India Tax & Regulatory

Regulatory Alert Tracking Change

Volume: RA/05/2012 14 Febraury 2012

In this issue:

Background RBI Announcement Implications under the Companies Act Conclusion Contacts

Increase in Bank Rate and its implication for corporate India

Background
Reserve Bank of India (RBI) is required to make public, the standard rate at which it is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase, in pursuance of the provisions of Section 49 of the Reserve Bank of India Act, 1934 (the RBI Act). This is popularly called the Bank Rate. Being the discount rate, the Bank Rate should technically be higher than the policy repo rate. The Bank Rate has been kept unchanged at 6% p.a. since April 2003 as discounting / rediscounting by RBI has remained in disuse. The Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their reserves requirements (cash reserve ratio and statutory liquid ratio). The Bank Rate is also used by several other organization as a reference rate for indexation purposes.

RBI Announcement
RBI has, on 13 February 2012, increased the Bank Rate by 350 basis points with immediate effect. Accordingly, the Bank Rate will be 9.5% p.a. with effect from 13 February 2012 as against 6% p.a. All penal interest rates on shortfall in reserve requirements of scheduled commercial banks which are specifically linked to the Bank Rate will also stand revised.

Implications under the Companies Act 1956

The increase in the Bank Rate will have an impact under the Companies Act, 1956 where the companies have lend monies to or borrowed monies from, other body corporate. This is for the reason that section 372A (3) of the Companies Act provides that no loan to any body corporate shall be made at the rate of interest lower than the prevailing bank rate, being the standard rate made public under section 49 of the Reserve Bank of India Act 1934.

In view of the above referred RBI announcement, w.e.f. 13 February 2012, the minimum rate of interest for purposes of Section 372 A (3) of the Companies Act will stand increased to 9.5%. Cases of inter-corporate loans given or taken on which interest is structured to be at not lower than the Bank Rate of RBI will require an immediate adjustment in interest rate. This will push up the minimum cost of borrowing by more than 50%. Conversely, the lending companies will have a windfall increase in their income.

Conclusion
Inter-corporate loans are widely used to bridge the financing gap by corporates. In cases where the loan is given, the interest rate on such loans may be pegged at the Bank Rate. The Bank Rate had remained static for almost a decade since discounting / rediscounting by the RBI remained in disuse. In such cases, companies will be affected by increase in the Bank Rate. The changes in the Bank Rate will not affect companies that are exempted from provisions of section 372A of the Companies Act or companies that have lent / borrowed funds at rate of interest equal to or higher than the revised Bank Rate. The companies which are affected by the increase in the Bank Rate may have to suitably rework their cash flow and tax requirements.

Source: Press Note No. 2011-2012 / 1298 dated 13 February 2012 issued by Reserve Bank of India.

Do you know about Dbriefs ?

Dbriefs are live webcasts that gives valuable insights on important developments affecting your business. To Register, visit www.deloitte.com/ap/dbriefs

Contacts
Mumbai 264-265, Vaswani Chambers, Dr. Annie Besant Road, Worli, Mumbai 400 030. Tel: + 91 (022) 6619 8600 Fax: + 91 (022) 6619 8401 Bangalore Deloitte Centre, Anchorage II, 100/2, Richmond Road, Bangalore 560 025. Tel: +91 (080) 6627 6000 Fax: +91 (080) 6627 6409 Delhi/Gurgaon Building 10, Tower B, 7th Floor, DLF Cyber City, Gurgaon 122 002 Chennai No.52, Venkatanarayana Road, 7th Floor, ASV N Ramana Tower, T-Nagar, Chennai 600 017.

Tel : +91 (0124) 679 2000 Tel: +91 (044) 6688 5000 Fax : + 91 (0124) 679 Fax: +91 (044) 6688 5019 2012 Hyderabad 1-8-384 & 385, 3rd Floor, Gowra Grand S.P.Road, Begumpet, Secunderabad 500 003. Vadodara Chandralok, 31, Nutan Bharat Society, Alkapuri, Vadodara 390 007 Tel: + 91 (0265) 233 3776 Fax: +91 (0265) 233 9729

Kolkata Bengal Intelligent Park Building, Alpha, 1st floor, Plot No A2, M2 & N2, Block EP & GP Sector V, Salt Lake Electronics Complex, Kolkata - 700 091. Tel : + 91 (033) 6612 1000 Fax : + 91 (033) 6612 1001

Ahmedabad Heritage 3rd Floor, Near Gujarat Vidyapith, Off Ashram Road, Ahmedabad 380 014.

Tel: + 91 (079) 2758 2542 Tel: +91 (040) 4031 2600 Fax: + 91 (079) 2758 2551 Fax:+91 (040) 4031 2714

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms This material and the information contained herein prepared by Deloitte Touche Tohmatsu India Private Limited (DTTIPL) is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s). None of DTTIPL, Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the Deloitte Network) is, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision which may affect you or your business. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this material. 2012 Deloitte Touche Tohmatsu India Private Limited Registered office: 12, Dr. Annie Besant Road, Opp. Shivsagar Estate, Worli, Mumbai 400 018. India.

Home | Add Deloitte as safe sender