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CS Professional · Strategic Management and Corporate Finance · Raising of Funds from Debt and Procedural Aspects

Rajat Finance Ltd's Board entered into a cash credit arrangement with its bank in the ordinary course, with a sanctioned limit of ₹3 crore, and the finance team draws and repays amounts daily within the limit. For Section 179(3)(d), what does the exercise of the borrowing power mean in dealings with bankers?

The exercise of the borrowing power means the arrangement made with the bankers for overdraft, cash credit or otherwise, not the actual day-to-day operation of the account. So the Board approves the arrangement once, and daily drawals within the sanctioned limit need no fresh Board resolution.

  1. AEach daily drawal on the cash credit account needs a fresh Board resolution
  2. BOnly the arrangement made with the bankers for borrowing by overdraft or cash credit, not the day-to-day operation on the accountCorrect
  3. CNothing, since bank borrowings are wholly outside Section 179
  4. DOnly borrowings exceeding the paid-up capital and free reserves

Explanation

Explanation II to Section 179 says that in dealings with bankers, the exercise of the borrowing power means the arrangement made with the bankers for borrowing by overdraft, cash credit or otherwise, not the actual day-to-day operation on those accounts. So a Board resolution is needed for the arrangement, not for each drawal. Explanation I exempts only borrowings by a banking company from certain banks, not a company borrowing from its bankers.

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