Group Finance
Intra-Group Loans and Corporate Guarantees: Rules Indian Business Groups Should Know
By ATTPL HOLDCO / ATTPL GROUP Editorial Team · · 2 min read
A plain-language guide to loans, guarantees and security between group companies in India — Sections 185 and 186 of the Companies Act, board and shareholder approvals, interest, documentation and tax points.
Why intra-group funding needs care
Moving money between group companies is common — a holding company funds a new subsidiary, or a cash-rich business supports a sister company. In India these transactions are regulated, and getting the approvals and paperwork right protects directors and lenders alike.
Each group company is a separate legal entity with its own shareholders, creditors and directors' duties. A loan or guarantee that helps the group can still expose one company's money to another company's risks. That is why the Companies Act, 2013 sets limits and approvals, and why banks and auditors look closely at these balances.
Section 186: loans, guarantees and investments
Section 186 governs loans, guarantees, security and investments made by a company. In broad terms, when the total crosses the higher of 60% of paid-up capital, free reserves and securities premium, or 100% of free reserves and securities premium, a special resolution of shareholders is needed. The section also requires a board resolution, disclosure in financial statements and, for loans, an interest rate not lower than the prevailing yield of comparable government securities.
There are specific relaxations, including for certain transactions between a holding company and its wholly owned subsidiary. Because the conditions are detailed, check the current text of the Act and rules before relying on any exemption.
Section 185: loans connected with directors
Section 185 restricts loans, guarantees and security to directors and to entities in which directors are interested. Some such transactions are allowed with a special resolution and use of funds for the borrower's principal business, and there are exemptions for loans by a holding company to its wholly owned subsidiary and for guarantees for bank loans to subsidiaries, subject to conditions. Map every intra-group transaction against both sections before money moves.
These transactions also usually fall within related party transaction rules, which bring their own approvals.
Documentation that should exist
- A written loan or guarantee agreement setting out amount, purpose, interest, tenure and repayment
- Board resolutions, and shareholder resolutions where required
- Entries in the register of loans, guarantees and investments
- Interest calculations and TDS where applicable
- Periodic confirmations of balances by both companies
Our intercompany agreements checklist covers the wider set of contracts that groups should keep in order.
Tax and treasury points
Interest received is taxable income for the lender and may be deductible for the borrower, subject to tax rules. Deemed dividend provisions can apply to certain loans from closely held companies to shareholders or concerns in which they have an interest, so tax review is essential. From a treasury view, central visibility of all intra-group balances — as described in our guide to treasury controls for group companies — prevents surprises at year end.
Getting it right
Intra-group funding sits at the meeting point of company law, tax and banking. ATTPL Legal can help with agreements and resolutions, ATTPL Consultancy supports compliance and finance processes, and you can contact ATTPL HOLDCO to discuss group funding structures.
Frequently asked questions
Can a holding company give a loan to its subsidiary?
Generally yes, subject to the Companies Act limits, approvals and conditions. Some relaxations apply to wholly owned subsidiaries; confirm the current rules before acting.
Is interest compulsory on loans to group companies?
Section 186 sets a minimum interest rate linked to government securities for loans covered by it, with certain exceptions. Check whether your transaction is covered.
Do we need shareholder approval for a corporate guarantee?
It depends on the limits under Section 186, the relationship with directors under Section 185 and related party rules. A board resolution is always required.
Sources and further reading
This article is general information, not legal or tax advice. Company law and tax rules have detailed conditions and change over time; consult a qualified professional before any transaction.
