Inter-Corporate Loans are short-term or long-term loans given by one company to another company. These loans allow businesses to meet working capital needs, expansion requirements, or temporary cash shortages.
ICLs are governed mainly under Section 186 of the Companies Act, 2013, which regulates how much a company can lend, invest, guarantee, or provide security to another body corporate.
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Why Companies Give Inter-Corporate Loans
To utilize surplus funds instead of keeping them idle.
To earn higher interest compared to banks.
To support group/associate companies.
To maintain strategic relationships with suppliers, distributors, or partners.
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Legal Framework Governing Inter-Corporate Loans
1. Section 186 of Companies Act, 2013
This section controls loans, guarantees, investments, and securities by companies.
2. Limits Without Special Resolution
A company can give ICLs up to the following limits without member approval:
60% of paid-up share capital + free reserves + securities premium
OR
100% of free reserves + securities premium
(Whichever is higher)
If the proposed loan exceeds these limits → Special Resolution must be passed in a general meeting.
3. Interest Rate Conditions
ICLs must be given at an interest rate not lower than the prevailing yield of Government securities with a similar maturity period.
Example:
If 1-year Govt. Security rate = 6% → Company cannot give a 1-year loan below 6%.
4. Board Approval
A Board Resolution must be passed in a board meeting (not by circulation).
Details of the loan must be recorded.
5. Prohibition on Defaulting Companies
A company cannot give loans if:
It has defaulted on deposits, or
Has defaulted in repayment of existing loans.
6. Disclosure Requirements
Company must disclose:
Details of the loan
Purpose
Amount
Interest rate
in the financial statements.
7. Exemptions
Companies can give unlimited ICLs without limits if:
The company is an NBFC
The company is a bank
The company is a housing finance company
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Types of Inter-Corporate Loans
1. Short-term Loans (up to 1 year) – for working capital needs.
2. Long-term Loans (more than 1 year) – for expansion projects.
4. Unsecured Loans – based on trust, common in group companies.
5. Loan Against Guarantee – one company gives money after another guarantees.
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Procedure for Giving Inter-Corporate Loan
1. Check borrowing/lending limits under Section 186.
2. Prepare a Board Note and call a Board Meeting.
3. Pass Board Resolution to approve loan.
4. If limit exceeds → pass Special Resolution in shareholders meeting.
5. Prepare loan agreement with:
Interest rate
Tenure
Purpose
Repayment terms
6. Disburse loan through banking channels.
7. Record in Register of Loans and Investments (Form MBP-2).
8. Report disclosure in financial statements.
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Advantages of Inter-Corporate Loans
For Lending Company:
Higher return than bank deposits.
Maintains strategic business relationships.
Efficient cash flow management.
For Borrowing Company:
Quick access to funds.
Flexible terms compared to banks.
Cheaper interest in some cases.
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Risks
Default risk if borrowing company becomes insolvent.
Misuse of funds by directors.
Too many inter-corporate loans may affect liquidity.
High regulatory scrutiny if limits are violated.
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Inter-Corporate Loans in India – Current Scenario
Common among business groups like Tata, Reliance, Adani, Aditya Birla.
Increasing use in:
Infrastructure sector
FMCG companies
Real Estate firms
RBI monitors NBFC involvement in ICLs to avoid systemic risk.
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Real Examples
Example 1: Tata Group
Tata Sons often gives ICLs to subsidiaries such as:
Tata Motors
Tata Steel
for meeting working capital or expansion needs.
These loans maintain group liquidity and lower borrowing costs.
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Example 2: Reliance Industries
Reliance gives short-term ICLs to:
Reliance Retail
Jio Platforms
Reliance Industrial Investments
Used mainly for:
Retail expansion
Telecom infrastructure
Working capital requirements
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Example 3: Adani Group
Adani Enterprises provides ICLs to:
Adani Ports
Adani Power
Adani Realty
Purpose:
Project funding
Meeting urgent capital needs
Cash flow balancing within group companies
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CASE STUDIES
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Case Study 1: DHFL Inter-Corporate Loans Scam
Situation: DHFL (NBFC) issued ICLs of over ₹30,000 crore to shell companies linked to promoters.
Outcome:
Huge defaults
Liquidity crisis
RBI takeover
Major governance failures exposed
Learning:
ICLs must be given only after strict due diligence and transparency.
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Case Study 2: IL&FS Crisis (2018)
IL&FS used inter-corporate loans among its subsidiaries to show inflated performance.
Problems:
No real cash inflow
False financial strength
Collapse led to systemic risk
Learning:
ICLs can create cascading defaults if not properly monitored.
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Case Study 3: Satyam Computers Fraud
Satyam illegally diverted funds to related companies through ICLs.
Learning:
ICLs must be:
Approved by Board
Disclosed properly
Not used for promoter benefit
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Conclusion
Inter-Corporate Loans play a crucial role in corporate finance by enabling companies to support each other, ensure liquidity, and fund growth. However, due to past misuse, the Companies Act, 2013 now ensures stricter limits, disclosures, and interest norms. Proper compliance and transparency are essential to prevent financial fraud and protect stakeholders.
