, whether in the form of instalments or otherwise, from a person with promise or offer to give returns, in cash or in kind, on completion of the period specified in the promise or offer, or earlier, accounted for in any manner whatsoever, or
    • any additional contributions, over and above the amount under item (a) above, made by the company as part of such promise or offer,  shall be considered as deposits unless specifically excluded under this clause
15. any amount received by way of subscription in respect of a chit under the Chit Fund Act,1982 (40 of 1982);
16. any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India,
17. ISSUE OF CONVERTIBLE NOTES BY STARTUP COMPANIES:
    • Start-up company can issue convertible notes (convertible into equity shares or repayable within a period not exceeding ten years) upto an amount of twenty-five lakh rupees or more received by from the date of issue in a single tranche, from a person.
    • Explanation.- For the purposes of this sub-clause-
      • “Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognized as such in accordance with notification number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade];
      • “Convertible Note” means an instrument evidencing receipt of money initially as a debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of the start-up company upon occurrence of specified events and as per the other terms and conditions agreed to and indicated in the instrument.

B. ISSUE OF DEBENTURES PURSUANT TO SECTION 71 OF THE ACT:

Debentures include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Section 71 of the Act and rule 18 of Companies (Share Capital & Debenture) Rules, 2014 deals with the provisions relating to the issuance of Debentures.

1. Debentures cannot be issued with voting rights.
2. The company issuing redeemable debentures shall create a debenture redemption reserve account out of the profits of the company available for payment of dividend.
3. Company to appoint one or more debenture trustees if the offer is made to members exceeding 500 for subscription of debentures.
4. A private company can issue unsecured non-convertible debenture, listed on a recognized stock exchange.
5. Secured debentures can be issued up to a maximum redemption period of ten years from the date of issue otherwise would be considered as deposits. In the case of a company engaged in the setting up of infrastructure projects such period of redemption may exceed a period of ten years but cannot exceed thirty years.
6. A company may issue debentures at zero coupon interest rate in accordance with the terms and conditions of their issue.
7. A company may by passing a special resolution, issue optionally convertible debentures into shares either wholly or partly.
8. The optionally convertible debentures and non-convertible debentures issued without creating a charge on the assets of the Company will be treated as Deposits and have to comply with the provisions of Section 73 of the Act and rules made thereunder.

C . DEPOSITS:

Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India

A private company can take loans in the form of deposits from its Members subject to following conditions. However, a private company cannot issue deposits to public.

A private company can with the approval of members, borrow monies from its Members on following terms and conditions:

1. May borrow money for a period not less than six months and not more than 36 months.

Provided that the company may, for its short term requirements may borrow money for a period less than six months but not less than 3 months and the amount so borrowed shall not exceed ten per cent of the aggregate of the paid-up share capital, free reserves and securities premium account of the company.

1. The amount so borrowed shall not exceed 100% of aggregate of the paid up share capital, free reserves and securities premium account.
2. Shall file the details of monies so accepted in form DPT-03.
3. Company shall not borrow money at a rate of interest exceeding the maximum rate of interest prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.

Exemption:

The maximum limit for borrowing monies from members shall not apply to the following classes of private companies, namely:

1. A private company which is a start-up, for ten years from the date of its incorporation.
2. A private company which fulfils all of the following conditions, namely:
3. which is not an associate or a subsidiary company of any other company,
4. The borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is less.
5. Such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under section 73.

Borrowing is necessary for every businessman and Companies. The borrowing depends upon objects, necessity and nature.  Any borrowing by the companies without following the rules and regulation may lead to legal complicacy as well as huge financial losses leading thereby the insolvency. Therefore every company and its directors should comply with the various provisions and should be regular in touch with their consultants.

Explore how the Companies Act, shapes borrowing rules. Learn about limits, sources, and legal steps required to ensure compliance today! From the best CA in Udaipur.