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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Corporate and Economic Laws

Case: Kaveri Agro Foods Ltd, an unlisted public company, wants to give a loan of Rs 2 crore to its wholly owned subsidiary, Kaveri Cold Chain Pvt Ltd, for working capital. The company's board is meeting to approve it. Under the Companies Act, 2013, which statement best describes the position on this loan?

A loan by a holding company to its wholly owned subsidiary enjoys exemption from the director-interest loan restrictions, so it is not prohibited and needs no Central Government approval or compulsory special resolution. The exemption exists because the subsidiary is wholly owned, so no outside shareholders are affected.

  1. ALoans by a company to its wholly owned subsidiary are exempt from the restrictions on loans to other persons in which directors are interested, but the investment/loan limits for body corporates still need to be examinedCorrect
  2. BThe loan can be given only after a special resolution of shareholders in every case
  3. CThe loan is wholly prohibited because a company cannot lend to any other body corporate
  4. DThe loan needs prior approval of the Central Government regardless of amount

Explanation

The Act provides an exemption for loans given by a holding company to its wholly owned subsidiary from the restriction on loans, guarantees and security in sections 185. Section 186 limits on loans and investments also do not apply to such loans, but the loan must be used for the subsidiary's principal business purposes. The prohibition and central government approval options misstate the law. A blanket special resolution is not required.

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