Highway developers have expressed concern that section 185 of the Companies Act, 2013, will have an adverse impact on projects considering the road sector is already reeling under severe paucity of funds.
Section 185 (Chapter XII – Meeting of Board and its powers) of the Companies Act, 2013, does not allow any company to directly or indirectly advance any loan including any loan represented by a book debt to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person except if the advancing of any loan to a managing or whole-time director is part of the conditions of service extended by the company to all its employees or pursuant to any scheme approved by the members by a special resolution. The exception also applies to a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan but in respect of such loans an interest is to be charged at a rate not less than the bank rate declared by the Reserve Bank of India.
In section 295 of the erstwhile Companies Act, 1956, which dealt with loans to directors, the bar on advancing of loan or giving guarantee or providing security did not apply to any loan advanced, guarantee given or security provided by a private company (unless a subsidiary of public company) or a banking company, any loan advanced by a holding company to its subsidiary company and any guarantee given or security provided by a holding company in respect of any loan advanced to its subsidiary company.
In case of highway projects implemented through the Public Private Partnership route, the infrastructure company that is awarded the project through the bidding process needs to float a Special Purpose Vehicle for execution. The SPV is either a subsidiary or joint venture of the holding company. To fund project cost, the SPV borrows from banks and financial institutions. Generally, project funding is available for a period of 15 to 17 years.
Under present project funding arrangements, a large part of the project cost is funded by banks and financial institutions. The holding company awarded the project has to fund the rest of the project cost by way of equity. Such equity infusion can be through equity share capital and sub-debt or quasi-debt which is unsecured interest free loan repayable only after complete repayment of project loans from lenders. Guarantees for termination payments, and in some cases shortfall guarantees, also have to be provided to the lenders. The right on project documents as well as toll rests with lenders. Besides, the holding company has to pledge its holding in the SPV with lenders.
Highway developers point out that it will be impossible for the SPVs floated for the purpose of executing highway projects to pay interest on the loans advanced by their holding companies at bank rate, as stipulated in section 185 of the Companies Act, 2013, over and above the interest payable to banks for the loans advanced.
The National Highways Builders Federation has suggested amending the Companies Act, 2013, so that in case of the infrastructure sector, loans advanced by a holding company to its subsidiary companies as well as guarantees and securities provided by the holding company in respect of loans advanced to its subsidiary companies don’t come under the purview of section 185 of the Act. The representative body of highway developers recently wrote to the Chairman of National Highways Authority of India urging that the matter be taken up with the Ministry of Corporate Affairs.
The Ministry of Corporate Affairs is enforcing the provisions of the Companies Act, 2013, in phases. In September, a notification was issued for commencement of 98 sections of the Act.