9 Corporate Borrowings and Investments

Prof.Dr Harpreet Kaur

INTRODUCTION: Any company running a business can raise either share capital or debt to meet its fund requirements. A trading company has implied power to borrow but it is not so with companies which are non-trading. Such companies should have power to borrow in their memorandum of association. A public company which is collecting debt from the public through the issue of debt securities has to meet listing requirements along with the compliance of Company law provisions. A company can also take long term loans from financial institutions and commercial banks. In order to meet short term needs of finance, companies generally use methods like trade credit, factoring, discounting of bills of exchange and bank overdrafts and cash credit. However, availability of such loans depends upon credit rating of the company, its capacity to repay, capital of company including debt to asset ratio and collateral etc. Companies can also raise loan through external commercial borrowings (ECB). ECB primarily is cross border debt capital raised by Indian companies from permitted overseas lenders with a weighted average maturity period of not less than three years1. Such borrowings are governed by RBI regulations and Foreign Exchange Management Act, 1999. It is necessary to understand here that a company after undertaking financial analysis decides about the manner of fund raising. Some important factors in such analysis are availability of equity for the company which depends upon investors’ confidence or differential interest rates between the banks and bonds. The module will restrict itself to provisions of the Companies Act, 2013 relating to borrowings by companies. Similarly a company can make investments according to the provisions of the Companies Act, 2013.

Borrowing by Indian Companies: Indian companies raised about 3.10 lakh crores through borrowings in 20132. Companies preferred to meet their financial needs through the debt rather than through issue of shares in the form of initial or further public offerings. Companies preferred private placement of bonds and non convertible debentures to meet their needs. Within the debt market, the companies raised Rs 2.65 lakh crore through debt placement route, Rs 23,745 crore through non-convertible debentures and Rs 19,650 crore through public issue of debt securities.

Ultra vires borrowing: Any borrowing which is neither expressly nor impliedly permitted will be termed as ultra vires borrowing because it is beyond the powers of the company. Such a lender has to equitable or legal debt against the company. He can get an injunction to restrain the company from using money lent by him in case it has not been used by the company. If his loan has been used by the company to pay off any lawful debt he will have the right to get subrogated to the position of the creditors whose debt has been paid off. To such an extent he will have the right to recover money lent by him. If he can identify and trace his loan in the original form or its products in the possession of the company, he can claim money or its products. But the lender loses this right if it is mixed up with the capital of the company.

Regular Borrowings: The Board of directors of a company has the power to borrow for company’s purposes under s. 179. Where the money borrowed, together with money already borrowed by company will exceed aggregate of its paid up share capital and free reserves apart from temporary loans obtained from the company’s bankers in the ordinary course of business, it can borrow money with consent of company by a special resolution [s. 180 (1) (c)]. Temporary loan is loan repayable on demand or within six months from the date of loan such as short term, cash credit arrangements, discounting of bills and the issue of other short term loans of a seasonal character. It does not include loans raised for the purpose of financial expenditure of a capital nature.

A regular borrower has legal right to repayment of the debt which he has lent to the company.

His right will not be affected even if the company applies loan to unauthorized activities.

Charges and their registration:

The power to borrow includes the power to mortgage company’s assets or to create a charge on them3. Lenders of money always insist upon some security for repayment of loan. This security may be created by mortgage of property or by creating charge on it. A company may create either a floating charge or a fixed charge. A fixed charge is created on some definite or specific assets whereas a floating charge is of ambulatory nature, floating with the property it is intended to cover, for example stock in trade of the company. It attaches to the property on which it is charged only when it crystallizes. The charge crystallizes when the company makes a default in repayment and the lender intervenes or the company reaches winding up. The benefit of the floating charge is that the charged property can be used by the company and subsequent charges can be created over the same property or asset with ranking in priority to the floating charge.

77 of the Companies Act, 2013 casts a duty on every company creating a charge to on its property or assets or any of its undertakings, tangible or otherwise to register the particulars of the charge signed by the company and the charge holder with instruments of charge. The charge may be created in India or outside India and the property charged may also be in India or outside India. Charge has to be registered within thirty days of its creation or Registrar may allow extending the period up to three hundred days on application made by the company. Any subsequent registration of charge does not prejudice any right acquired in respect of any property before the charge is actually registered. If a company fails to register the charge within time period given, the person in whose favour the charge is created may apply to the Registrar with instrument of charge. The Registrar will issue a notice to the company after receiving the application for registration. The Registrar may allow registration unless the company decides to register the charge or shows sufficient cause for not registering it.

The Registrar has to maintain a register of charges. The company creating a charge is under a duty to inform the Registrar about payment or satisfaction in full of the charge. The Registrar will send a notice to the charge-holder to show why payment or satisfaction in full should not be recorded as intimated to him. If no cause is shown then he should enter the memorandum of satisfaction of the charge.

It is also important to understand here that where any charge on any property or assets or any undertakings of a company is registered, any person acquiring such property, assets, undertakings or its part or any interest or share in them is deemed to have notice of the charge from the date of such registration.

A company has to inform the Registrar when the charge is fully paid or satisfied within 30 days from the date of such payment or satisfaction. The Registrar issues a show cause notice to the charge holder after intimation by the company as to why such intimation should not be recorded by him. On reply by the charge-holder confirming the payment or full satisfaction, he records the memorandum of satisfaction in the register of charges and informs the company.

If any person obtains an order for appointment of a receiver or manager for the property subject to a charge, he has to inform the company and the Registrar about such an appointment.

The Central Government has the power to order for rectification of register of charges. Under s. 87, Companies Act, 2013, if the Central Government is satisfied that omission to file particulars of any charge or any property acquired with a charge or any modification in any such charge or omission to register charge within time period or omission to give information of payment or satisfaction of the charge to the Registrar within given time period or omission or misstatement in relation to any charge, modification or memorandum of satisfaction was accidental or due to inadvertence or some other sufficient cause of a like nature or it will not prejudice the creditors or shareholders of the company or nay other ground which is just and equitable, it may extend the time period for filing such detains or rectification of omission or misstatement. However, such an will not prejudice rights acquired by any person regarding the property concerned before the charge is actually registered.

Debentures:

A company can borrow by splitting the loan amount into several units for the ease of borrowing large sum. The company may do so by issuing debentures. A debenture is a certificate of loan issued by a company. It is a type of security.

‘Debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture.’4 We must look at the substance of the instrument itself and without the assistance of nay precise legal definition, form the best opinion we can whether the instrument is or is not a debenture5.

According to s. 2(30), ‘debenture’ includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of a company or not.

On the basis of above definitions, a debenture should have following features:

Generally they are issued in series by any company but companies can also issue a single debenture. It is also not necessary that they should create a charge on assets of the company which have issued them.

The Companies Act, 2013 under s. 71 provides that a company may after passing a special resolution issue debentures with an option to convert them into shares at the time of their redemption. This conversion may be either wholly or partially. Debentures cannot carry any voting rights. A company may issue secured debentures. Any company issuing debentures is required to create a debenture redemption reserve account out of profits of the company available for payment of dividend. This amount can be utilized by the company only for redemption of debentures.

Where a company issues a prospectus or makes an offer to the public or its members for subscription of its debentures exceeding five hundred in numbers, it should appoint one or more debenture trustees before making such offer. The role of debenture trustee is to take steps to protect the interests of debenture holders and redress their grievances.

Debentures issued by the company have to be redeemed and interest should be paid as per terms and conditions of their issue. If debenture trustees find that the assets of the company are insufficient or likely to become insufficient to discharge principal amount of debentures, he can apply to Tribunal which may order restricting company form incurring further liabilities.

Where a company fails to redeem debentures on the date of their maturity or fails to pay interest when it becomes due, any debenture holder or all of them or debenture trustee may apply to Tribunal for the same. Tribunal may direct the company to redeem debentures forthwith with payment of principal and interest due. Default in complying with directions of Tribunal is punishable under s. 71.

A contract with the company to take up and pay for nay debentures of the company may be enforced by a decree for specific performance.

Loans and investment by companies:

S. 186 of the Companies Act, 2013 deals with loans and investments by companies.

A. Investments: A company is restricted by the section that it should not make investment through more than two layers of investment companies. An investment company is a company whose principal business is the acquisition of shares, debentures or other securities. However, such a restriction does not affect:

i. a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the law of that country;

ii. a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force [sub-section (1)].

law for the time being in force [sub-section (1)].

Loans: Section 186 has limited the power of a company regarding loans. A company shall not exceed sixty percent of its paid up share capital, free reserves and securities premium account or one hundred percent of its free reserves or securities premium account, whichever is more for loan purposes. The section provides that this restriction applies when a company directly or indirectly:

gives any loan to any person or other body corporate;

gives any guarantee or provide security in connection with a loan to any other body corporate or person; and

acquires by way of subscription, purchase or otherwise, the securities of any other body corporate.

However, if this limit is exceeded by the company prior approval of the company in general meeting by passing a special resolution is necessary.

Formalities for companies:

Before making any decision for loan, investments, guarantee or security a resolution should be passed at a meeting by the Board of directors with the consent of all directors present at the meeting. Prior approval of the public financial institution concerned will be required where any term loan is subsisting in case its total investments etc. exceed the above stated limit and there is default in repayment of loan instalment or payment of interest as per the terms and conditions of such loan to public financial institution.

The company is required to disclose to its members in the financial statement full particulars of the loans given, investments made and security or guarantee given and the purposes for which they will be used by the recipients.

Loan shall not be given at a rate of interest lower than the prevailing yield of one year, three year, five year or ten year Government Security closest to the tenure of the loan.

A company in default of repayment of any deposits or payment of interest will give any loan or guarantee or provide any security or make an acquisition till such default is subsisting. A register has to be maintained by every company for recording every such activity under this section. Contravention of the section is punishable with fine and every officer in default is punishable with imprisonment and fine.

Exceptions:

b. to any acquisition:

i. made by a non-banking financial company registered under Reserve

Investments of companies to be held in its own name:

According to section 187, all investments made by a company in any property, security or any other asset shall be made and held by a company in its own name. A company may hold shares in its subsidiary company in the name of its nominee in order to ensure that the number of members of the subsidiary company is not reduced below statutory limit.

However, a company can deposit any shares or securities for collection of dividend or interest with a bank who is banker to the company. A company can also deposit with or transfer to or hold shares or securities in the name of State Bank of India or a scheduled bank, being the bankers of the company, in order to facilitate their transfer. In case within a period of six months from the date on which shares or securities are transferred by the company to or first held by the company in the name of SBI or a scheduled bank, no transfer takes place, the company shall as soon as practicable after expiry of the period to retransfer shares or securities to it and hold them in its own name. Any shares or securities can also be deposited with or transferred to any person by the company by way of security for repayment of loan advanced to it or performance of any obligation undertaken by it. A company may also hold investments in the name of a depository when the investments are in the form of securities held by the company as a beneficial owner.

Any company not holding shares in its own name has to maintain a register for it. Any contravention of provisions of the section is punishable with fine and every officer of the company in default may be punished with imprisonment or fine.

important to connect village clusters with the international markets and not only domestic markets by building the physical infrastructure and virtual infrastructure so that all our goods and services are connected to all markets,” he further said.6

NTPC: NTPC ’s Board of Directors has cleared way for investments worth Rs. 10,000 crore for two of its power plants. It is reported that Board of Directors of the Company at its meeting held on September 10, 2014, has accorded the investment approval for the Tanda Super Thermal Power Project, Stage-II (2×660 MW) in the state of Uttar Pradesh at an appraised current estimated cost of Rs. 9188.98 Crore; and Rammam Hydro Electric Project, Stage-Ill (3×40 MW) in the state of West Bengal at an appraised current estimated cost of Rs. 1381.84 Crore” said NTPC in its statement to the stock exchange.7

Tata Steel: Issue of Non Convertible Debentures:

2% Non-Convertible Debentures, at YTM of 9.80%

Issue Amount: Rs. 1,500 Crs, issued at a discount of 15% to the Face Value

Issue Date: April 2012

Maturity Date: April 2022

Coupon / YTM (Yield to maturity) : 2.00% / 9.80%

Coupon payment:          Annual

Rating: AA+ by CARE and Brickworks8

Tata Power: Launch of perpetual debentures: Tata Power, India’s largest integrated private power utility, launched an offering of perpetual debentures of Rs1,500 crore. The mandated joint lead arrangers for the issuance were Standard Chartered Bank and Yes Bank.

The unique features of the debentures were that they were perpetual in nature with no maturity or redemption and are callable only at the option of the company. The coupon (which may be deferred at the company’s option) on the debentures wasset at 11.4 per cent per annum, with a step up provision if the debentures weren’t called after 10 years. These debentures rank senior only to share capital of the company. This provided equity characteristics to these ‘hybrid’ debentures. This instrument was rated ‘AA/Positive’ by Crisil and ‘CARE AA’ by CARE.9

Summary: This module has briefly introduced students to the concepts of borrowings and investments by companies in India. The module has dealt with authorized and unauthorized borrowings, their consequences for companies, how a company raises debt through issue of debentures, what are charges and implications of registration of charges for the company and the creditors /lenders, how a company can give loans and make investments in other companies.

References:-

1. A Singh, Introduction to Company Law, Eleventh edition, 2014, Eastern Book Company

2. A Singh, Company Law, fifteenth edition, 2011, Eastern Book Company

3. Companies Act 2013 with Rules, Taxmann, 2014

4. Company Law, Mayson, French and Ryan, twenty second edition, 2005-06

5. Securities Law, Hudson, Sweet & Maxwell, 2008

6. International Securities Law Handbook, Best and Solier, third edition, Wolters Kluwer, 2010

7. Bare Act: Companies Act, 2013

8. Bare Act: Securities and Exchange Board of India Act, 1992

9. Bare Act: Securities (Contracts) Regulation Act, 1956

Web-links:

1. www.sebi.gov.in

2. www.mca.gov.in