1. Governing Law and Applicability

• Inter-corporate loans are governed by Section 186 of the Companies Act, 2013.
  
• These rules apply when a Public Limited Company gives:
  
  • Loans to any other body corporate
    
  • Guarantees or security in connection with loans
    
  • Investment in securities (shares, debentures, etc.) of other companies
    
• This section applies to both listed and unlisted Public Limited Companies, with some exemptions (e.g., banking companies and NBFCs for loans in the ordinary course of business).
  

2. Monetary Limits Without Shareholder Approval

• A Public Limited Company cannot make loans, guarantees, securities, or investments exceeding:
  
  • 60% of its paid-up share capital, free reserves, and securities premium, or
    
  • 100% of its free reserves and securities premium,
    Whichever is higher, without passing a special resolution in a general meeting.
    
• If the proposed loan exceeds these thresholds, prior approval from shareholders by special resolution is mandatory.
  
• Notice of the resolution must include full details of the transaction, including the purpose and financial impact.
  

3. Rate of Interest Requirement

• Any loan given must carry an interest rate not lower than the prevailing yield of one year, three-year, five-year, or ten-year Government security, closest to the loan tenure.
  
• Charging interest below this rate is not allowed and could be considered a violation.
  
• This rule ensures that inter-corporate loans are priced fairly and not misused to shift funds.
  

4. Board Approval and Documentation

• All inter-corporate loans, guarantees, securities, or investments must be approved by the Board of Directors through a resolution passed at a Board Meeting.
  
• The approval must include full justification and the terms of the loan.
  
• A Register of Loans, Guarantees, Security, and Investments (Form MBP-2) must be maintained with details like the name of the borrower, amount, purpose, terms, and repayment schedule.
  
• The company must also ensure that the borrowing company is not defaulting on repayments of existing loans.
  

5. Restrictions and Exceptions

• Loans or guarantees cannot be given to any person or body corporate in which any director is interested, unless previously approved by a special resolution (Section 185 may also apply).
  
• A default in repayment of deposits or interest disqualifies the company from making further inter-corporate loans or investments.
  
• No company is allowed to give a loan or guarantee for buying its shares, directly or indirectly.
  
• Loans given to wholly-owned subsidiaries or joint ventures are exempt from shareholder approval but still require Board approval and disclosure.