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Home » » Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(iii)(b)

Companies (Auditor's Report)(Amendment) Order, 2004 - Clause 4(iii)(b)

Written By Admin on Sunday, 1 April 2012 | Sunday, April 01, 2012

Clause 4(iii)(b)

whether the rate of interest and other terms and conditions of loans given by the company, secured or unsecured, are prima facie prejudicial to the interest of the company.

1) This clause, read with Paragraph 4(iii)(a) of the Order, requires the auditor to examine and comment whether the rate of interest and other terms and conditions of loans given by the company (whether secured or unsecured) to companies, firms or other parties covered in the register maintained under section 301 of the Act are prima facie prejudicial to the interest of the company. 

2) The auditor should examine agreements entered into by the company with the parties covered in the register maintained under section 301 of the Act or any other supportive documents available for ascertaining the rate of interest
and other terms and conditions of all loans granted by the company to such companies, firms or other parties. 

3) The auditor’s duty is to determine whether, in his opinion, the rate of interest and other terms and conditions of the loans given are prima facie prejudicial to the interest of the company. The “other terms” would primarily include security, terms and period of repayment and restrictive covenants, if any. In determining whether the terms of the loans are “prima facie” prejudicial, the auditor would have to give due consideration to a number of factors connected with the loan, including its ability to lend, borrower’s financial standing, the nature of the security, prevailing market rate of interest and so on. 

4) It may be mentioned that clause (a) of sub-section (1A) of section 227 of the Act also requires the auditor to inquire whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members. The auditor’s inquiry under the aforesaid clause may also be useful for the purposes of reporting under this clause.

5) Further, the auditor may also come across a situation where the company has a policy of providing loans at concessional rates of interest to its employees and such a loan has been given to a relative of the director who is also an employee of the company. In such a case also, the auditor would be required to examine and comment whether loan is prejudicial to the interests of the company. It may, however, be noted that normally such rate of interest as per the policy followed by the company cannot be said to be prejudicial to the interest of the company if other employees of the company also receive the loan at the same rate of interest.

6) The following is an example of reporting under the clause:

“According to the information and explanations given to us, we are of the opinion that the rate of interest and terms and conditions of loans given by the company to a firm in which Mr. X, one of the directors of the company, is interested are prima facie prejudicial to the interest of the company on account of following reasons:
 
(i) the company has granted the loan at an interest rate of X% per annum which is significantly lower than the interest rate prevailing in the market; and
 
(ii) coupled with the (i) above, there are no covenants with regard to the repayment of the loan.”


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