MCA Updates: Clarification u/s 372A(3) of the Companies Act, 1956...prohibits lending of money to Bodies Corporate at a rate lower than the prevailing bank rate.

The Ministry of Corporate Affairs vide its General Circular No. 06/2013 dated 14.03.2013, has issued a clarification with respect to Section 372A (3) of the Companies Act, 1956 that prohibits lending of money to Bodies Corporate at a rate lower than the prevailing bank rate. 

The Union Budget 2013-14 allows the Central Government to raise Rs. 50,000 Crores in the form of Tax Free Bonds which carry a lower rate of interest (presently 6.75% to 7.5%) which is tax free under Sections 10(15) (iv)(h) of the Income Tax, 1961. Such a provision was also made in Budget 2012-13 but it received poor acceptance owing to restrictions posed by Section 372A (3) of the Companies Act, 1956. The Ministry of Finance therefore drew the attention of MCA to the said section in order to remove bottlenecks in effective implementation of this provision. 

Keeping the current scenario in mind, MCA has clarified that the said Section will not be considered contravened if the effective yield or rate of return on tax free bonds is greater than the yield on prevailing bank rate. 

It is noteworthy that the Companies Bill 2012 has already taken care of the issue as the provision therein with reference to Loan and investment by company mentions:- 

186 (7) No loan shall be given under this section 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 tenor of the loan.