Sub – section (7) of Section 186 of the Companies Act 2013 , no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.
Rate of interest here directly linked to yield of government securities here. A tax-free bond gives higher yield compare to taxable bond at similar rate of interest.
Ministry of Corporate Affairs has issued clarification on rate of interest of tax-free bonds through its General circular 06 of 2015 dated 9th April 2015.
In cases where the effective yield (effective rate of return) on tax-free bonds is greater than the prevailing yield of one year, three-year, five-year or ten-year Government Security closest to the tenor of the loan, there is no violation of sub-section (7) of section 186 of the Companies Act, 2013.
Even though present circular refer to General Circular 06 of 2013 dated 14th March 2013, this serve only academic interest only.
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