Checks on inter-co loans

In a bid to check fund manipulation by companies, the government may introduce greater safeguard provisions to govern inter-corporate loans. The proposed changes, likely to be introduced as part of the new company law amendments, would require companies to be more transparent in their efforts to avail such finance options. While the government’s efforts would not be directed to cap companies’ rights to raise funds through the route, the ministry of corporate affairs wants them to be totally transparent about loans and reasons for any deviation from standard procedure. Officials say the government was not in favour of curbing the rights of companies for easier access to financing. The proposed steps would ensure that corporates are made to follow greater standards of compliance before availing such loans. To check fund manipulation, it is proposed that the capacity of the corporate houses to invest or lend surplus funds should be established transparently. It is believed that detailed disclosures in the annual report of the lending company on the end-use of the loans and advances by the recipient entity for the intended purpose will usher greater transparency to such operations. While the new provisions are unlikely to put in place regulatory hurdles for corporates to comply before reaching such an arrangement, the idea is to ensure that companies do not misuse their rights. The rights of corporates to enter into inter-corporate loans are covered under Section 372A of the company law. The proposed regulatory changes are in consonance with the J J Irani committee’s recommendations stating that provisions of the company law on such loans should be strengthened to prevent misuse of the exemptions by corporates. Officials, however, say the proposed legislative changes would not affect the interests of the corporates. The expert committee had also recommended that regulatory changes should not reintroduce a regime of government approvals. It is believed that India Inc should not be placed at a disadvantage compared to the companies incorporated in other jurisdictions in any international competitive bidding for acquisition