Companies may give such loans, guarantees, or acquire securities up to a maximum of 60% of their paid-up share capital, securities premium account and free reserves2 or 100% of their securities premium account and free reserves, whichever is more3 [collectively, inter-corporate deposits (“ICDs”)]. Such financial assistance provided inter se companies, whether in the form of a loan, guarantee or security, plays a pivotal role in offering liquidity to group or affiliated companies to address short-term financing needs. Therefore, ICDs sustain businesses and support growth and corporate operations by ensuring a steady flow of funds for various companies in need of capital. That said, while corporates with short-term surplus may place their deposits as ICDs, such loans are offered on an uncollateralised basis and as such, are unsecured borrowings, inherently at a substantial risk and therefore, come at a high-risk premium built into higher rates of interest.
Please click here to read the full article by Sidharth Sethi and Shreya Sircar, published in SSC Times.
Shreya is a multi-disciplinary dispute resolution practitioner, experienced litigator, and Partner at JSA.