Inter Corporate Loans
What are Inter Corporate Loans?
Inter Corporate Loans refer to loans or advances given by one company to another company. These can be either short-term or long-term loans provided for various business purposes like working capital, expansion, or strategic alliances.
Key Features
Between Companies: The loan is from one corporate entity to another (not individuals).
Can be Secured or Unsecured: Loans may or may not have collateral/security backing.
Interest-bearing or Interest-free: Depending on the terms agreed upon by both parties.
Purpose: Often for funding projects, business operations, or investment opportunities.
Regulatory Framework in India (under Companies Act, 2013)
Section 185 - Loans to Directors and Related Parties
This section restricts companies from giving loans to directors or their relatives. But it also applies restrictions on loans to entities where directors have substantial interest.
Section 186 - Loans and Investments by Company
This section regulates loans and investments made by a company to other bodies corporate, including:
Companies must obtain approval from the Board of Directors and special resolution from shareholders if the loan or investment exceeds specified limits.
The total loans, guarantees, and securities provided by the company should not exceed 60% of the paid-up share capital, free reserves, and securities premium account, or 100% of free reserves and securities premium, whichever is higher.
The company must disclose such loans in the financial statements.
Disclosure Requirements
The details of inter-corporate loans should be clearly disclosed in the company’s financial statements as per accounting standards.
Practical Considerations
Due Diligence: Companies should conduct due diligence to assess the creditworthiness of the borrower company.
Documentation: Proper loan agreements should be drafted specifying interest, repayment terms, default consequences, etc.
Compliance: Ensuring all regulatory approvals and disclosures are in place to avoid penalties.
Summary
| Aspect | Description |
|---|---|
| What | Loans given by one company to another |
| Governing Law (India) | Companies Act, 2013 (Sections 185, 186) |
| Approval Required | Board and sometimes shareholders |
| Limits | Subject to percentage limits on capital |
| Purpose | Business financing, strategic support |
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