I. What is Borrowing?

Every company needs money to run its business. When internal funds (like share capital or
profits) are not enough, companies borrow from outside, through bank loans, debentures,
fixed deposits, etc. Borrowing means arranging money from external sources with the
intention of returning it.

Power to Borrow (Section 179)

Only the Board of Directors can exercise the power to borrow money or issue debentures,
and only at a properly convened Board meeting. This power can be delegated to a
committee, MD, or senior officer, but the resolution must specify the maximum amount that
can be borrowed.

Limits on Borrowing (Section 180)

The Board cannot borrow beyond the aggregate of the company's paid-up share capital, free
reserves, and securities premium without getting a special resolution from shareholders.
"Temporary loans" (like short-term cash credit repayable within 6 months) are excluded from
this limit. Private companies are exempt from this requirement entirely.

Ultra Vires Borrowing

If a company borrows beyond its legal authority (beyond what Articles or the Act allow), it is
called ultra vires borrowing and is void. Even shareholders cannot ratify it.

Intra Vires Borrowing Beyond Directors' Authority

the company has the power to borrow, but the directors exceeded their specific authority
(e.g., borrowed beyond the ₹100 lakh Board limit without shareholder approval). This can be
ratified by the company. The Doctrine of Indoor Management (Royal British Bank v.
Turquand) protects lenders who acted in good faith.

II. Debentures

Definition (Section 2(30))

A debenture is any instrument issued by a company that acknowledges a debt, whether or not
it creates a charge on assets. It includes debenture stock and bonds.

Types of Debentures

By Convertibility:

• NCD — Non-Convertible Debentures (remain debt forever)

• PCD — Partly Convertible (part converts to equity)
• FCD — Fully Convertible (fully converts to equity)
• OCD — Optionally Convertible (investor chooses)
By Security:

• Secured — backed by a charge on fixed assets; if the company defaults, assets can be
sold
• Unsecured (Naked) — no charge; holder is like any other unsecured creditor

By Redemption:

• Redeemable — repaid on a specific date

• Perpetual/Irredeemable — no fixed repayment date (now banned under Companies
Act 2013)

By Registration:

• Registered — in the name of a specific person; transferred by instrument

• Bearer — transferable by mere delivery; holder gets full rights

Key Provisions on Debentures (Section 71)/ 44

Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

III. Acceptance of Deposits

What is a Deposit? (Section 2(31))

A deposit is when people give money to a company for a certain period, and the company
agrees to return that money after the agreed time, often with interest. except specific
excluded categories such as:

• Amounts from Central/State Government

• Loans from banks and financial institutions
• Inter-corporate deposits
• Share application money (if allotted within 60 days)
• Director's loan (with declaration that it is from own funds)
• Secured debentures
• Employee security deposits (non-interest bearing, within annual salary)
• Business advances (adjusted within 365 days)
• Promoter loans (under lending institution stipulation)
• Amounts from Nidhi companies, AIF, Mutual Funds, etc.

Section 73-

Who Can Accept Deposits?

• All companies can accept deposits from members (subject to conditions)

• Eligible Companies (public companies with net worth ≥ ₹100 crore OR turnover ≥
₹500 crore) can also accept deposits from the public
• Exempted: Banking companies, NBFCs, Housing Finance Companies
Conditions for Accepting Deposits from Members (Section 73(2))

• Pass a resolution in general meeting

• Issue a circular (Form DPT-1) showing financial position, credit rating, etc.
• File DPT-1 with the Registrar 30 days before issue
• Maintain a Deposit Repayment Reserve Account with at least 20% of deposits
maturing in the next financial year
• Certifyno default in past repayments (or 5 years have passed since making good any
default)
• Provide security if deposits are secured

Conditions for Accepting Deposits from Public (Section 76)

Only Eligible Companies can do this. Additional requirements:

• Obtain credit rating each year

• Create a charge on assets within 30 days equal to the deposit amount
• Obtain special resolution (ordinary resolution if within Section 180 borrowing limits)

Other Key Rules

• Deposits must be for 6 months to 36 months (short-term exception: up to 10% for 3–6
months)
• Joint names allowed (up to 3 persons)
• Interest rate cannot exceed RBI's prescribed rate for NBFCs
• Deposit receipts must be issued within 21 days of receiving money
• Register of deposits must be maintained at registered office
• Penal interest of 18% per annum for overdue deposits
• Return of deposits filed in Form DPT-3 on or before 30th June each year

Key Forms

• DPT-1 — Circular/Advertisement inviting deposits

• DPT-2 — Deposit Trust Deed
• DPT-3 — Return of Deposits
• DPT-4 — Statement of deposits existing at commencement of Act

Penalties (76A section)

• Failure to repay deposits –

• Company - Fine of ₹1–10 crore
• Officers - imprisonment up to 7 years + ₹25 lakh–₹2 crore fine
• If fraud is proved - Officers personally liable without limit under Section 44

IV. What is a Charge? (Section 2(16))

A charge is an interest or lien created on the property or assets of a company as security for
a debt, and includes a mortgage. It involves at least two parties, the company
(borrower/creator) and the lender (charge holder). A charge gives the lender the right to
have that property made available for repayment if the company defaults.

Types of Charges

Fixed (Specific) Charge

A fixed charge is on specific, identified assets (like land, buildings, machinery). The
company cannot sell or dispose of those assets freely. The charge holder has priority over all
later creditors. In liquidation, fixed charge holders rank highest.

Floating Charge

A floating charge is on a class of fluctuating assets (like stock-in-trade). The company can
deal freely with those assets in the normal course of business. The charge "floats" over assets
until a triggering event causes it to crystallise (become fixed). Only companies (not
individuals) can create floating charges.

Crystallisation occurs when:

• Company goes into liquidation

• Company stops carrying on business
• Debenture holders appoint a receiver
• A specific event stated in the deed occurs

Where a company creates a floating charge within 12 months prior to the commencement
of winding up, the law treats such a charge as presumptively invalid, and the charge holder
loses the status of a secured creditor, being ranked instead as an unsecured creditor. This rule
exists to prevent companies on the verge of insolvency from unfairly preferring certain
creditors by granting them security over assets. However, this invalidity is not absolute.

Additionally, even if the company was not solvent, the charge remains valid to the extent of
any fresh cash or new value advanced at the time of its creation; only this portion is protected
as secured, while any past debt covered by the charge remains unsecured. Thus, the law strikes
a balance between preventing fraudulent preference and protecting genuine commercial
transactions involving new advances.

Other Types of Charges

• Pari Passu Charge — shared by multiple lenders on equal footing

• Exclusive Charge — security provided to one lender only
• Further/Second Charge — with consent of first charge holder, same asset charged
again (first charge holder gets priority in liquidation)

Section 77
Inter-Corporate Loans,

Companies often need to lend money to other companies, invest in other companies, or give
guarantees on their behalf. This is common especially within group companies. But this also
creates a risk of misuse — directors might channel company funds to benefit themselves or
related parties.

Section185

To prevent this, the Companies Act, 2013 (Section 186) places strict limits and conditions
on:

• Loans given to other companies or persons

• Guarantees given on behalf of others
• Security provided for others' loans
• Investments made in other companies' securities

Loans and Investments by Companies (Section 186)

The Two-Layer Rule (Section 186(1))

A company cannot invest through more than two layers of investment companies.

Simple Example:

Company A → invests in Company B (1st layer)

Company B invests in Company C (2nd layer).

This is the maximum allowed.

Company C cannot further invest in Company D as an investment company.

Exceptions:

• Investingin a foreign company that already has more than 2 layers (as per that country's
laws)
• A subsidiary company having investment subsidiaries as required by law

The Overall Limit (Section 186(2))

A company cannot give loans, guarantees, security, or make investments beyond:

60% of (Paid-up Share Capital + Free Reserves + Securities Premium Account) OR

100% of (Free Reserves + Securities Premium Account)

Whichever is MORE

This limit applies to the total combined amount of all loans + guarantees + security +
investments made.
Simple Example:
• If a company's Paid-up Share Capital₹50 crore
• Free Reserves₹30 crore
• Securities Premium₹20 crore
• Total₹100 crore
• 60% of ₹100 crore = ₹60 crore
• 100% of ₹50 crore = ₹50 crore

The limit is ₹60 crore (whichever is more)

Important: The word "person" in this section does not include employees of the company.

Special Resolution Required When Limit is Exceeded (Section 186(3))

If the combined amount of loans + guarantees + security + investments exceeds the above
limit, the company must:

• Pass a Special Resolution at a General Meeting (shareholders' approval)

• The resolution must specify the total amount up to which the Board is authorised

Exception: No special resolution needed if the loan or guarantee is to a wholly owned

subsidiary or a joint venture company, or if a holding company is acquiring securities of its
wholly owned subsidiary.

Board Meeting Approval Required (Section 186(5))

Every loan, guarantee, security, or investment must be approved by a Board resolution

passed with consent of ALL directors present at the meeting.

Additionally, if the company has an existing term loan from a Public Financial Institution
(like LIC, IDFC, etc.), prior approval of that institution is also required — unless:

• The total amount is within the Section 186(2) limit, AND

• There is no default in repayment of loans to that institution

Rate of Interest on Loans (Section 186(7))

Any loan given under Section 186 must carry an interest rate not lower than the prevailing
yield of Government Securities (1-year, 3-year, 5-year, or 10-year G-Secs, closest to the loan
tenor).

Simple Meaning: The company cannot give loans at below-market interest rates. It must
charge at least what the government pays on its bonds for a similar period.

No Loans When Company is in Default (Section 186(8))

If a company has defaulted on repayment of deposits (under Sections 73–76), it cannot

give any loan, guarantee, security, or make any investment until that default is fully
cleared.
Disclosure in Financial Statements (Section 186(4))

The company must disclose full details in its financial statements of:

• All loans given

• All investments made
• All guarantees given
• All security provided
• The purpose for which the recipient will use the money

Register of Loans, Guarantees, Security and Investments (Section 186(9))

Every company must maintain a register in Form MBP-2 recording:

• All loans given

• All guarantees and security provided
• All investments made

Key Rules:

• Entries must be made within 7 days of each transaction

• Register kept at the registered office
• Preserved permanently
• In custody of the Company Secretary or Board-authorised person
• Members can obtain extracts on payment of fee (max ₹10 per page)
• Can be maintained manually or electronically

Who is Exempt from Section 186?

The following do not need to comply (except the 2-layer rule):

• Banking companies (in ordinary course of business)

• Insurance companies (in ordinary course of business)
• Housing Finance Companies (in ordinary course of business)
• Companies that finance industrial enterprises or infrastructure
• Investment companies (for their investment activities)
• NBFCs registered with RBI whose principal business is acquiring securities
• Government companies engaged in defence production
• Government companies (non-listed) with prior Ministry approval

Penalties for Violating Section 186

• Company: Fine of ₹25,000 to ₹5 lakh

• Defaulting Officers: Imprisonment up to 2 years + fine of ₹25,000 to ₹1 lakh