Foreign Direct Investment

[THYAGARAJAN KALYANASUNDARAM]

Dear experts ,

One of my clients is a share holder and director in a company incorporated in Singapore. He is citizen and resident in India. He has already Invested his subscribed capital amount in that co. Now, he wants to send additional funds of USD 10,000 to the Company.

Kindly suggest me proper ways through which he can send the funds , can we treat it as loan from director to the Co? Or suggest me any other ways.

Thank you in advance.

[YAGAY andSUN]

In India, FDI can be received in two manners:- 1)Automatic Route 2) Approval Route.

Loans is not defined anywhere in the Companies Act, 2013.However, in normal parlance, any transaction in which money is given with the intention to be returned either with or without interest is termed as loan.

Refer Section 179 and 180 of the Company's Act.

Section 179 of the Companies Act, 2103 provides to take prior consent of the Board to borrow money.

Section 180 of Companies Act, 2013 provides to take prior consent of the members of the company by way of a special resolution to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed an aggregate of its paid-up share capital, free reserves, and securities premium, apart from temporary loans obtained from the company’s bankers in the ordinary course of business. Section 180 does not apply to Private Company and as such Private company can continue to borrow money by simply passing Board Resolution even if the borrowed amount exceeds the above-specified Limit.

Directors can lend money to the company in two ways:

Directors out of Borrowed Funds: There are two situations:

1. If Director is also a shareholder: In this case, the amount received from the directors will be treated as Deposits from members and will have to comply the provisions of Section 73 read with the Companies (Acceptance of Deposits) Rules 2014 and Section 180 of the Companies Act, 2013 captioned above.

2. If Director is not a shareholder: In this case, the amount received from the directors will be treated as Deposits from Public and the provisions of Section 76 read with the Companies (Acceptance of Deposits) Rules 2014 and Section 180 of the Companies Act, 2013 will be applicable. In this case, the deposits can be accepted only by an Eligible Public Company (explained above) and will have to obtain credit rating every year. In case of a secured deposit, the company will have to create a charge on its assets in favor of the deposit holders for an amount not less than the amount of Deposit so accepted.

3. Directors lending out of their own Funds: If a Company receives the amount from the directors of the company or the relative of directors of the private company out of their own funds, it will be treated as Loans and do not attract the provision of Section 73 or Section 76 of the Companies Act, 2013. However, to avail such relief, the director or the relative of the director as the case may be, needs to furnish a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Director’s or Board’s Report. Section 180 will be applicable to the Public Company.

Note:

• Every Public Company and Private Company shall disclose in its financial statement, by way of notes, about the money received from the director or relative of directors (in case of a private company).
• Every company other than Government company shall file an onetime return of outstanding receipt of money or loan by a company but not considered as deposits as per Companies (Acceptance of Deposit) Rules, 2014 from the 01st April 2014 to 31st March 2019, as specified in Form DPT-3 within ninety days from 31st March 2019 along with applicable fees.
• Loans from Director may be secured as well as unsecured.
• Unsecured Loans from directors may have a zero rate of interest.
• The position of director at the time of acceptance of deposit will be considered.

[YAGAY andSUN]

Please go through these provisions and decide yourself what will this transaction look alike.

AI Summary

Director loans: classification as deposits or loans determines Companies Act compliance and disclosure obligations. Money advanced by a director to a company is treated according to source and recipient status: advances from borrowed funds may amount to deposits from members or the public and attract the Companies Act deposit regime and charge/credit rating requirements; advances from a director's own funds are treated as loans if accompanied by a written declaration that the funds are not borrowed, with mandatory disclosure in financial statements and potential Form DPT 3 filing obligations.