103. Corporate Guarantee

Section 372A of the Companies Act, 1956 put certain restrictions on companies on its investments and the loans it can give. This Section was inserted through the companies (amendment) Act, 1999. Both loans and investments are governed by the same Section. Giving corporate guarantee or security has the same effect as giving loan, as, if the person to whom guarantee or security is given decides to enforce the guarantee or security, the company will have to pay the amount. That is why restrictions are also placed on giving guarantee by corporate.

Companies can give guarantee as higher of the following: 1.   60% of the aggregate of paid up share capital and free reserves, or 2.   100% of the free reserves of the guarantee giving company.

To give guarantee within the above limits, Board should pass a resolution, which shall be approved by all Directors present at the meeting. If the company wishes to give guarantee more than the above ceiling, previous approval of members should be obtained by means of a special resolution. Hence a general meeting has to be conducted and form 23 has to be filed with Registrar of Companies. The prior approval of members can be by passed, if the following three conditions are satisfied(only for giving guarantee): 1.   Should exist exceptional circumstances/emergency; 2.   There should be a Board resolution authorizing to give guarantee; 3.   The above said board resolution is confirmed within 12 months either in a general meeting or in the coming Annual General Meeting, whichever is earlier.

The Act clearly specifies that the notice for General Meeting shall indicate: ·         Specific limits; ·         The particulars of the corporate to which guarantee is to be given; ·         The purpose of guarantee; ·         Such all other details including interest of Directors.

Other important points: 1.   A company which is in default in repayment of fixed deposits or interest thereon is not permitted to make guarantee. 2.   The company should update the register of loans/investments by adding the details of guarantee given. 3.   If any Director is interested, the concerned register should be updated. 4.   Giving guarantee of any purpose other than loan advance has no restrictions (to provide performance guarantee). 5.   These restrictions are equally applicable to Section 25 companies. 6.   Restrictions imposed by Section 295 are over riding restrictions. 7.   Loan includes debentures or deposits made by one company with another company.

Exceptions: the following companies are exempted from the applicability of Section 372A.

1.   A private company.(not a subsidiary of a public company) 2.   A company whose principle business is acquisition of shares, stock, debentures or other securities. 3.   A company doing the above transaction in their ordinary course of business or a company established with the object of financing industrial enterprises or providing infrastructure facilities. 4.   Investment made by virtue of rights issue offered by the investee company.