Procedure For Inter-Corporate Guarantee

A company which proposes to make loan/give guarantee/provide security/make investment in another body corporate must follow the procedure detailed below:

1. Issue notice for Board meeting in writing to every director for the time being in India and to every other director at his usual address in India as per the provisions of Section 286 of the Companies Act.

2. Hold Board meeting to consider the proposal to give loan/guarantee or provide security/make investment and—

(i) if the aggregate amount of proposed loan/guarantee/security/investment is within the limits specified in the first proviso to Subsection

(1) of Section 372A of the Act, then pass the resolution with all the directors present at the meeting consenting specifying the limit for such loan/guarantee/security/investment.

(ii) if the aggregate amount of proposed loan/guarantee/security/investment exceeds the specified limits under Section 372A then fix time, date and venue for holding general meeting to pass the special resolution thereat in that regard.

If the Board wants to give guarantee without being previously authorised by a special resolution then—

(a) a resolution is required to be passed in a Board meeting to give guarantee as per Section 372A;

(b) there must exist exceptional circumstances which prevent the company from obtaining previous approval by a special resolution; and

(c) the Board resolution is required to be confirmed within 12 months in a general meeting of the company or the annual general meeting held immediately after passing of the Board resolution, whichever is earlier. If your company is a listed company then have the Special Resolution mentioned above passed through postal ballot for giving loans or extending guarantee or providing Security. [Section 192A read with Rule 4(g) of the Companies (Passing of the Resolution by Postal Ballot) Rules, 2001]

3. Draft the notice of the special resolution indicate therein clearly the following—

(a) specific limits;

(b) particulars of the body corporate in which the investment is proposed to be made or loan or security or guarantee is to be given;

(c) the purpose of investment, loan, security or guarantee;

(d) specific sources of funding;

(e) other details.

4. Get the aforesaid notice and its relevant Explanatory Statement approved by the Board.

5. Issue notice in writing at least twenty one clear days before the date of the General Meeting proposing the special resolution with suitable explanatory statement.

6. In case of listed companies, send three copies of the notice to each Stock exchange, where shares of the company are listed.

7. Hold the General meeting and pass the special resolution.

8. In case of listed company, forward to the Stock exchanges where the shares of the company are listed, copy of the proceedings of the general meeting.

9. File the special resolution in e-form 23 along with the explanatory statement with the concerned Registrar of companies within thirty days of passing the Special Resolution after paying the requisite fee prescribed under Schedule X to the Companies Act, 1956.

Specifically indicate in the Explanatory Statement to the resolution the specific Securities in which the company is proposed to invest the amount.

10. Ensure that approval of the Public Financial Institution(s) has been obtained before implementing the proposal if the company has taken any term loan from any one of the financial institutions referred to in Section 4A and that term loan is subsisting except in the following situation:

(i) where the aggregate of the loans and investment so far made, the amounts for which guarantee or security so far provided to for in all other bodies corporate, alongwith the investments, loans, guarantee or security proposed to be made does not exceed the limits of 60% as specified in Sub-section (1); and

(ii) there is no default in repayment of loan instalments or payment of interest thereon as per the term and condition of such loan to the Public Financial Institution.

11. Ensure that company has not defaulted in complying with the provisions of Section 58A of the Companies Act, 1956.

12. Also ensure that loan to any body corporate is not made at the rate of interest lower than the prevailing bank rate of interest being the standard rate made public under Section 49 of the Reserve Bank of India Act, 1934.

13. Follow the guidelines/rules, if any, prescribed by the Central Government for the purposes of Section 372A.

14. The officers authorised for this purpose should comply with all formalities like execution of documents, remittance of money etc.

15. Enter the following particulars in respect of every investment or loan made, guarantee given or security provided by the company in relation to any body corporate in a register kept for such purpose in chronological order:

(i) the name of the body corporate;

(ii) the amount, terms and purpose of the investment or loan or security or guarantee;

(iii) the date on which the investment or loan has been made;

(iv) the date on which the guarantee has been given or security has been provided in connection with a loan.

16. The above said entries are to be made within seven days of the making of such investment or loan or the giving of such guarantee or the provision of such security.