Mohan Lavi

Loan restrictions under the Companies Act should be relaxed

Mohan R Lavi | Updated on June 01, 2020

Given that Covid-19 is unlikely to fad away anytime soon, to help companies’ cash flow, they should be allowed to borrow at will, with certain conditions

The present government at the Centre has a reputation for not hesitating to impose bans for political or economic purposes. It now has an opportunity to impose a ban to boost people’s morale — a ban on anybody predicting how bad the economy is going to be due to the impact of Covid-19. Everyone knows that all the top-level indicators — GDP, GST collections, Purchasing Index, credit growth — are not going to make pleasant reading for some time. Instead of attempting to predict the GDP growth rate down to two decimal points, everyone should think of ideas to improve the economy by providing more jobs, which would lead to more money in the hands of the people who would then spend more — the only way to get over an economic crisis.

While the stimulus package is an assortment of goodies with something for everyone, its success would depend on its seamless implementation — no one seem confident of this. Just like other legislations that have focussed on providing flexibility in compliance and payments, amendments to the Companies Act, 2013, have focussed on CSR activities and keeping the June 30, 2020 deadline for meeting monetary thresholds such as deposit repayment reserve. Nothing radical has been envisaged.

For corporates to run over a long term, they need money. Banks and financial institutions have found solace in depositing the excess moolah they have with the Reserve Bank of India instead of lending it to customers. The Companies Act imposes a number of restrictions on companies availing loans and accepting deposits. It’s time these are relaxed, for a couple of years at least. Sections 185 and 186 of the Act lay down the details regarding giving and taking of loans by companies. Like most of the provisions of the Act, these Sections are more of a warning on what not to do, rather than telling us what we can do. These sections also impose numerical limits — loans given cannot exceed 60 per cent of paid-up capital and free reserves or 100 per cent of free reserves and securities premium account.

Relaxations provided by the Companies Act due to Covid-19 include amending the requirement under Section 73(2)(c) of the Act to create a deposit reserve of 20 per cent of deposits maturing during FY2020-21 before April 30, 2020 — this shall be allowed till June 30, 2020. Similarly, the requirement under Rule 18 of the Companies (Share Capital & Debentures) Rules, 2014 to invest 15 per cent of debentures maturing during a particular year in specified instruments before April 30, may be done so before June 30.

These may have been knee-jerk relaxations, enacted with the supreme confidence that Covid-19 would itself go into a permanent self-quarantine by June 30. Now that it is known that Covid-19 is going to be part of us at least for some time to come, the Ministry of Corporate Affairs (MCA) should discard its role as a strict policeman and assume the role of a helping mentor.

With banks and financial institutions still reluctant to lend generously, it would be natural to expect companies to turn to related parties for loans and deposits to fund their activities. They could breach thresholds given in the Companies Act. The MCA should send out a Circular that the thresholds and other restrictions would be deferred for a couple of years — companies should be entitled to borrow as much as they want from whomever they want. A condition can be imposed in terms of disclosing the sources and utilisation of these funds. Similarly, the condition that share application money would be considered as a deposit if not allotted within two months needs to be removed at least for the time being.

Instead of thinking of relaxations every quarter for eight quarters, the MCA should think medium term — what should be done for the next, say, two years. They will realise that the relaxations can also be very different.

The writer is a chartered accountant

Published on June 01, 2020

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