Ministry of Corporate Affairs has issued a clarification on the contentious section 185 of the Companies Act, 2013 regarding loans made, guarantees given or securities provided vide section 372A of the Companies Act, 1956.
The gist of the clarifications are given below:
This Ministry hos received number of representations on the applicability of Section 185 of the companies Act, 2013 with reference Io loans made, guarantee given or security provided under Section 372A of the Companies Act,1956. The issue hos been examined with reference to applicability of Section 372A ol the Companies Act, 1956 vis-a-vis Section 185 of the Companies Act. 2013. Section 372A of the Companies Act, 1956, specifically exempts any loans mode, any guarantee given or security provided or any investment mode by d holding company to its wholly owned subsidiary. Whereas. Section 185 of the Companies 2013 prohibits guarantee given or any security provided by o holding company in respect of any loon token by its subsidiary company except in the ordinary course of business.
2. In order to maintain harmony with regard to applicability of Section 372A of the companies Act, 1956 till the same is repealed and Section 185 of the Companies Act, 2013 is notified, it is hereby clarified that any guarantee given or security provided by a holding company in respect of loons mode by o bonk or financial institution to its subsidiary company, exemption as provided in clause (d) of sub-section (8) of section 372A of the. companies Act, 1956 shall be applicable till section 186 of the Companies Act, 2013 is notified. This clarification will, however, be applicable to cases where loans so obtained ore exclusively utilized by the subsidiary for its principal business activities.
The copy of the circular can be accessed here http://www.mca.gov.in/Ministry/pdf/General_Circular_3_2014.pdf