Borrowing Security explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
"Secured by hypothecation of current assets" against a block of term loans is not a disclosure. Schedule III wants the security identified loan by loan, and the asset type named.
Borrowing categories before borrowing security
- Bonds or debentures;
- Term loans — (i) from banks; (ii) from other parties;
- Deferred payment liabilities;
- Deposits;
- Loans from related parties;
- Liability component of compound financial instruments;
- Other loans (specify nature).
Each is further sub-classified as secured and unsecured, and the nature of security shall be specified separately in each case.
The guidance note names the failure directly: a blanket disclosure of different securities covering all loans classified under the same head such as "All Term loans from banks" will not suffice.
One relaxation is permitted: where one security is given for multiple loans, the same may be clubbed together for disclosure purposes with adequate details or cross referencing. That is a genuine common case — a consortium charge covering several facilities — and clubbing is allowed because the security really is one.
A second requirement runs alongside it. Disclosure about the nature of security should also cover the type of asset given as security — inventories, plant and machinery, land and building — and the reason is given: the extent to which a loan is secured may vary with the nature of the asset against which it is secured.
A charge over receivables and a charge over land are not equivalent protection, and a disclosure that says only "secured against assets of the company" tells the reader nothing about which.
Borrowing security by guarantee: directors and others
Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.
The scope of "others" is read widely: the word "others" would mean any person or entity other than a director. Therefore, this is not restricted to mean only related parties. The practical observation follows — in the normal course, a person or entity guaranteeing a loan of a company will generally be associated with the company in some manner.
Personal security is not borrowing security of the company
When promoters, other shareholders or any third party have given any personal security for any borrowing, such as shares or other assets held by them, disclosure should be made thereof — though such security does not result in the classification of such borrowing as secured.
The distinction is between the company's assets and someone else's. Secured, for Schedule III purposes, means secured on the company's own assets; a promoter pledging personal shareholding provides the lender with recourse, but the company's balance sheet carries no charge. The fact is disclosable, the classification does not change.
Lease liabilities are not borrowings
Lease liabilities are presented under non-current financial liabilities as a line item separately from borrowings, and the disclosure requirements stated for borrowings shall not be applicable to lease liabilities.
Under non-current liabilities they represent the principal amount of lease liability payable, as recognised and measured under Ind AS 116, beyond a period of 12 months from the reporting date.
Compound and liability instruments
Guidance on the liability component of a compound financial instrument is drawn from the equity share capital paragraphs to the extent applicable. And the borrowings disclosures apply to compound instruments with a liability component and to instruments entirely liability in nature — those meeting the financial liability definition in para 11 of Ind AS 32 in full.
Common mistakes
- One borrowing security description covering an entire category of loans.
- Describing borrowing security without naming the class of asset charged.
- Classifying a loan as secured on the strength of a promoter's personal guarantee.
- Applying the borrowings disclosures to lease liabilities.