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CS Professional · Corporate Restructuring, Valuation and Insolvency · Acquisition of Company or Business

Vishwa Components Ltd, a public company, is being acquired by Arjun Holdings, which has taken a bank loan to buy Vishwa's shares. Vishwa's board proposes to give a guarantee to the bank in support of Arjun's loan. Under the Companies Act, 2013 as stated, what is the position?

The guarantee is prohibited. A public company cannot directly or indirectly give a loan, guarantee, security or other financial assistance for the purchase of its own shares or its holding company's shares. The banking exemption applies only to a bank lending in its ordinary course, not to the target.

  1. APermitted, because the guarantee is given to a bank and not to the acquirer
  2. BProhibited, because a public company cannot give financial assistance, including a guarantee or security, for a purchase of its own sharesCorrect
  3. CPermitted if the guarantee does not exceed six months' salary of the directors
  4. DPermitted if the company is a limited company with share capital

Explanation

Section 67(2) bars a public company from giving, directly or indirectly, any financial assistance, whether by loan, guarantee or security, for a purchase of or subscription to its shares. The bank-lending exemption covers a banking company lending in its ordinary course, not a target guaranteeing a loan taken by the acquirer. The six-month salary exemption applies only to loans to employees.

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