Legal Requirements for Equity Funding
Requirement 1: Approval of Board
1. In all cases irrespective of the amount of loan, investment, guarantee, or security, the approval of the Board is required.
2. The approval of the Board shall be obtained by a unanimous resolution passed at a Board meeting along with the consent of all the directors present and voting at the meeting.
3. Resolution by mere circulation or resolution of the committee of directors is not sufficient to approve any loan, investment, guarantee, or security.
Requirement 2: Approval of the Members by Passing a Special Resolution
1. A prior approval using a special resolution is necessary when the aggregate of the loan, investment, guarantee, or security already made together with the loan, investment, guarantee, or security proposed to be made exceeds the limit specified under Section 186(2) of the Companies Act 2013.
2. The limit provided under Section 186(2) is the number higher of:
- 60% of paid-up share capital + free reserves + securities premium or
- 100% of free reserves + securities premium.
3. The contents of the special resolution passed shall also contain the total amount up to which the Board is authorized to make loans, guarantees, investments, or security.
4. No approval by special resolution is required when:
- The loan is given by a company to its wholly-owned subsidiary, a joint venture company, or
- A guarantee is given or security is provided by a company to its wholly-owned subsidiary or joint venture company.
- Where the holding company acquires the securities of its wholly owned subsidiary by way of subscription or otherwise.
Requirement 3: Approval of Public Financial Institutions
1. The company is required to obtain prior approval from a public financial institution from which it has taken a term loan.
2. The directors of the company shall pass a resolution at a Board meeting.
3. Approval of PFI will not be required if:
- The aggregate amount of loans, guarantees, investments, or security already made together with the loan, investment, guarantee, or security proposed to be made does not exceed the limit provided under the mentioned section.
- As per the terms and conditions of such a term loan, there is no default in repayment of loan installments or interest to a public financial institution.
- The Board can pass a resolution at the Board of Directors meeting or through a resolution passed by circulation in the case of a Specified International Financial Services Centre (IFSC) public company or Specified IFSC private company.
Requirement 4: Rate of Interest
The Rate of Interest (RoI) chargeable should be higher than the rates prevailing on one, three, five, or ten years of government security closest to the tenure of the loan.
Requirement 5: No Subsisting Default with Respect to Deposits
1. A company that has made a default in repayment of any deposits accepted by it or a default in payment of interest on deposits shall not make any loan, guarantee, investment, or security until such a default exists.
2. In other words, when a company fails to repay the deposit amount or interest amount on the due date, it may make a loan, guarantee, investment, or security only after such default in repayment has been made good.
Requirement 6: Disclosures in Financial Statements
1. The company is required to disclose to the members in the financial statement:
- The full particulars about the loans given, investments made, guarantee or security provided, and
- The purpose for which such a loan, guarantee, or security is proposed to be utilized by the recipient of the loan, guarantee, or security.
Requirement 7: Company registered under SEBI
1. Any company that is registered under Section 12 of the Securities and Exchange Board of India (SEBI) Act 1992 shall not be engaged in taking inter-corporate loans or deposits exceeding the prescribed limit provided under the act.
2. The company is required to furnish the details of the loan or deposits in its financial statement.