Loans to/by Companies

Lets see what are the restrictions to a Company in borrowing or lending loans to individuals or to other companies. The reason behind taking this topic is off late there are so many companies which does not comply with the regulations and legal compliance. We could have come across these lines in all our daily's

"CBI investigations have revealed that the DB group took a loan of Rs 242 crore from a financial service company on December 23, 2008. And Rs 200 crore out of this loan was routed on the same day to Cineyug and Kusegaon Fruits and Vegetables, who in turn transferred the money on the same date to Kalignar.CBI believes this money was the bribe for Raja and Kanimozhi, even though Kalignar claims this was an unsecured loan."

This article is not anything about political views. But it was on this background which stirred my curiosity to see what are the limitations a Company has in receiving or lending loan

Inter-corporate Loans and investments

• A company cannot lend loans to another company beyond certain limits.Any lending of loan should be done by passing resolution in the meeting.However, if a Company lends loan to its subsidiary company, then there are no restrictions.
• The rate at which a Company lends loan to another company should not be less than the bank rate prescribed by RBI at any time.
• If the lending Company has defaulted in the repayment of loans and interest, then it will not be allowed to extend any loans.