Business Daily from THE HINDU group of publications
Thursday, Sep 11, 2008
ePaper | Mobile/PDA Version | Audio
Business Daily from THE HINDU group of publications Thursday, Sep 11, 2008 ePaper | Mobile/PDA Version | Audio |
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Financial Services Web Extras - Fixed Deposits Richa Mishra New Delhi, Sept. 10 The revamped Company Law is likely to put a cap on inter-corporate loans or deposits being received or made by stock-broking companies. Official sources told Business Line that the Companies Bill (2008), which is to be introduced in the forthcoming session of Parliament, is likely to propose that the Government may prescribe limits on inter-corporate loans/deposits for a class or classes of companies registered as stockbroker. However, for the companies in the business of financing, such as banking, insurance and housing finance, the Bill proposes that there will be no restriction for extending inter-corporate loans to such entities. Preventing misuseTo prevent misuse of this provision for price-rigging or funds diversion, the revamped law is likely to propose some safeguards in the disclosure requirements. Such class of companies, which are allowed to extend inter-corporate loans, can do so by disclosing it to its members and by passing a special resolution, sources said. The Bill is likely to propose that no company will directly or indirectly make any loan or guarantee to any other body/corporate exceeding 60 per cent of its paid-up share capital and free reserves, or 100 per cent of free reserves, whichever is more. If the amount exceeds the prescribed percentage then the entity should get it authorised by a special resolution passed in a general meeting and approved by its Board. Prior approval of the public financial institution, if the amount exceeds 60 per cent, may also be proposed. Companies that have defaulted on repayment of loans or deposits will not be allowed to extend any loans.
It is also likely that no loan would be allowed at a rate of interest lower than the prevailing bank rate. Besides, loan to directors or the companies in which the director has an interest is not allowed, unless it is an ordinary business of the company to give loans or guarantee. The misuse of inter-corporate loans came to the forefront during the stock market scam of 2001. It was found that large amounts of corporate funds were being diverted to the stock market for price rigging. The Joint Parliamentary Committee on Stock Market Scam had recommended that a suitable mechanism be devised to check the same. The JJ Irani Committee on Company Law had proposed that the provisions of the current Act, which prescribes for such loans, may be strengthened to ensure that there is no misuse of these exemptions by corporates. It had also suggested a prohibition on companies making such loans to stockbrokers and stock-broking firms/companies subject to exemptions currently provided in the Companies Act. More Stories on : Financial Services | Fixed Deposits | Company Law
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